How Companies Can Seize Opportunity in the Economic Correction

For almost a year, prognosticators, politicians and private-sector leaders have been talking about how we’re being confronted by the “the worst economic crisis since The Great Depression.”

My answer doesn’t involve defining our current set of circumstance as crisis, recession or depression. I believe how – and why – we’ve come to this point in the economic cycle has been fully – and exhaustively – documented. If pushed, my response is that we’re experiencing a broad-based correction brought on by the over-leveraging of every sector as well as excessive debt-driven behavior by consumers.

From my point of view, it seems apparent, based on today’s psychology and fundamentals, that we’re living in a time of tremendous and rapid uncertainty – as well as opportunity.

Taking Advantage of the Possibilities
If you’ve been involved with companies long enough, you know that uncertainty is a constant that must be addressed each and every day. Whether it’s a new and unexpected market entrant, the introduction of a cutting-edge disruptive technology or a major patent expiration, the resulting uncertainty is a simple fact of doing business.

You also know that uncertainty always hurts companies that are unprepared or inflexible.
On the other hand, uncertainty has consistently spelled opportunity for entities that are informed, primed and nimble; action oriented; and ready to take advantage of the possibilities. As the Roman philosopher Seneca once said: “Luck is what happens when preparation meets opportunity.”

Changing Attitudes and Behavior

It’s extremely difficult to remain open to opportunity if recent conventional thinking paralyzes you. Unlike most people, who see downside gloom and doom today, I see upside potential.

Why?

Because I believe we’re experiencing an economic correction that is changing attitudes and behavior when it comes to consumption, saving, selling, pricing and profiting.

To put it simply: end users today just aren’t willing (or are unable) to buy the same product or service at the same price that yields the same profit margin as they were 13 months ago; looking forward, end users will become increasingly value driven, and they’ll be trading down more than trading up.

The markets are in the process of seeking and redefining this new and real equilibrium; as this process unfolds, opportunities for a variety of companies can be successfully created and acted upon.

In many ways, it’s all about conditioning and re-conditioning.

The decline in consumption and corresponding company valuations is being driven by a reduction in the capital flows that we became conditioned to over half a century – and especially in recent years.

A Return to Accountability

The reduction of capital stems from re-alignment of trust. That’s just another way of saying that we’re now – finally – returning to sound practices among lenders, who are unwilling to extend credit in a world that is completely over-leveraged. It’s also a way of saying that consumers and companies are – at last – inching their way back to accountability.

It all makes sense. There’s very little mystery here. Detroit’s automakers are teetering, commercial and new home builders are deteriorating, retail distribution is rapidly recalibrating, Lehman Brothers is in liquidation and companies as bold as General Electric are hoarding cash, so the current restructuring of the value creation system should hardly come as a shock.

The big surprise – to me, at least – is that most of the proposed solutions to our present problems revolve around unlocking more credit. This will just reignite the behavior that has resulted in the current situation. Let’s be clear: credit is an essential driver of the global economic engine, but credit needs to flow based upon sound lending fundamentals – and that means creditworthiness.

Three Step Process

What this all means is that in order to truly capitalize on the opportunities that this economic correction presents, companies must embrace a dynamic and holistic approach that deals with the immediate and near-term implications of the current uncertainty; but all new plans and programs must also contribute to long-term success.

Here is a three-step process to manage the short-term uncertainty and position for long-term success.

• Define the current situation; get smart fast
• Identify and address opportunities; target end games
• Execute; short-term survival, long-term prosperity

This approach will almost certainly affect businesses differently, depending on their overall competitive and financial strength. Right now, I see five types of companies, each playing out a different scenario:

• Those that will benefit immediately, or in the short term
• Those that will need modest changes
• Those that will, and can be, turned around
• Those that will be consumed
• Those that will disappear

On their face, these scenarios appear to be generic and common; but the fact is that many companies will actually confront these outcomes over the next several months.

The primary objective of this process is to insulate companies from the downside risk that is attached to the current uncertainty, and to then position firms so they can identify and capitalize on the longer-term opportunities stemming from the disequilibrium. The ultimate objective is long-term success.

Get Smart Fast

The first step is based on outside-in knowledge – getting up to speed in a hurry. Then it’s important to take action, identify quick wins and get things done.

In this period, it’s critical to recognize that, as a result of the recent attitudinal and behavioral changes, many of your company’s assumptions and historical trends may no longer be viable. So, new perspective based upon rapid and potentially sustaining change in end-user requirements will be essential.

This means further diagnosing the strengths, weaknesses, opportunities and threats of your entire business system relative to that of your direct and near competitors. You’ve got to really understand the needs of the end user and your customer, as well as the businesses of your distribution, suppliers and sub-suppliers. The purpose of this effort is to realign your business system so it is in synch with how revenues and profits have – and will be – derived.

Building Bridges

Keep in mind that short-term cooperation and value sharing may be required as you build bridges to long-term success. To that end, I believe that clearly defining the dynamics of your business system allows you to collaborate – and prosper – in tough times.

The net is that your business system becomes competitively and financially superior to that of your competition.

If all goes according to plan, the first step, outlined above, should take two to three weeks.

Targeted End Games

The second step is based on inside-out knowledge and using your new collective wisdom to determine your end- game options.

You’ve really got to ask, and answer, the hard questions without flinching or fooling yourself. Here’s a partial checklist to consider:

• Review your risk-mitigation scenarios – the best case, the worst case and the steady state
• Determine what your response to competitive actions under each scenario might be
• Ensure adequate cash flow and access to capital and liquidity with as much precision as possible 
• Aggressively manage working capital
• Get under the hood and check inventory momentum and sell through
• Scrutinize demand and margin stability 
• Actively confirm accounts receivables
• Analyze the pipeline
• Right size your organization to its company volume; upgrade your organization
• Target precious resources and manage them dearly

Another essential, of course, is optimizing your capital structure. With slowing or declining revenues and profits, many companies are going to have trouble paying the interest on their current debt; an improved balance sheet will definitely help. The goal is lower interest costs, but the means to this end is the tricky part.

Once again, it’s important to take action, identify quick wins and get things done. The second step I’ve just discussed should take about one to two weeks.

Short-Term Survival, Long-Term Prosperity

The third step for you to consider is based on the ability to execute.

The mantra for today is that long-term prosperity depends on short-term survival – and, in the end, this usually comes down to how well you execute.

People and processes matter even more when you’re trying to execute in times of great and rapid change. And successful execution relies on the systematizing of talent – getting the right people in the right room, getting the right people in the right jobs, and creating incentives for performance; measuring leading versus lagging indicators; and the re-establishing of management governance systems – the methods and processes by which organization communicate, make decisions and evaluate outcomes.

Getting the Right Things Done

Collectively, these processes should lead to a culture based upon trust, alignment and accountability to one another; and the results – getting the right things done – will follow.

These are uncertain days and months that may stretch into uncertain years. Attitudes and behaviors are finally changing about excessive leverage while consumers, companies and governments seek a new equilibrium.

This is a time to create new opportunities; a time for investment that will redefine business models and reinvigorate innovation; and a time that shouldn’t hamper the acquisition of share, scale and complementary capabilities, or stymie investment in operating efficiencies and infrastructure.

Indeed, I’m convinced that agile and flexible companies that are conscious of these and other opportunities, that get smart fast, and that understand and execute their end games with both a short- and long-term focus, can adapt and win in the current economic correction.

Conventional wisdom sees this as a crisis – I see it as opportunity.
 
Richard T. Cavalli is founder, CEO and president of professional services firm Black Box Principals.