The Great Recession and Business Learning
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2009 has been a year of questions. How did we get into this mess? How do we survive? What can we do better?
How did we get into this mess?
From the mid-1980's until just a couple of years ago, it was boom times all the way. If your business career started after 1983, you might be forgiven for thinking that it was all easy and the boom times would go on forever.
In the early 80's, the Dow was about 1100. It grew steadily until October 9, 2007 when it closed at over 14,000.
There were only two recessions in that time. They lasted eight months each and barely dented the growing Gross Domestic Product.
It was a world of celebrity CEOs with celebrity salaries. Home prices soared along with investment portfolios.
Seven figure bonuses were common among the quants, whose equations seemed to have cracked the code and eliminated risk. And over it all there was the UberQuant, Fed Chairman Alan Greenspan.
In late 2007, cracks began to appear in the edifice of perfection. By late 2008 legendary investment houses had passed into history and the economy, along with many investment portfolios, home values, and retirement plans, was in ruins.
The Great Recession dominated the business landscape in 2009. Hopefully, the boom and the slide into recession taught us some important lessons.
What we can learn from the ride to recession
The rules of economics don't change just because some theory says so. Business basics, like cash flow, still matter.
Jack Stack is CEO of SRC Holdings. He was one of the people who founded the company, then known as Springfield Remanufacturing Company.
They started that company during the 1981-82 recession, the last one to go on for more than a year. Unemployment topped 10 percent. The prime interest rate was above 20 percent.
That experience reminded SRC to maintain a ferocious concentration on the business basics. They strive to maintain their experienced labor force, replace leverage with cash strength, and benefit from business cycles.
That concentration on basics meant that SRC was in solid financial position when the Great Recession hit. They could keep their valuable workforce intact and seize any opportunities that came their way.
The laws of human nature don't change. It's still human to confuse good luck with great leadership. When you do that you get prideful. The Greek dramatists called it Hubris and it was always followed by Nemesis.
It's also human nature to be tempted to go along with the crowd. Fortunately we can learn from business leaders who didn't get sucked into the vortex of blind optimism.
One after another, banks and investment houses and fund managers climbed on the bandwagon of new structured investment securities. Jamie Dimon and his management team at JP Morgan Chase did something different.
They unloaded many investments that others lauded and stayed away from structured investment vehicles. At the time, many people, including some on the bank's board thought that Chase was being stupid. Not so much anymore.
For Dimon, the reason to stay away from those investments was simple business. As he told Charlie Rose: "they had no business purpose for real clients."
Two strategies for surviving the recession
For many business leaders, 2009 was the year devoted to surviving the Great Recession. There seemed to be two ways of meeting the challenge.
Some companies concentrated on cutting costs. Layoffs were the method of first resort, just like it was in the manufacturing economy of the 1950s.
Other companies tried to meet the challenges of the Great Recession with tactics more suited to today's world. In a Knowledge Economy people, with their knowledge and relationships are the key to long term, sustainable competitive advantage. That means maintaining an intact workforce as far as possible.
There are good models for this. Companies like Lincoln Electric, Nucor, and Toyota have accomplished the feat during prior recessions.
Finding opportunities and ways to improve
Some business leaders haven't been content to survive the Great Recession. They see it as an opportunity for growth in market share and to experiment with new ways of doing things.
The Great Recession has spawned some great discussions about the way we do business. Some companies increased the number of teleworkers as a way to cut costs and keep valuable people. When they did that, they discovered potential productivity benefits of teleworking, but also the supervisory challenges.
Discoveries like that encourage conversations about how to do things better. They help us question the status quo and find new ways to work.
Conversations about how we choose bosses, alternative career paths, performance appraisal, and ways of working have intensified in 2009. So have conversations about governance, executive compensation and which stakeholders, beyond shareholders, should matter.
Boss's Bottom Line
No matter what the latest business success secret is or what the gurus say, business leadership is always about two things. You must accomplish the mission and care for your people. And you need to do it in a way that everybody wins.
