Leading a company during a slowing economy has plenty of challenges:
What should you change, stop or continue doing? Organizational change is just a concept. Organizations do not change – individuals change. If enough individuals change then you start to reap the benefits of organizational change. Therefore, this report addresses common vs. effective responses to tough times.
POWER OF ASSUMPTIONS MODEL
The most important conversation you will ever have is the one with yourself. This self-talk reflects your underlying assumptions (about people, the market, your own capabilities). As an example, if market conditions require your company to change, you have three choices; stop, start or do something differently. Since most people assume that “change = loss” leaders reflexively stop spending, hiring, training, etc.
These assumptions dictate your personal response to tough times. Personal responses predispose you to certain behaviors or practices. Ultimately, your behavior has a significant and lasting impact on the organization. The employees observe your behavior and start to create their own assumptions of you and the company, then they start a similar cycle of their own. For better or for worse, this is how your culture is perpetuated.
Although many of our clients are building impressive growth trends, we remind them that no graph goes up (or down) forever. The path to sustained growth is like a roller coaster ride. Your personal assumptions about change and tough times will dictate how your company will experience the roller coaster ride. In fact, the greatest opportunity for your company to create a sustainable competitive advantage is during a tough economy.
LEADERSHIP PRACTICES: IMPACT ON MARKET POSITION
Let’s focus on how your leadership behavior can affect two of these quadrants. Quadrant 2 illustrates that it is easy to be a good leader during good times – high revenue growth forgives many sins. It is harder to create a sustainable advantage because if an economy is forgiving, anyone can ride that wave, even companies with less effective leadership. In Quadrant 1, effective leadership and poor economic times offer the best opportunity for you to create sustainable distinction in the marketplace.
PERSONAL RESPONSES TO CHANGE
With this framework, we will now describe the three common personal responses to change and alternative, more effective responses:
- Survival vs. Opportunity
- Control vs. Involvement
- Panic vs. Focus
Survival vs. Opportunity
The survival response uses as its operating assumption, “We just need to stay afloat.” The resulting leadership behaviors include: reducing headcount, decreasing employee development and controlling expenses. The organizational impacts of these leadership behaviors are employee cynicism and sacrificing the company’s long-term capacity to sustain growth.
These are fear-based, defensive responses that reflect the “change = loss” paradigm. It is true that cash is king during bad times (and good times!) but avoid “majoring on the minors” by cutting a couple of $20,000 clerks or saving paper clips.
The labor shortage is not going away anytime soon. In fact, there will be 2 million more jobs than people by 2008. Companies currently reducing their workforces to make their numbers will be hustling to find talent when things improve. At that time, they will likely be short of the talent they need to meet their business objectives and they will have the reputation as a company who is quick to cut heads when times get tough, another obstacle to attracting talent.
The more effective alternative to the survival response is the opportunity response. The assumption that underlies the opportunity response is, “Here is an opportunity to improve our business”. This results in leadership behavior like upgrading the workforce and strategic cost cutting. Greater employee commitment and a strengthened ability to sustain growth are the outcomes.
Charles Schwab has taken an opportunity response to tough times. They took a “share the pain” approach. They cut executive salaries and bonuses, tightened discretionary spending and asked employees without direct customer contact to take three unpaid Fridays off during the next three months. Admittedly, they may have to take additional measures in three months, but they have already sent a strong, positive message to employees and the market about what they value and how they operate.
The realities of your business may require you to reduce headcount. If so, make sure that you do the right thing – from a legal, employee relations and market perception standpoint. Resist the convenience of an across-the-board cut and use this opportunity to get rid of your ‘C’ and ‘D’ performers. Even if you are closing a location, try to re-deploy your best performers elsewhere.
The best run companies always behave like they are losing money. All of your employees should understand the most basic unit of profitability (e.g., the airlines use revenue/passenger mile). If your employees understand the drivers of your cost and revenues they can act more like owners of the business. During tough times, shift your focus from the top line to the bottom line with a close eye on inventory control, receivables and cash flow.
Control vs. Involvement
The second common response to tough times is control. This response has the statement “We know what is best for employees. They will just worry” as its basis. Typical leadership behaviors that result form this assumption are the tendency for leaders work in the business rather than on the business and what we call TLM (tight-lipped management). These result in distrust in company leadership and an expanded organizational blind spot (weaknesses that everyone, except management, are aware of).
