Six Ways The Financial Crisis Should Change Short and Medium-Term Operating Plans

Dear Executive,

While once unthinkable economic events are happening with daily frequency, most of the hard work of managing companies in this environment remains to be done. While volatility and economic difficulty radically “restack” competitive positioning in most industries, economically challenging times in and of themselves do not cause corporations to stall. Rather, they set up the conditions for serious strategic opportunities or missteps that have lasting consequences.

Companies that experience improvement in relative performance have two key factors at play: 1) better tactical responses to rapidly shifting market conditions that secure financial self-determination and 2) relentless focus on and continued funding for a narrow set of key strategic priorities.

While markets may get a bailout, corporate management will not. With many executives, this is the first and (likely) only shift of this magnitude they will confront “on their watch.” And, paradoxically, most of the playbook they have been handed up to this point turns out to be wrong.

CEB has always sat at the forefront of the critical issues facing our membership. Now, across all of CEB, we are providing daily insights for the executives and professionals we serve and a daily perspective on how the current conditions of the markets and the economy will impact your organization.

CEB was built to help you navigate uncertain times like these; use us often to help you move with confidence in driving decisions and change. We encourage you to stay in close dialogue with us and welcome your feedback.

During this unprecedented time, we offer an initial look at six actions for companies to consider as they revisit both their short and medium-term operating plans:

1. Plan for increased cost and reduced availability of credit. Whether by outright failure, consolidation, or conversion to more capital-restricted corporate structures (such as bank holding companies), availability of standard credit will fall far short of demand. That, however, is not the real news. The real news is that this retraction of debt financing is taking place against the backdrop of unprecedented capital availability globally. There are things that each company should do to survive:
   1. Ratchet up your ability to self fund by reducing investment in working capital.
   2. Leverage healthy relationships with healthy suppliers to structure more attractive financing.
   3. Build/retain credibility with investors by focusing communications on crisp, differentiated messages.
   4. Plan for cash needed in the next 9 - 18 months rather than just next month.
2. Reorient Sales and Marketing around the impaired economic condition of your customer base. The news here is not that demand has slowed in most parts of the developing world-that is well understood. It is that capacity to buy is more unevenly distributed than at any time in recent memory.
   1. In B2B markets, adjust sales and marketing targeting methods to better reflect creditworthiness of customers and their own industry conditions (their exposure to their customers will drive their appetite to grow with you). Furthermore, where your balance sheet allows, use creative terms as a competitive weapon; where it doesn’t, upgrade value-added services.
   2. In B2C markets, expect wildly uneven growth across regional markets and demographic segments. While consumer dependence on credit rose to unhealthy levels in several Western European countries and the U.S., this dependence was highly localized.
   3. Target customers whose ability to pay is still robust (or even increasing). Pricing, an underexploited lever in even the best of times, becomes a critical discipline as customer fortunes diverge and input prices fluctuate wildly. This has implications both for targeting price increases (a marketing discipline) and convincing customers to accept them (a sales discipline).
3. Develop a concrete response to a radically changed picture of supplier capacity and viability. Across all categories, suppliers have radically different demand for their services and radically different levels of economic stability.
   1. Evaluate your suppliers’ own demand positions (e.g., is a key software vendor overexposed to the financial services industry?) to help your procurement team target opportunities for advantaged pricing and service terms.
   2. Understand the strength and stability of key suppliers’ financials and quickly determine where you are exposed to unhealthy levels of risk.
   3. Appraise opportunities to backward integrate, as suppliers’ financial self-sufficiency is crippled.
4. Ensure an activist response to emerging talent market opportunities. We have the privilege of serving more than 4,700 of the world’s largest companies and have yet to hear C-suite executives tell us they have the talent necessary to succeed five years from now. Difficult economic times enable aggressive players to close this gap.
   1. Launch an aggressive performance management process to create “headroom” for emerging leaders and budget room for new hires. Accelerating the careers of your best is harder (but even more necessary) in difficult times.
   2. Target recruiting strategies for “not-in-play” talent. The best talent-even in the worst economic environments-is almost never out on the street. But slowing growth prospects can create rare moments of disengagement for emerging stars in prominent roles at other companies. As others reduce capacity, the chance to build a whole class of leaders with an aggressive posture is a once-in-a-decade opportunity.
   3. Pursue a strategy to win the hearts and minds of your own top performers. Although the labor market is softening for some employees, it is never softening for the best and the brightest. In fact, with retirements on hold and specialized skills becoming more scarce, do all you can to lock in critical talent now. Remember, competitors are targeting your top employees as well.
5. Balance aggressive (but small) M&A with equally aggressive due diligence. The adage that great assets are on sale at times like these creates real opportunity to set up future growth, but the potential for significant downside surprises also increases.
   1. Reevaluate deal pipelines for unique opportunities. The likely “winners” from these series of events will have acquired truly unique assets and capabilities.
   2. Ensure aggressive due diligence around financial issues and focus on key success drivers such as talent, IT, and R&D-especially if this downturn lasts several quarters (and have your legal team reread your standard MAC clause to be safe). However, do not get caught up in protecting downside risks to the extent that you scare off would-be sellers.
6. Over-invest in ethical management and tone at the top. It will come as no surprise that difficult times often beget many more instances of less-than-perfect human behavior.
   1. Manage compliance programs and clarify leadership postures. Executive tone and messaging has the potential to save your company heartache, reputation damage, and outright economic loss. There is more real economic return in compliance management than in any fancy enterprise risk management program.

To access best practices and tools to support each of the above actions, please visit our dedicated microsite. Thank you for your membership and ongoing commitment to CEB. We are working diligently to leverage the collective insights and wisdom of our network and you can take comfort knowing that the 2500+ CEB associates and 120,000+ of your corporate peers across industries and geographies are here to support you.

Sincerely,

Thomas Monahan, III
Chairman & CEO Corporate Executive Board

P.S. If you are a member of a CEB program, please contact your account manager for additional assistance. If you are unsure who to call and would like to gain access to CEB resources, please call us at +1-866-913-2632 or E-mail us at exbd_support@executiveboard.com.