Wally's Working Supervisor's Support Kit is a collection of information and tools to help working supervisors do a better job. It's based on what Wally's learned in over twenty years of supervisory skills training. Click here to check it out.
Categories: Recession,Leadership
Tags: Business Leadership
I enjoyed your post,
What the Great Recession has taught a number of leaders who “just counted on the business coming in each year” that a big part of their role is understanding your market. Specifically understanding your buyers and how they buy.
Market leaders know and value the importance of keeping close ties with their markets. Market losers become angry when the phones stop ringing and believe shear tenacity will make them ring again.
2009 was a wake up call to business leaders everywhere. If you are one of the leaders who were caught off guard and you are writing a plan for 2010…you must first establish: Market Truth as I discuss in my blog post: http://nosmokeandmirrors.wordpress.com/2009/11/23/proven-steps-to-profitable-growth-step-one-establish-market-truth/ .
Market Truth helps you shape and execute strategic plans that add value to your bottom line. Or you can keep assuming, and using your gut, your intuition, and oh by the way…how did that work for you in 2009?
Great content, thank you,
Mark Allen Roberts
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Thanks for stopping by. When things are going well, it's easy to just let things ride and too many businesspeople did exactly that for too long.
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Thanks for the education for us young people who started after the 80's. The people thing is so important, you must make a product that people want and you must be big in the customers eyes. I learned a lot. Thanks.
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Thanks for the kind words, Brad. It's very hard to understand a crisis like this if you've never been through something similar. It's even harder to imagine that it will happen when your entire business experience has involved a rising tide that lifts all boats. You're right, in the end, it's all about people but it's also about the need for sustainable and profitable business.
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Wally,
Interesting entry on The Great Recession and business learning. I was caught by your mention of Lincoln Electric because I have a book coming out in February about the company and its now-61 year old unbroken policy called Guaranteed Continuous Employment.
No US worker at Lincoln Electric (which remains the largest manufacturer of arc welding technology in the world) who has been with the firm for more than three years and who meets the well-defined performance standards has been laid off for economic reasons since 1948.
Published by PublicAffairs in New York, the book is called:
SPARK How Old-Fashioned Values Drive a Twenty-first Century Corporation: Lessons from Lincoln Electric's Unique Guaranteed Employment Program
The continuity of the company’s thinking on this issue is dramatic.
In 1948, James spoke to business executives at the Canadian Club in Toronto: “The idea that Free Enterprise is a system where the fear of losing your job is the incentive which causes a man to work is outmoded, because of the fact that you do not get results. I do not believe in that idea of fear (of losing your job) with its relatively small productivity, relatively small profits and relatively small satisfaction."
In December 2008, I asked John Stropki, Lincoln Electric's current CEO and a 36-year veteran of the company, why his firm had stuck for so long with a promise to place the interests of its employees on par with those of its customers and its shareholders.
"I don't think of this as a social responsibility," Stropki answered as we sat in his office overlooking the vast parking lot at the Cleveland factory. "I think my philosophy and that of my predecessors is that we can perform in an economically challenging environment and we can spread that pain in a way that long-term will better represent our shareholders' interests without crucifying our employee base and we think it is good business, not bad business, to do that."
What is also fascinating is that a 1975 case study by Harvard Business School on Lincoln Electric remains to this day, the best-selling case study in the B-school’s history. It is taught in MBA programs around the world, but sadly, largely as an anomaly – “interesting, for sure, but hardly relevant to our modern economy.” I spent quite at bit of time at Harvard, other B-schools and Wall Street exploring the persistence of that attitude.
If interested, you can see more about the book at my webpage:
www.frankkoller.com ,
cheers,
Frank Koller
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Thanks for adding your voice and insight, Frank. I'm a huge Lincoln Electric fan. I hope you covered more than the layoff policy in your book, because compensation and supervision are important parts of the success story.