Many companies who have previously grown over the past several years, are now responding with control. Controlling management practices set them back to old ways of managing when they were a smaller company. When the leader shifts back to working in the business rather than on the business it predictably squelches any type of ownership behavior by employees.
Studies on organizational change show that most employees do not resist change itself; rather, they resist that unknown place between where we are now and where we will be – the Abyss.
The effective alternative to control is involvement. The involvement response works off of the assumption, “We must harness all of our ideas to manage these times most effectively”. Leader taken this more effective approach work on the business and solicit employee input for solutions. Naturally, these behaviors result in greater ownership behavior (what every CEO wants more of) and a diminished organizational blind spot.
It is important to not just make employees feel like they are involved -a common, mechanical substitute for real involvement. Those who underestimate their employee’s intelligence overestimate their own.
Analysis of cumulative employee attitude research shows that the biggest concern for employees is communication. However, executives are continually frustrated that their communication efforts do not improve employees’ perceptions of company communication. Further analysis of these historical data reveal more specifically what employees want to know. It boils down to four simple questions companies need to address:
- Where are we going? (Strategy)
- What are we doing to get there? (Plans)
- How can I contribute? (Roles)
- What’s in it for me? (Rewards)
Panic vs. Focus
The third and final common response to tough times is panic. The panic response assumes that “We better do something different to get through this”. This assumptions leads to a continuous eye on the next deal and an obsession with getting new customers or initiatives. This results in eroding customer service, missed, low-cost new business opportunities with current customers and the “ship is adrift” syndrome.
This is a classic entrepreneurial response. Look for a new deal or create another business model. The problem is that it is five times more expensive to obtain business for a new customer than it is from an existing customer. Also, employees really want clear direction, not a plethora of new initiatives, during tough times.
Focus is the effective alternative to panic. Focus assumes, “Let’s keep doing what we do best”. Leaders that respond with focus reinforce customer service and existing customer relationships and sustain their marketing efforts. This results in improved perception of market position and stronger, more profitable customer relationships (again, what every CEO wants more of).
Put your resources where you are strongest (core competency). It is tempting to try to shore up your weak areas during tough times. However, unless those areas are strategic, you will just be throwing good money after bad. Think about this – since some approximation of the 80/20 Rule exists in almost all systems, we can safely infer that it also exists in your company. This means that the most profitable 1/5 of your company is 16 times more profitable than the remaining 4/5. Needless to say, you should regularly look at your most/least profitable sales people, products, service lines, divisions etc.
During a slower economy, everything gets commoditized except customer service. Focus appropriate resources on these existing relationships and commitments while your competitors are looking for the next deal. This will build customer loyalty and resulting profitability for you company.
Here is a table that summarizes each personal response.
|Response||Assumptions||Leadership Behavior||Org. Impact|
|“We just need to stay afloat.”||– Eliminate headcount
– Decrease employee development
– Control expenses
|– Employee cynicism
– Sacrifice long-term capacity to sustain growth
|“Here is an opportunity to improve our business.”||– Upgrade workforce
– Strategic cost cutting
|– Committed employees
– Strengthened ability to sustain growth
|“We know what is best for employees. They will just worry”.||– Work in the business
– TLM (Tight-lipped management)
– Expanded organizational blind spot
|“We must harness all of our ideas to manage these times most effectively.”||– Work on the business
– Solicit employee input for solutions
|– Ownership behavior
– Reduced organizational blind spot
|“We better do something different to get through this.”||– Look for a new deal or project
– Obsession with getting new customers or initiatives
| – Eroding customer service
– Missed, low-cost new business opportunities
– “Ship is adrift”
|“Let’s keep doing what we do best.”||– Reinforce customer service and existing customer relationships
– Sustain marketing efforts
|– Improved perception of market position
– Stronger, more profitable customer relationships
Many of the leadership practices that we suggest under “Effective Responses” should be done all of the time. For example, watching your expenses is like cleaning your house – you always have to do it. Regardless of where your company is on the economic roller coaster, you should consider the organizational impact of your own personal assumptions and leadership behavior.
Think about your response to your business roller coaster. Are you enjoying the ride?