Managing Effectively Through Tough Times By Professor Mason Carpenter

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1 Managing Effectively Through Tough Times By Professor Mason Carpenter Last fall, the continued financial and auto-industry meltdown prompted Henry Paulson, then the U.S. Treasury secretary, to observe rather plaintively: There is no playbook for responding to turmoil we have never before faced. The continuing financial woes of admired companies such as GE, Starbucks, FedEx, and Goldman Sachs only served to further roil already-fragile global financial markets, and offer major challenges to managers charged with leading their organizations effectively through these uncertain and tough times. UPDATE Spring 2009

2 But what does it mean to manage effectively during tough times? Is there really no playbook for managers to follow? Actually, there are some even for managers in companies facing the most dire of circumstances. Good examples of these guidelines-in-action can be seen in the paths followed by the companies profiled in Jim Collins business best sellers, Good to Great and Built to Last (written with Jerry Porras). While salvation is never guaranteed, research has found that there is indeed an orchestrated set of steps that managers can take to better their positions and those of their organizations. The path forward involves attention to detail in eight fundamental areas. These eight areas spanning all activities in the organization are summarized below. Not all firms will need to make changes in all areas, and managers will want to start with the low-hanging fruit. There is also the reality that some changes will be more urgent than others. For example, a business that is running out of cash will likely have to focus on the financial dimension in order for changes on any of the other dimensions to matter. However, as a word of caution, experience has shown that urgency and importance are often confused in setting managerial priorities. Cutting across each of the eight areas is the need for management to have or develop the capacity, willingness, and ability to take risks and to learn. Similarly, you will quickly see how each area is somewhat dependent on the status of other areas, so in that sense, the managers able to manage effectively through tough times do so in a deliberate yet systemic fashion. Let s briefly look at these eight areas in turn. 1 Revisit mission and vision. Here s where managers start this journey by revisiting the past. As a manager looking to executive an effective strategy, you will need to ask whether you and everyone in your organization understands and lives the mission and vision. Without a clear mission and vision, it is nearly impossible for an organization to formulate and execute a coherent strategy. Mission reflects an organization s reason for being, and vision summarizes the organization s future aspirations in terms of what it wants to become. Mission should subsume and foreshadow vision, since vision emerges from and allows fulfillment of the mission. Since a strategy is the expression of how a firm will achieve its mission and vision, a fuzzy or absent mission and vision often will result in a fuzzy or absent strategy. During good times, and even through some tough times, firms can survive without a clear and compelling mission and vision. However, such firms are analogous to a car or plane set to travel using an automatic pilot at some point, traveling conditions change and human intervention is required. Absent a mission and vision, such intervention will be infrequent at best, or wrong-headed at worst. 2 Get the strategy right. Mission and vision are clearly important, but they will not be realized without clear strategy. Getting the strategy right is where you need to go next. A good strategy provides a solid framework for decision making, articulating positioning, and differentiation against competitors. Strategy helps an organization establish focus and priorities. More importantly, strategy is an impetus for action. Tough times give managers an opportunity to keep what works and jettison what does not. For best performance, strategy, which typically comes from top management down, is aligned with bottom-up projects, typically from middle management. 3 Engage customers. On the surface, customer engagement seems intuitive and logical enough. However, even in good times many firms have trouble executing well in this area. Such difficulty tends to arise from at least two related missteps. First, the firm s focus on core customer needs can become fuzzy, often as a result of growth during the good 8 UPDATE Spring 2009

3 Leverage social capital. You probably have heard a little about social capital, starting with the old adage that it s who you know, not what you know. In some situations, social capital determines what you know (so, who managers and employees know influences what they know). Social capital is a result of your social networks, and reflects the resources available in and through personal and business social networks. Such resources include ideas, information, business leads, money, influence, and trust. While an organizational chart might show who reports to whom, an organization s social network is the means by which the organization s work actually gets done. If this somewhat invisible social structure (in that it does not typically show up on an org chart) is not well understood, then any changes made to personnel may unintentionally damage the organization s future prospects. times. And second, as a result of unfocused growth, the organization ends up serving customers who are unprofitable or distracting. While it sometimes may seem that the solution to tough times is to lay off employees (which would reduce labor and other costs across the board), it may make more sense to fire some customers who don t fit the firm s strategy and strengths. 5 Attend to human capital. While it is a good practice to control costs and waste in tough times, in terms of employees this often translates into across-the-board job cuts or hiring freezes. Such moves, unless the firm had a perfect fit in human-capital needs prior to the tough times, indicates that managers either have not gotten the strategy right, or else are ignoring the priorities that it dictates. 4 Revisit mission & vision 1 Practice values-based leadership Control financial capital 2 8 Get the strategy right 3 Understand drivers of innovation and organizational change Engage customers Attend to human capital Leverage social capital UPDATE Spring

