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Why Companies Underperform Part III

And what they must do to succeed in the new economy

Please read Part I and Part II of this post for background information.

S&P 500 Historical Earnings

Chart 1. S&P 500 Historical Earnings

As of this date (Mid 2010) most large multinational companies are seeing a strong recovery in their earnings: (Note the chart below)

The ‘Chart of the Day’ of Aug 18, 2010 shows that the companies making up the S&P 500 have earnings returning (after an extreme drop in 2009) to where they were at the peak of the Dot Com bubble. Most of these companies are also running with employee levels as low as 50% of their 2007 levels. This means that the productivity of labor in these companies is extremely high. We believe that all US companies will change structurally to try and maintain this level of productivity going forward.

August 2003-July 2010 Trend: Wells Fargo/Gallup Small Business Index

Chart 2. Small Business Sentiment Index

However small to medium (STM) US companies, and especially those deriving their business from construction are not seeing the ebullient levels of income being enjoyed by the S&P companies. Note the results from the Wells Fargo/Gallup Small Business Index survey:

These data are reflecting the sentiment of US small business owners. It is pretty clear that small business owners don’t think they are doing as well as the S&P 500 companies. There is also a negative compounding

effect biting at them. They mostly have lower revenue streams, and less cash available to spend on productivity improving equipment and processes.

On top of this they might have lost some of their best employees during the downturn. The best employees don’t hang around patiently waiting for a recovery. They will assess the likelihood of the company recovering in the short term, and if they don’t see it (or feel it) they are gone, down the road to their next job.

Another factor affecting productivity is capital (and lack thereof); it has been so difficult for STM companies to acquire capital to improve or run their businesses. They find themselves “taking all the running they can do, to keep in the same place” (Red Queen, Alice in Wonderland). And compounding this, their customers are unable to borrow to purchase their products or services.

Strategy to Tactics

The new economic environment is forcing many companies (especially the STMs) to become much more tactical. Upper managers are continuously dealing with day to day problems, walking the tightrope of keeping their company afloat, and thinking less about future opportunities.

In these situations adaptability and flexibility become very important. Too often managers become uniquely focused on their sales numbers, or operations that provide stability and control, and not preparing for some other business ambiguity, or event.

The stress created by the economic environment forces managers to focus on past events (e.g. Sales, see Illustration 1, Part II,) their current products, and old strategies that were previously successful. Many small companies may only have had one strategy (with variations), the one they started the company with. That’s the one they try repeat again, and again.

As Porter (Competitive Strategy 1998) pointed out in this book, when discussing industries and or companies in transition to maturity, “the manager fails to recognize and accept the changes required, or lacks the required skills. As a result, the historical strategy and organizational arrangements are doggedly continued. This sort of rigidity is a common reaction to strategic difficulty not only during transition but also in other adverse company situations.

The environment for STMs could be considered as being directly comparable to industries or companies in transition to maturity. The same management behaviors (above) are being exhibited by upper managers in most STM companies. As Porter points out, STM managers probably “lacks the required skills” to manage and steer his (her) company out of the malaise they find themselves in.

Psychology of Threatened Managers

Stress conditioned organizational changes, and environmental changes, engenders a variety of behaviors, similar to normal human survival psychology (a five step process. However, managers in the final acceptance phase, are usually involved in performing five activities:

Planning – Long and Short range

  1. Organizing – Business Units, Divisions
  2. Staffing – Matching the Task and Workforce
  3. Motivating – The More with Less Paradigm
  4. Controlling – Leading to Delegation

Usually upper level managers are responsible for strategic planning, and determining the overall direction an organization should be moving in. Middle level managers tend to be concerned with tactical planning, i.e. strategy implementation, getting the organization to where it wants to go.

Tactical planning typically involves setting tasks, and responsibilities, implementing the actions of a plan, and measurement and control. To be effective, managers should critically appraise the situation (environmentally, operationally) their company is in. In STM’s however, managers who are threatened by conditions and the environment begin to behave like middle managers.

As pointed out, managers become very tactical and operational. They concern themselves with issues of immediacy. And if they are niche market specialists (Porter), their behaviors are magnified, and can engender centricities; maybe about their product (or service), but behaviors that don’t have a “big-picture” or knowledgeable objectivity in them (aforementioned).

Getting off the Dime

The new ‘mantra’ for STMs we have discovered is “doing more with less” which indicates that managers should be looking for ways to improve their company’s productivity; which we measure in terms of Sales Dollars per Employee.

They need to turn their (corporate) ships onto courses of productivity and growth using resources they currently have (or by minimally acquiring other resources). Unfortunately many (or most) don’t really know ‘what they have’. This would be a great place to start to get off that dime!

By Charting a Course, the planning process continues; managers need to understand and describe what uniquely defines their company. Its special differences, the strengths that can be built on, and how they perceive themselves; it is the basis for the company’s strategic intent.

Like a baseball team that is trying to recover from a slump, companies need to ‘go back to the fundamentals’. A company’s fundamentals are its culture, its core, and enabling competencies.

Managers should examine the very core of their company, and maybe even redefine it if necessary, i.e. if they know what their core is in the first place. Many STMs don’t even have something as fundamental as a “Vision Statement”. They got by without having one until the “crunch;” but now it is mandatory to establish a ‘vision’ and the company’s “Reason for Being.”

The steps in the self-evaluation process are as follows:

  1. Examine (or maybe define) the company’s core – Its Culture; Its Values; Its Leadership
  2. An audit should be made of its Strengths, Weaknesses, Assets (intellectual and physical)
  3. A clear Position Statement should be made for the company in its business environment
  4. Before a course can be set, a ‘destination’ (a SMART Objective) must be chosen
  5. A Strategy that has a reasonable chance of reaching that Objective must be developed
  6. The Objective and the Strategy must be communicated to all levels of the workforce
  7. The Organization’s Structure, the Workforce, and the Strategy must be in alignment
  8. Feedback on the Strategy and the plan should be eagerly sought from the workforce

Many senior managers of STMs (especially if they have had some success) will consider having to go through this fundamental process as a “bunch of academic junk.” They would like to just apply their own brand of “common sense” to the problem. A sense that “aint so common.”

These managers need to understand that it was the dramatic changes in the business and economic environment that put them in their present position.  And accept that the environment is not changing (in a few years anyway) SO waiting for a ‘self-correction’ is not a good strategy.

On the plus side, even if these managers don’t like having to go through the process, they will find that it costs them little (other than some time) and they will learn a lot about their company.

It is recommended that STMs get some help going through the process, the objectivity provided by 3rd party involvement, can be very useful. As pointed out, the myopia caused by the rigidities we have discussed and the emotional connection to previous successes, can make it difficult for managers to think ‘outside their box.’

Copyright 2008 – 2010 Henry Gregor, StrategicVisions. All Rights Reserved Worldwide.