John Forzani knows a thing or two about creating a playbook designed to score the winning touchdown. The former pro footballer, part-owner of the CFL’s Calgary Stampeders and founder of The Forzani Group Ltd. (TSX: FGL), the largest sporting-goods retailer in Canada, is well aware that he must scout the opposition, consider the environment and then devise offensive and defensive plays for different situations. Let’s face it, a coach with just one strategy in his playbook can’t lead his team to a championship, particularly in this depressed and confused economic climate.
So far, Forzani, which includes the Athletes World, National Sports and Sport Chek chains, has been relatively unscathed by the recession, but its creator and chairman is not leaving anything to chance. He has devised strategies for what the company will do should revenue plummet 5%, 10% or (shudder) 15% from expectations. Ever the optimist, Forzani even has a scenario for what to do if sales exceed expectations. While acknowledging the bleaker revenue targets would mean cutting into the fibre of the company’s long-term growth, he’d rather have a playbook ready to use instead of scrambling for strategies should his company become another victim of the current downturn.
With companies such as Boeing, Starbucks and Microsoft recently announcing layoffs in the thousands and everybody still awaiting the impact of billions of government bailout dollars, times are tough all over the globe. In Canada, the unemployment rate reached 7.2% in January, and GDP contracted 0.7% in November. Forzani and his fellow business leaders can’t be certain when the recessionary tide will turn, and it might get worse before it gets better. Or not. It may be over in a few months. There is undeniable confusion across Wall Street, Bay Street and even Main Street, but that doesn’t give business leaders a pass to sit on the sidelines and hope for the best. Instead, in the tradition of the Scouts, business leaders should be prepared for whatever is thrown their way.
To start preparing, if they haven’t done so already, execs should be planning for multiple eventualities, just as Forzani has done, says Roselinde Torres, partner and managing director at The Boston Consulting Group in New York. She says leaders need at least three different strategies for three different scenarios to navigate this year’s uncertainty. These should include: a recession followed by a return to modest growth; an upswing leading to a boom; and a long and deep recession. Boston Consulting expects the last scenario to be the most likely, but Torres says it’s still prudent for business leaders to plan for the other situations, so they are not paralyzed by the unexpected. “Speed matters, and so does the strategic approach,” she says.
Torres suggests senior management bring together a fact-based analysis of the company and its operations, as well as the economy and their suppliers. These scenarios, she says, should also include key performance indicators that when met set a particular plan in motion. For example, a key indicator at Forzani is revenue. Should a certain revenue target be reached, Forzani doesn’t want his management team to wait for a board meeting before executing a certain strategy. Instead, he wants them to dust off the playbook and follow it as soon as revenue dictates.
But ensuring that employees react to certain situations in specific ways is not easy. Execs have to let their staffers know what’s going on and what’s expected from them, and that means becoming more conscious of communicating during tough times. “I’m a hands-off guy,” says Sean Durfy, CEO of WestJet (TSX: WJA) in Calgary. “But I have to make sure that everyone understands the strategy of the company and everyone appreciates it. You almost have to be evangelical about it.” During the downturn, Durfy says he’s not communicating more with staff, but is more aware of the importance of communication. “You have to show your appreciation and reassure staff,” he says. “There are layoffs in all industries, and every indicator points downward. You have to be the beacon of light.”
Durfy suspects it will take another 12 to 18 months before the economy bottoms, but doesn’t want that to affect employees who are at the core of his company’s competitive advantage to provide top-notch customer service. For example, when the bad weather at Christmas delayed passengers, WestJet staff worked hard to ensure that the company’s mission of “Because owners care” was enacted. Dozens of WestJet office staff worked up to 16 hours a day at the Calgary airport, manning check-in counters, kiosks, baggage belts and even serving food and drinks to people standing in line. Durfy rewarded employees with a $500 flight credit to show his appreciation of their efforts and to reinforce the importance of maintaining the mission even in tough times.
Durfy’s approach is consistent with one of Torres’s strongest pieces of advice for leaders: believe in the human capacity for resilience. It’s people who work for organizations. They have endured recessions before, and have scraped and innovated so that their organizations escaped relatively unscathed. But to get to the point where leaders are inspiring their employees to work like that, they first have to gain their trust and confidence. That’s difficult, in part, because most of today’s leaders haven’t seen a recession with the depth or length of what we’re expected to see now, says management guru Ram Charan, who is based in Dallas. That, combined with the uncertainty of when it will end has stoked fears at both ends of the organizational chart.