I appreciate you sharing that quote from John Stropki. Most of the people who talk about "social responsibility" ignore the central importance of profitability. Companies like Lincoln make a profit. They don't take care of their people because it's part of some program. They do so because it's both the right thing to do and good business besides, especially in a world where long term sustainable competitive advantage is rooted in people with their knowledge and relationships.
I sure hope I get a copy of the book to review. It sounds great.
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Wally,
You're absolutely right. Lincoln's "Guaranteed Employment" policy (which in itself is much more sophisticated - and demanding - than just a simplistic-sounding no-layoff program) is but one element among four policies which drives the company's successful workplace culture. The others which I do explore in the book are:
- an extremely well-defined, rigorously-measured and well-publicized internal system of performance benchmarks,
- a merit-based (derived from the benchmarks just mentioned) profit-sharing system which distributes an astonishing 32 % of EBITB (earnings before interest, taxes and bonus) among all workers each year, and
- a true open-door policy whereby any employee can talk directly to the CEO with concerns about the workplace but just as importantly, with new ideas about improving productivity. (That also sets the tone for open communication at lower levels.)
You can't cherry-pick these ideas and expect to "do better." Lincoln Electric's workplace culture has evolved slowly over the past century. But there are others as well ... Hypertherm in New Hampshire, for example, which hasn't had a layoff since it started in 1968 .. which have realized that "valuing employees" is a powerful business model. It can't just be rhetoric: it takes hard work.
Frank Koller
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Thanks for adding that, Frank. The fascinating thing to me about companies like Lincoln Electric and Nucor is that they initiated the policies they have now when it still make simple economic sense to use layoffs as a first resort. Many jobs then had been reduced to a level of simplicity (and stupification) that people were a kind of interchangeable parts. No more. In a Knowledge Economy, people complete with those human things, knowledge and relationships are not interchangeable at all.
You're also dead right when you note that you can't "cherry-pick" this. The thing I've noticed about companies that are successful for decades is that they grow a culture and then the culture becomes a supportive environment. Most of those companies also consider employees and other stakeholders beyond their shareholders when considering what action to take.
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Nice post and comments. I agree that good management systems are just that systems that cannot be picked apart. You can learn some good ideas and see how to adapt your system to achieve something similar.
A huge problem with how people think of problems is to see what you can do given that we are where we are... Much of the time a huge part of the problem is that you allowed yourself to get where you are. If you plan for the long term you need to plan on very serious economic downturns occasionally and your organization must be to cope in that environment too. Obviously all are large banks completely failed this basic understanding - which is very lame for people that are suppose to judge the credit worthiness of others.
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Thanks for adding your comments, John. Problems have a history and sometimes the heroic measures that a leader takes would not have been necessary if things have been done differently earlier. For me that's another aspect of systems thinking, answering the question: "How did we get here?"
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Well-written article, with very good points. One difference of opinion from here though - you talk as though the recession were over, even using the quaintly-coined term "Great Recession" (with capitalization, no less).
In recent years I have studied the decay of our Constitutional government as it has been occurring since the Civil War. My studies have included the decay of U.S. fiscal policy (beginning in 1913 with the creation of the Federal Reserve), and its concomitant impact on the Great Recession. Numerous times during the Great Depression, the natural corrections of a free market were disrupted and stymied by FDR's continued tinkering and befouling of free-market forces.
Do I see parallels today? Absolutely! Obama appears to have utterly failed to learn the lessons of FDR and the Great Depression (or perhaps he is in fact an adept pupil and staunch advocate of such, depending on how you attribute his motivations). In short - is the recession over? Judging from history, and the Obama administration's current record, NO. Restated in the vernacular, "Obama ain't done with us yet!"
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Thanks for adding your voice, Keith. I choose not to participate in the dueling definitions of when a recession begins or ends and I'm surely not a student of Constitutional government or fiscal policy. "Great Recession" is a term I use because it's a fairly common usage to designate the current recession, even though, in many ways there have been greater recessions since the Great Depression.
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