The Materials Analyst, Part 105: Another break from the technical – Thoughts on doing business during a downturn

Don’t make the mistake of waiting until things get better to improve your business. Find out what makes you the vital business you are to your customers and make it the company culture.

There are models and lessons on how to conduct business all around us. We tend to think of business as what happens in the office during “normal” hours. This used to be Monday through Friday from approximately 8 a.m. to 5 p.m., but few of us have escaped the penetration of work into our traditional away-from-work environs. Nevertheless, there is still a well-defined line in most people’s minds between work and the non-work part of our lives. Business is conducted when we work. We have customers and we have suppliers and everyone knows their roles.

But any time you engage in an exchange of services, you are involved in business. The business world is really nothing more than a stage where we have the opportunity to adhere to or deviate from all of the principles that we have been taught on how to live an effective life. The fact that money is involved raises the stakes and makes us take things a little more seriously, but in the end the accomplishments we leave behind are likely to be secondary to the relationships that we build, for better or for worse.

So whether you are flying on an airplane, dining at a restaurant, or shopping for electronics, you are in a business environment where the company providing the service has an opportunity to amaze, disappoint, or occupy that middle ground in between that characterizes most of our experiences. We are fairly clear on what we want from our experiences as customers, but somehow when we form companies and provide those services to others, we seem to forget or think that we are the only ones that value quality and service. The larger the company becomes, the more insulated we are from the consequences of our actions because of the protection of the institutions that grow up around the organization.

Until there is a downturn. Then the harsh reality of performance impinges on our offices and our factories and takes a toll as the excesses are winnowed out of the organizations. This process is seldom fair and often does not fix root causes because it is conducted by people with their own built-in biases and self-interests. But overall, business declines because demand drops and when there is less to do, there are fewer people needed to do it. Interestingly, downturns do not affect all operations equally. In my travels, I frequently walk past two businesses in close proximity to each other serving the same markets and see one full of customers and the other practically empty.

Clarify your purpose

There are many reasons for the disparity in the health of businesses and many books have been written on the subject. But some aspects of successful companies recur enough in the literature to warrant our attention. Primary among these is a clear vision of the purpose of the endeavor. This gets the company through the hard times. When the economic climate becomes challenging, the first instinct of those educated in traditional business practices is to cut services. The calculation is that the customer will put up with a temporarily diminished level of service and the company culture becomes one of relentless cost cutting.

Unfortunately, the practice frequently becomes ingrained in the operation for the long term and by the time it is finally recognized that things are turning up, it is too late to implement the more forward-looking practices that lead to sustained competitiveness and prosperity. Organizations that are constantly in reaction mode to the economic conditions are easy to spot. They are the ones that are always launching a productivity initiative, a quality initiative, or an innovation initiative. These special programs are often deemed necessary because the values associated with productivity, quality, and innovation are not woven into the fabric of the corporate culture. They are added and removed from the company offerings according to what the financial people feel the company can afford to extend to its customers.

The regrettable aspect of cutting services is that the things that are cut are often those things that make the operation distinctive. A good example comes from the airline industry. In 1984 a new airline based in Milwaukee was started. It had originally served the travel needs of Kimberly-Clark employees and was spun off as its own enterprise. When the company was founded, it set out to do things very differently. The front-line people were unfailingly helpful and friendly; all the planes contained seating throughout that is typically only seen in the first-class cabin. The food was excellent (you read that right – airline food that was excellent), complimentary red and white wine were served with meals, and then there were the chocolate chip cookies. These amenities probably represented 4-5% of the purchase price of the average ticket. Travelers would frequently go out of their way to fly the airline, even if it cost a little more.

But when the airlines went into their cost-cutting mode in the mid-‘90s, the good food and the wine disappeared. Gradually, planes began to appear in the fleet with typical seating arrangements and eventually a first-class area at a premium price was added. And while all these changes were made in the name of cost cutting and staying competitive, the airline is one of the more expensive to fly these days and it looks more like every other airline than it ever has.

Cost is not king

The problem with business models that focus all of their attention on costs is that they do not distinguish between those services that are standard and can be made more efficient without impacting the customer and those services that make the company distinctive and provide an incentive for customers to do business. Often the people making the cuts do not even know the difference between the two. And in taking out those services that make a company special, they effectively turn themselves into commodities and have nothing to talk about except price.