Leaders need to act with integrity and credibility to rebuild trust and restore some of that missing confidence. And that could mean breaking with habits that worked well in the past. In his new book, Leadership in the Era of Economic Uncertainty, Charan notes that in good times a CEO’s dominant psychology tends to be aggressive, optimistic and oriented toward ever-increasing revenue growth and profit. Sometimes they can become arrogant know-it-alls. They can also lose touch with the day-to-day operations, because they tend to focus on external matters, including “basking in the glow of being a well-known corporate chieftain.” But during these tumultuous times, chief execs must re-examine how to spend their time. Forzani calls a recession the perfect time for leaders to rework the guts of their organizations and make decisive actions, because their time during expansionary eras is more often spent outside of the company.
Figure out where your company is going wrong and where the market is going, says Forzani. Recognize the reality of what the environment is, rather than hope things will soon fix themselves, adds Charan. Acting with integrity and credibility means business leaders need an approach that doesn’t just include being defensive, but also the ability to offer bold, offensive moves. Furthermore, Charan recommends protecting the company’s core operations: its assets, people, customers and brand. When assessing the top team, Charan suggests cutting out individuals who could stall the organization’s progress, including employees who are indecisive, aren’t team players or are frozen by the new reality. It is also imperative that leaders know when to change their strategy, he says. “The key here is no wishful thinking. You have to confront reality,” Charan says. “The economy is in a downward spiral, and you can’t forecast where its bottom will be, but you can be prepared.”
Perhaps one of the best ways to demonstrate preparedness and build the confidence of employees, shareholders and other investors is to have strong financials. As the old saying goes, cash is king. With the credit crisis at the root of this particular downturn, the importance of cash has once again escalated. That means focusing on how to manage cash, including paring down customers and suppliers who are high risk and use more resources than they generate. “There are no sacred cows,” Charan says. “The trade-off is that by eliminating certain customers or products, you eliminate some complexity from your operations and you can better manage receivables, inventories and production schedules, all of which can be sources of cash generation.”
Generating cash is important to all businesses, but is perhaps even more so in sectors where massive capital expenditures are essential to operations, such as mining and energy. Millions of dollars are often needed to transform unproductive assets into future sources of revenue. But the credit crisis means financial institutions have become more stringent when it comes to lending money, so companies need stronger financial statements than in the past to secure credit.
Peter Marrone, chairman and CEO of Yamana Gold Corp. (TSX: YRI), realized in the early autumn of 2008 that a significant correction was taking place in the commodities market, and the long-talked-about economic downturn was now in his backyard. Gold might have hit its record-breaking price of more than US$1,000 an ounce mere months before, but when the price abruptly melted in late summer, it left even its most ardent followers surprised. “One can never predict all eventualities, and we didn’t expect to see the severity in the fall of the price of metals that we did,” says Marrone. As a result, Marrone shored up Yamana’s cash position and credit lines to the point where it had almost half a billion on call at the end of December. This should not only increase investor confidence (Yamana’s share price has ranged from $4.59 to $19.12 over the past year, closing at $10.56 on Feb. 5) and move along development programs, but gives Marrone the deep pockets needed to snap up new assets.
“This is a time to look for opportunities where the strong will acquire the weak,” says Thomas D’Aquino, CEO and president of the Canadian Council of Chief Executives, who recently announced he will be stepping down next year. “This is a good time for good opportunities with good values for those companies with strong balance sheets and good numbers.”
Solid oilpatch companies, for one, will particularly find opportunities to acquire weak junior explorers, says John Stephenson, senior vice-president and portfolio manager at First Asset Funds Inc. in Toronto. This is just one reason why they should focus on their use of cash and capital. While the dry oilpatch of the 1980s and 1990s might evoke bleak memories as oil drops to less than US$40 a barrel, Stephenson says the companies that did well during the last recession, such as Suncor, had leaders who knew how to allocate capital. In today’s market, that means focusing on projects that are close to production, and delaying projects that are at the early exploration phase. Capital spending needs to efficiently produce a return during tough times, says Stephenson. To date, forecasted capital investments for 2009 in northeastern Alberta alone have dropped to $10 billion from $20 billion, according to the Canadian Association of Petroleum Producers, an industry association for the upstream oil and natural gas industry. It shouldn’t come as any surprise then when leaders continue to delay capital projects in upcoming quarters.
But despite the pressure to deliver a quick return on capital, companies still need to invest in riskier projects, particularly when it comes to innovation, even while cutting costs. History shows a recession doesn’t stop innovation. Indeed, with fewer resources available, it’s the perfect breeding ground for disruptive products and services that will snatch away market share from existing companies who stand pat.
At the start of the recession in the 1990s, the U.S. Patent Office reported a record number of patent applications the year the recession began. Indeed, some of the most durable companies, brands and products were created during past recessions: General Electric, Kraft, Walt Disney, FedEx, Microsoft, Apple’s iPod, Campbell’s condensed soup, Procter & Gamble’s Crest Whitestrips, Time’s People magazine and Loblaw’s President’s Choice brand are but a few.
