UK: Management - Catering for future calamity.

UK: Management - Catering for future calamity. - The boom-and-bust cycle is part of business life. Be prepared, says Robert Heller.

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Last Updated: 31 Aug 2010

The boom-and-bust cycle is part of business life. Be prepared, says Robert Heller.

In one important respect, managers have a genuine grudge against the gurus at whose feet they sit. By and large, in the world of management theory and teaching it is always fair weather. Hostiles abound, of course, in the shape of competitors who may be faster and more furious. But defeat at their hands is culpable. By implication, nothing that happens, for good or ill, is beyond management's control.

In real life, however, beyond-control calamity comes round as regularly as the business cycle, which is the prime, but by no means the only, cause of such pain. Nothing that British or American media owners can do, on the one hand, will add to their revenue if advertisers stay sunk in recession; on the other hand, all marketers of personal computers are trapped in the current price war, for which recession is only partly responsible, but no individual company, not even the mighty and prescient IBM, can do much to mitigate the general damage.

The charitably minded can argue further that debt-laden hulks like Brent Walker would not have sunk but for the recession deliberately engineered by the Government; and that the high street banks owe their parlous loan books less to crass misjudgement than to the same event - one which was clearly beyond their control. You do not have to be in business very long, at any level, to learn that misfortune and fortune, though the latter perhaps more rarely, are both visited upon you and invited; and the visits (like the collapse of a major customer) are often most difficult either to foresee or forestall.

Against that, bad practice is not made better by booms. Over-gearing and over-lending are as indefensible in rich times as in poor: financing the £685 million purchase of betting shops from Grand Metropolitan was bad business for both Brent Walker and the banks.

Similarly, the recession delayed rationalisation and exposed the overmanning and other weaknesses at ICI, and thus made it theoretically vulnerable to an alert Lord Hanson: but the defects were culpable, and not incorrigible, in any circumstances. Every turnaround tells the same story. However adverse the business climate might have become, the new management always finds botched basics that also explain the need for rescue.

It follows that a continuous programme of monitoring and improving basic operations is essential: that is the philosophy of total quality management (TQM), one which has been hard to sell in the West, partly because of its very emphasis on the continual as opposed to the one-off. True, a survey by the CMC Partnership sounds a far more positive note: 78% had "taken the quality issue on board", of which "two thirds viewed quality as a strategic necessity", while even the 22% minority "all believe they already operate as a quality business". The proof of the pudding is not in the believing, however; nor in the limp response to export requirements by 88% of the sample who found 1992 to be "of no consequence" for awful reasons: "We only work in the UK ... Language is a barrier ... European laws and regulations are a minefield ... British law will prevent increased competition at home ... It won't affect small and medium-sized businesses like mine".

Can ostrich managements such as these truly understand that TQM is about using the hardest and fastest of disciplines to run the tightest possible ship to the greatest possible effect in the eyes of the customers? The tightness of the vessel is fundamental in the avoidance of a private recession.

I was once somewhat amazed to hear middle managers at Dow Chemical worrying about the availability of precisely rationed "man years" for certain projects. Such a tight discipline, however, may help to explain how in 1990, a relatively poor year for Dow, it had the world chemical industry's second highest profits on the sixth largest sales, with a 16% return on equity. That number has a certain significance if, like me, you accept Fortune's criterion of super-performance: a 10-year average return on equity of 20%, with no year falling below 15%.

It is impossible to exaggerate the difficulty of such an achievement, not least because of its rarity. In 1984, when the magazine first ran the rule over its 500, only 13 passed this most acid of tests. In 1989 the number was up to 21 - but five winners from five years back had dropped off and out, among them IBM and SmithKline Beecham. Both had shot themselves in the feet, compounding basic business errors (floundering against the PC clones, weak defence of the crucial Tagamet market, etc.) by running untight ships.

Probably there is a managerial connection between the loose spending and the lax strategy. The other way round, the more efficient and economical the operations, the more effective and rational the management (blessed, what is more, with a low cost base) is likely to be. The eight surviving champs from 1984 mostly share other characteristics, though companies such as American Home Products, Deluxe Check Printers and Coca-Cola not only concentrate on well defined markets but also sensibly operate within non-cyclical industries.

There is no better example than Kellogg. The breakfast barons of Battle Creek once won this well justified encomium from Business Week: "High margins pay for spending on new products, efficient plants, snappy marketing." That recipe added up to an average 1987-88 return on equity of 32%, with a high of 51% and a low of 25%; in the two years since then it has scored 29% and 26%.

You can hardly hope to achieve such glory in a cyclical industry. That cannot be a cop-out, though. The correct measure in such cases is the average return over the cycle: the corollary of inevitable busts is beautiful booms - and persistence in a business where you get the former without the latter is grim strategic planning. Great planning, however, takes the busts into account: thus Delta Air Lines owes its current recessionary strength, at least in part, to having cautiously included two recessions in every 10-year planning cycle on the obvious premise that "You don't know where, you don't know when, and you don't know how deep or long, but you do know it will happen".

Possibly British managers were seduced by the Thatcher hype into believing that the business cycle was another corpse of Labour history, like union power. Possibly their own hype had the same effect. It is not easy, if you have been rising high, wide and handsome, to plan for a possible fall - though failing to do so is an early sign of impending calamity.

In the PC profit recession, for instance, the most conspicuous victim must be Compaq, which after years of unbroken climbs in sales and profits has tumbled into an 81% earnings decline. The beyond-control external factors that it cites are all valid enough: recession, with Europe softening after the US; the stronger dollar; regrouping and thus order delays among its biggest US distributors; and virulent competition, which has forced down the premium prices that once underpinned its complacent trust in everlasting growth.

But what about internal factors? Compaq's premium prices were founded on a strategy premier perception - customers thought the products superior, and paid for the superiority. According to Dataquest, alas and alack, users' 12-month cumulative satisfaction now puts Compaq bottom of nine, behind Dell, Hewlett-Packard, Apple and IBM. Lose command of the in-control factors and the beyond-control battle is lost before you start.

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