In upturns, managements, like King Canute, pretend to be in control. In downturns, however, the covers of self-deception are stripped away, says Robert Heller.
Bull markets generate bull companies. Soaring shares and rising profits create inflated corporate and managerial reputations, which adversity often reveals to be a 'load of bull', as Americans say.
Bear markets are led downwards by deflated companies and their managers. In the US, Boeing has removed the head of its sorely mismanaged civil aircraft division. Procter & Gamble's chief executive is quitting early after disappointing results. IBM, after a miserable 3% sales rise last year, seems to have stopped growing completely.
Americans are especially prolific at corporate hyper-inflation. Take Amazon.com: the internet will undoubtedly have an unprecedented and revolutionary impact on business and its management but that hardly justifies the bookseller's valuation of 10 times its unprofitable sales.
All such over-hyped values are deeply vulnerable to any hint of recession.
Few sectors will face collapses as sharp as semiconductors, with memory prices down by 85%. This typifies boom and bust management. Like investors, managers act in the belief that markets will rise for ever. Couple extravagant forecasts of the total market with exaggerated ambitions for market share, multiply those absurd expectations by the total number of players, and you have excruciating over-capacity.
There are more constructive responses than closing a few plants and waiting for the next upturn. Major companies let themselves be carried along by economic tides and conventional wisdom. In upturns, managements pretend, more successfully than King Canute, to be in control of forces that are actually controlling them.
In downturns, they pretend that setbacks are outside their control. But even the impact of currency movements - the most powerful general factor - can be offset by companies which, like the best Japanese, continuously drive down their costs while also expanding markets by introducing new and improved products. That's the winning double whammy of management.
Recession strips away the covers of self-deception from single and zero whammy managers. The naked spotlight falls first on groups that have 'under-performed the market', such as BTR and Rank Organisation. Yet there are plenty of companies that have kept pace with the market (or risen even faster), which display all the faults of the underperformers. These accidents may be waiting to happen, but happen they surely will.
In Rank and BTR, previously successful long-term strategies ceased to be relevant years back. For all its diversification, Rank was wholly dominated by Rank Xerox in its palmy days. Conglomeration, even round a core of UK leisure activities, is no substitute for a high-tech, high growth, highly concentrated, multinational money machine. Xerox famously failed to sustain that magic formula itself and for a similar reason: delay.
Reacting only when the Japanese wolves had devoured its market, Xerox launched corporate transformation much too late.
BTR was also slow to realise that its once wonderfully effective strategy no longer worked.
It could no longer rely on extracting more profit from mostly dull companies and topping that up with cheap acquisitions that were susceptible to the same treatment. The whole concept of a multi-business, multi-market, multinational conglomerate is obsolete. Converting such structures into wholly different, focused companies is a daunting task, especially at a time of economic difficulty.
The moral is clear: make changes in the good times and the bad ones may never roll. What you don't do is imitate General Motors. After decades of persevering with the internal brand competition created by the legendary Alfred Sloan, the automotive giant is disarming the division behind the brands. Each brand was formerly a fully-equipped company but GM is now centralising marketing and sales functions and relegating the marques to brands alone, eliminating a maze of costly overlaps.
The impetus, however, has come from a disastrous collapse in market share - lately around 20% of US sales. The Wall Street Journal reports that GM 'is emptying its bag of marketing tricks' to force this figure, once half the market, back to 30%. While the GM strikes helped to cause this collapse, what caused the strikes? An outmoded management has lagged behind in most respects, allowing Ford Motor to leap ahead of its eternal rival on all key measures.
The turning point came two years ago, when chief executive Alex Trotman turned over operations to Jacques Nasser to accelerate results from Ford's ambitious global revamp. With $3 billion of cost savings in 1997, Nasser promptly obliged, demonstrating that reforms pack far more punch against buoyant backgrounds. However deep the next recession, analyst John Casesa believes Ford can 'keep up product development and still be profitable'. The double whammy rules. Rubbing in GM's agony, Ford has moved early to install Nasser as chief executive, to consolidate the gains. A stitch in time truly does save nine. A stitch too late loses billions.