In the case of President’s Choice, Loblaw started the initiative during the recession of the early 1980s, and the first products were launched in 1984, says Ken Wong, marketing and strategy professor at Queen’s University School of Business in Kingston, Ont. The company recognized during the recession that consumers wanted quality goods at lower prices. At the time, most new products were backed by hefty advertising budgets, but Loblaw instead spent the money on higher-quality ingredients, says Wong. The result was a successful brand that continues to reap benefits today with several top-selling products, including The Decadent chocolate chip cookies.
A recession is also a good time to introduce new promotions and services that might stimulate growth. During the 1970s recession, financial services firm The Charles Schwab Corp. started offering discount commissions, and The Vanguard Group started selling index funds. And during the Super Bowl in 1975, Chrysler introduced a car rebate to clear out an oversupply of cars. The strategy was copied by the other Big Three automakers, as well as by companies in other industries.
Cutting costs while investing in innovation may seem contradictory, so it’s small wonder that leaders are confused about what to do. But in the midst of the barrage of advice, business leaders can’t just focus on either managing costs, innovating or pruning customers, warns James Shein, professor at Northwestern University’s Kellogg School of Management in Evanston, Ill. Instead, they have to learn the art of juggling multiple balls in the air. He says leaders who haven’t successfully navigated the turmoil include James Cayne, former CEO of Bear Stearns, Richard Wagoner, CEO and chairman of General Motors, and Philip Schoonover, former CEO of Circuit City. Possible reasons? Arrogance and the inability to focus simultaneously on the three corporate pillars of operations, finance and strategy.
During downturns, leaders too often fall into the trap of just focusing on financial issues, such as restructuring the balance sheet to meet debt covenants. Or, just as bad, leaders make a knee-jerk reaction by fixing operations, such as cutting staff without properly considering whether the right people are being fired. They forget to consider the long-term implications. Without keeping all three areas of the business in focus, they run the risk of dragging their companies into a crisis.
Shein notes that there are five stages of a crisis. 1) Blinded: where the leader doesn’t understand what problems the company faces. 2) Inaction: the leader knows there’s a problem, but doesn’t act. 3) Faulty action: the company makes a move, but it’s the wrong one. 4) Crisis: the company is bleeding cash, losing key employees and customers and has been cut off from suppliers. 5) Dissolution: the company goes through liquidation or bankruptcy. The deeper a company is in this crisis chain, the more difficult it is to pull out of it.
By having multiple areas of focus, leaders won’t just be prepared for when the sky is falling, but also for when the horizon seems brighter. With all the doomsday talk, one of the toughest things for people to remember is that the good times will return. Your company might be smaller and fitter than before, says Charan, but this will make it better to welcome the good times.
One of the best examples of enduring downturn after downturn and emerging stronger and stronger is Japanese entrepreneur Konosuke Matsushita. He left school as a nine-year-old, but eventually built an electrical goods company that withstood the Depression, the Second World War and the ensuing collapse of Japan. Canadians probably better know Matsushita’s company as Panasonic.
The company started in 1918 selling light-bulb attachment plugs that Matsushita designed, and it has thrived since then, because of Matsushita’s vision to create wealth for shareholders and society. It created a 250-year business plan in the 1930s and warned stakeholders not to become greedy with its increasing success. In the midst of the Depression, Matsushita’s consumer goods company faltered, says Glenn Rowe, professor of strategic leadership at the University of Western Ontario’s Ivey School of Business in London, but instead of laying off workers, Matsushita paid employees less and moved them to different jobs. His engineers, for example, became salespeople, on the premise that the good times would return. At the end of the recession, Matsushita was left with something many companies want today: engineers who understand sales and salespeople who understand engineering.
Matsushita was able to continue his company’s success through economic downturns by having a long-term view of the company. This allowed him to remain nimble during the short term and adjust to whatever problem arose. He died in 1989, but the company has continued moving forward on its business plan. (In February, Panasonic announced it would shed 15,000 jobs — or 5% of its workforce — over the next year and close 27 manufacturing plants.)
At Forzani, there isn’t a 250-year business plan, but John Forzani is confident that the good times will return and his playbook will help get the company there in one piece. So far, his business hasn’t been hurt much — “Kids still need hockey skates,” he says — and if business fades a little, he’s not too worried. But the coach still has a defensive play of last resort that involves cutting projects that will curtail future growth but keep the company going in the meantime. But as soon as the game changes, he’ll be on the offensive with investments to grow his team and its winning streak. The secret is having a playbook, because as Forzani says, “There is no magic bullet.”