4 6 Understand drivers of innovation and organizational change. Innovate or die. This mantra, popularized by management guru Tom Peters, has been repeated many times by the media, government, business leaders, business professors, and consultants. At its core is the need to better understand the organizational processes leading to innovation and adaptability. In a recent Max Gladwell blog, the bloggers observed that, As the financial crisis rips across the economy, it s forcing innovation and adaptation on a scale that should make Darwin proud. The challenge and opportunity for managers is to change fast enough in ways that delight customers, pay the bills, and at the same time allow the organization to retain and develop its best people. Yes, change takes care and effort. But, given these tough times, managers need to ask themselves if there will ever be a better time for operational, service, or product innovation than when B2B and B2C customers are clearly stretched thin. Control financial capital. In financial circles the saying is cash is king. This is particularly true in the case of business turnarounds, where a firm is clearly going broke. In terms of firm survival and longer-term prosperity, cash may not be the only royalty but it certainly is one of the (eight) crown jewels. Understanding where business is in terms of financial capital requires two sets of related actions. First, management must instill the spirit of turnaround management in everyday activities. Second, managers should develop a clear financial map of how strategy creates value. This type of map is sometimes called a balanced scorecard, but in the form we are discussing here, it is much more than a system of accounting controls (though judging from the state of the financial services industry, controls are not a bad thing!). Specifically, the financial strategy map should show how resource-allocation decisions underlying the strategy can lead to near-term firm survival and longer-term competitive advantage. 8 Practice values-based leadership. To paraphrase Charles Dickens, Tough times bring out the best in people as well as their worst. Tough times put managers in a situation that is new, sometimes unpleasant, and always without a readily desirable course of action. When a situation arises that we have to deal with, there are three different ways we can arrive at a decision on what to do to formulate a response: we can use our beliefs, our intuition, or our values. Beliefs and intuition are based on context (and sometimes panic, in the case of tough times) and past experience. Values-based leadership is the action of articulating the wants and needs of employees by helping them understand and act on the company s shared vision. A values-based leader inspires his or her employees by listening and understanding their needs, then influencing them to make the necessary changes to accomplish the company s shared vision. If we use our values to make decisions, our decisions will align with the future we want to experience, and not be constrained by the past. Values transcend both contexts and experiences. Values-based leadership is also based in moral values, and a consistent display of respect for all followers. Values are becoming the preferred mode of decision-making in business. Therefore, it is not surprising to find ample research showing that adaptable and values-driven companies are the most successful organizations on the planet. Values-based leadership helps companies manage effectively in tough times. For some organizations, effective management will make the difference between death and survival. For others, effective management will not only position their organizations to emerge from the global downturn alive, but do so with greater focus, clearer purpose, and brighter future prospects. After all, in Chinese the written word crisis is composed of two characters the first represents danger, but the second stands for opportunity. A number of studies by strategy-consulting firm McKinsey & Company has led them to believe that, some companies emerge from a recession stronger and more highly valued than before the economy soured. By making strategic choices that sometimes defy conventional wisdom, they increase their stock market valuations relative to those of their former peers and thus gain more power to shape their industries, according to McKinsey. Private and familyrun businesses have similar opportunities. Admittedly, an organization needs to survive current 10 UPDATE Spring 2009

5 challenges in order to prosper later. It is relatively easy, unfortunately for managers to take actions today that may contribute to survival, but actually get in the way of future success. In some of these cases, such as cutting R&D or customer service, that might be obvious. In other cases, like across-the-board job cuts or reducing investments in training or technology, it might not be so clear. All these actions can have disastrous long-term effects or at the least put the firm at a disadvantage when good times return. The difference between the post-recession haves and have-nots? Companies with managers who act on what we know about managing people and relationships are those most likely to build a strong foundation for future prosperity. Firms without such managers may emerge intact, but will be speedily outpaced by the performance of their more able competitors. Tough times are just that tough. However, there is ample reason to expect that many firms will emerge from these tough times with better resources and capabilities than many of their competitors. WRITING THE BOOK ON STRATEGIC MANAGEMENT Mason Carpenter is the M. Keith Weikel Professor in Leadership at the Wisconsin School of Business. His textbook, Strategic Management: A Dynamic Perspective is used in more than 1,500 classes throughout the United States. When global business education powerhouse Pearson PLC needed a vehicle to rally readers during the current recession, the firm turned to Carpenter for a solution. The result: Managing Effectively Through Tough Times, a highly condensed, just-released publication from which this UPDATE article is adapted. (Pearson will be providing the longer publication with each of its business textbooks. Information on research on strategic management mentioned in the article can be found at Carpenter said his goal in writing Managing Effectively was to provide managers with reminders about what they learned (or should have learned) in business school. Tough times provide a great opportunity to get back to the basics, he said, but when panic sets in, the basics tend to get shoved out the window and replaced with bad decision making. Carpenter earned his PhD in strategy from the University of Texas, Austin. His research concerns corporate governance, top management teams, and strategic management of global firms. He is widely published in top academic journals and is associate editor in the areas of strategy and entrepreneurship for the Academy of Management Review. He has been honored for teaching excellence by UW-Madison and the Wisconsin School of Business. Managing Effectively Through Tough Times M A S O N A. C A R P E N T E R M. Keith Weikel Professor in Leadership Department of Management & Human Resources Wisconsin School of Business University of Wisconsin-Madison Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo Prentice Hall UPDATE Spring