Winning in turbulence

By Darrell Rigby

Lessons on gaining ground in tempestuous times

Turbulencethe sudden change of wind speed or directionhas killed and injured more air travelers than any other aviation hazard. It tests the mettle of even the most experienced pilots. Now, business leaders are grappling with an equally ominous form of turbulence: economic volatility. According to Bain & Company's interviews with nearly 90 executives at Fortune 500 companies, navigating through economic turbulence will be key to successful corporate leadership in the new millennium. Virtually all survey respondents are less sanguine about the economy than leading economists, but three-quarters also believe that turbulence creates a valuable window of opportunity to gain strategic advantage. And evidence suggests they're right. Those that are prepared tend to capture a disproportionate share of industry growth and profits.

The test of a first-rate intelligence is the ability to hold two opposing ideas in the mind at the same time and still retain the ability to function. F. Scott Fitzgerald

Darrell Rigby is a Director and Vice President of Bain & Company.

Turbulence is Increasing

The Trick is to Be Prepared

Evidence of increasing turbulence is everywhere. After the Dow peaked on July 17, 1998, at 9338, it slumped almost 20% in 45 days then flew past its July record only six weeks later. In October, mergers were dead, the cycle was over-then came November and Mega-Merger Monday, when more than $42 billion of deals poured through in a single day. International markets are even more tumultuous than our own. And while the U.S. unemployment rate is near record low, layoffs are at an all-time highclose to 700,00022% more than in the recession of 1991. Most disturbing, while consumers have been confidently spending every penny they're making, the Conference Board reports that Chief Executives' confidence in the U.S. economy has plummeted to its lowest level in more than seven years.
When Uncertainty Surges, DecisionMaking Falters

So how should today's executives cope with the dangers? Bain analyzed more than 375 companies to see how they performed before and after the most recent recession of 1990-91. Several, such as Arrow Electronics, EMC, and Chrysler, used the recession to reverse declining fortunes and launch business trajectories that carried them forward for many years. What were the lessons to be learned from these success stories? Our interviews and analysis identified a four point approach that is common to winners:
1 Strengthen the core business

Winning in turbulence demands a well-tuned cost position, and everyone knows it. Three-quarters of respondents say that cost reduction programs are critical to success in severe turbulence. But executives aren't just shedding weight, they're adding power. They are using acquisitions and alliances to build economies of scale, expand their clout with distribution channels, and increase pricing power. Unlike the break-up deals of the '80s, these are deals that merge competitors in the same industry with the same products and the same customers in order to consolidate market power.
2 Develop contingency plans before the turmoil hits

The problem for corporate leaders is that turbulence makes decision-making more risky and less likely. Executives find it harder to approve capital spending, R&D expenditures, hiring increases, and advertising dollars. Progress grinds to a halt. This gridlock, alone, can trigger economic slowdowns.

Ninety percent of respondents believe that in turbulent times it is more important than ever to have a clear strategy. That's just the start. Many take the concept much further: Have a plan, a backup plan, and a contingency plan. Think ahead. Imagine alternative environments and develop strategies for
Successful companies are using acquisitions and alliances to build economies of scale, expand their clout with distribution channels, and increase pricing power.

even the worst conditions. Make decisions before increasing pressure makes them even tougher.

Effective turbulence planning requires asking (and answering) some critical questions:
What are our objectives, priorities, and values? Turbulence always forces leaders to prove with actionsnot with elegantly phrased mission statementswhat they value the most. The best compass in turbulent times is a strong set of core values that consistently guides choices among tradeoffs. Is revenue growth more important than cost reduction? Is market share more valuable than profit margins? Is the loyalty of employees and customers more consequential than quarterly earnings targets? What are the most important decisions we will need to make? Long before deciding, the best
3 Act quickly without overcorrecting

The best compass in turbulent times is a strong set of core values that consistently guides choices among trade-offs.

F. Scott Fitzgerald once said The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function. Leaders in turbulent times have to act on imperfect, even conflicting data. It can be more important to make timely decisions than perfect ones. At the same time, acting quickly does not mean overcorrecting. Frequent adjustments are usually better than wild flip-flops. Keep in mind that since 1950, the average recession has lasted less than 11 months. Overcorrect, and you could be zigging when you should be zagging.
4 Distill and disseminate wisdom from experience

companies simply discuss what should be decided. Research shows that under stress most executives tend to reach for the same levers they have pulled in the past. Experienced executives make sure they are reaching for the right levers before they start pulling anything at all. What changing conditions could we encounter? Survey participants suggested several methods for envisioning alternative futures and challenging conventional wisdom. In planning for turbulent times it is important to encourage company Cassandras, people who generate nightmare scenarios that often surface genuine causes for concern. The objective? Avoid the traps that snare overconfident managers. What conditions would trigger a change in course? Only 16% of the executives interviewed strongly agreed that if a slowdown hits our economy, we are well prepared to quickly implement appropriate contingency plans. Moreover, it does not help to have these plans if you have not decided what events would trigger you to use them. Determine up front what significant environmental changes should be monitored, and what level of change would dictate a shift to plan B to protect your strategic position and profitability .

There is no substitute for experience. The problem is that only 35% of today's CEOs were in the pilot's seat during the last recession. Turnover rates at middle management levels have been even higher. Management teams have less experience working together than ever before, just when turbulence requires even greater teamwork. Seventy-five percent of senior executives fear that managers have a false sense of security after seven years of economic prosperity. Companies are scrambling to codify the experience necessary to thrive in turbulence. Many are finding insights in the strategies of smaller companies that have to deal with extreme turbulence everyday just to survive. As economic turbulence becomes the norm, the dangers are real, but so are potential rewards. Leaders who strengthen their core business, establish perceptive contingency plans, act decisively, and build wisdom from the experience are far more likely to find significant opportunities in the tumult. 3

Bain & Company:

Strategy for Sustainable Results

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