The lament that it’s all about price is the hallmark of a company that has lost the creativity and the will to make the business relationship about something besides price. As consumers, we know it is not all about price. If it were, we would all be driving Yugos and watching 12-inch black-and-white television sets. And yet as business people we somehow get talked into the proposition that price is the only thing that matters to our customers.

Some companies endeavor to improve customer service by conducting surveys. These are fine when measuring the general ability of the company to perform the basic functions that everyone expects. It does not take a survey for an airline to figure out that customers have basic expectations of an on-time departure and arrival and a bag that gets there at the same time they do. But in the forefront of a company’s efforts to improve should be the understanding that the most successful products and services are frequently the ones that the customer would not think to ask for.

If you think this is a doubtful proposition, look at your personal spending in a month on all the services that you use to keep yourself connected to the outside world. Thirty years ago this probably consisted of the telephone that hung on your wall in the kitchen or sat on the bedroom nightstand and a newspaper delivered at some interval during the week. Today these two items may not even be a part of everyone’s daily life. But in their place is a computer with an Internet connection, a cell phone (one for everyone in the family), a Blackberry (or two), and some form of cable television service that has expanded the three to five free channels of old into the 200-500 channels that cost anywhere from $40-$100/month.
Of course, none of these new items was seen by virtually any consumer as things that they wanted or needed 30 years ago. As Henry Ford famously said of his part in the creation of the auto industry, “If I had asked people what they wanted, they would have said a faster horse.” Sometimes, when it comes to the things that are really going to change an industry, the customer is a rear view mirror, not a window to the future.

A smile never hurts

In a declining market, one of the best ways to prevent erosion of demand is to take market share from competitors. One of the greatest untapped tools for executing this strategy is service, and ironically this is something that frequently costs little or nothing additional to provide. Last May I took a flight from Chicago to Phoenix where the flight attendant, with genuine enthusiasm for his job, made the mundane experience special simply with his attitude. The food wasn’t any better and the seats were not any wider, but the flight was so enjoyable that I can still remember the man’s name.

The cost for the airline to operate the flight that day was not one cent higher than it would have been if that flight attendant had been the surly person who usually assaults those in the aisle seats with the beverage cart. But I can virtually guarantee the airline that if they were to train all of their front line people to conduct themselves the way this gentleman did, they would take market share overnight and probably would be able to charge a few more dollars for each ticket without hearing any complaints.

There is one more strategy that is important to weathering a downturn: financial stability. This lesson is being driven home every day in the news with stories of once-mighty institutions that have virtually collapsed because they tried to leverage huge amounts of assets with very little real capital. I remember a few months ago watching Jim Cramer on CNBC conducting a phone interview with a CEO in which he inquired as to why the company was in such a solid position compared to its competitors. The CEO answered simply, “We don’t have any debt. When you have no debt, you control your future.”

With all the supposedly sharp minds running the world’s financial institutions into near ruin, this sounds like a profound piece of advice. It is decidedly out of step with the trendy creative financing that produced the phantom prosperity that accrued in the years between the tech bust and this current one.

But the logic is compelling. It costs money to carry debt (it’s called interest payments). But more importantly, financial obligations to outside interests constrain the ability of the company to operate. They make it difficult to control the rate at which the company burns through its cash reserves. Reserves allow a company to ride out a rough period without overdoing the cuts, preserving talent and taking proactive steps to research new technologies and launch new products in slack times without worrying about how to make payroll.

Ken Blanchard, taking an analogy from tennis, once pointed out that it’s difficult to hit the ball when your eye is on the scoreboard. Of course you need to be aware of the score, because it helps guide strategy. But if you never take your eye off of it, it becomes a distraction that detracts from the real job of playing the game. And eventually the enterprise sinks into a short-term focus and cannot plan, cannot create, and cannot prosper. Now is the time to train, to experiment, and to invest in the operation. Waiting until the turnaround to do so is like waiting for the rain to stop so that the leak in the roof can be fixed. Once the sun comes out it is all too easy to forget about the leak, until the rain comes again.