Ram's Rules for using a downturn to make your company better

The February 18, edition of Fortune Magazine says “There is no one-size-fits-all solution when the economy goes South…smart executives can use the downturn to make their companies better, stronger, and faster,” and has an article called “Ram’s Rules” by über-consultant Ram Charan.  Here’s an XPM (eXtended Performance Management) look at Ram’s Rules:

1.    Keep Building.  It’s okay to go after discretionary spending, but the following are not optional:
-    Product development
-    Innovation
-    Brand Building
-    Personnel (especially rewarding excellence)

XPM says let’s look at the right model: given the economic impact (fewer buyers, lower prices, longer sales cycles), and the internal impact (revenue, cash-flow, debt), what is the optimum scenario for continuing to invest in the business, ride-out the storm, and appease shareholders?  Once we have ‘debated’ the right levers and their impact on the business model, let’s put that plan in place and ‘decide’ to execute that optimum model.

2.    Communicate Intensively.  Ram Charan says “get information from where the customer action is, and get it to the operating people – fast.”  Since the pace of decision-making speeds up during a downturn (you can’t put-off the tough choices anymore), you need a management system that supports fact-based decision-making.  This is where financial and operational business intelligence (‘gather’) and analytics (‘analyze’) offer a foundation for that intense communications.  “The companies that are readiest to act on solid information are primed to shoot ahead of the business cycle.”

3.    Evaluate your customers.  In a downturn you need to identify your most profitable and least risky customers.  Who will buy from you (with a predictable margin), and who will pay?  Customer profitability analysis and reporting is a big part of the “how did we do, and why” half of XPM.  And don’t forget to feed what you learn there into the other half of XPM: “what should we do, and how?”  In this way, your forecast drivers and P&L modeling components will be closely linked with reality.

4.    Just say “no” to across-the-board cuts. The operative phrase being “across-the-board.”  Only make those cuts that have a purpose and make sense.  Don’t cut costs that impact profitable sales and highly rated new product development.  This is a good time to do some serious Product Profitability Analysis (another part of XPM) and divest stagnant brands.  Then use that money to “invest in higher-growth areas.”

According to Ram: “…a slump can also be an opportunity if you use the sense of urgency to improve strategy, management, and discipline.”  XPM is about taking charge.

Comments

[Ron Dimon]

Anecdotal Evidence:
From The March 17, 2008 edition of Fortune Magazine (interview with Steve Jobs):
"We've had one of these (economic downturns) before, when the dot-com bubble burst. What I told our company was that we were just going to invest our way through the downturn...we weren't going to lay off people...And we were going to keep funding. In fact we were going to up our R&D budget so that we would be ahead of our competitors when the downturn was over. And that's exactly what we did. And it worked. And that's exactly what we'll do this time."

[Ron Dimon]

From the March 24 edition of the Wall St. Journal (p. B1, "In The Lead," by Carol Hymowitz)
In "Executives Find Ways to Keep Moving Ahead Despite Economic Fears," Carol gives some additional examples of management lessons to help navigate the coming months. The first event was right in line with this blog post: "Seize opportunities while you can." That is what J. P. Morgan Chase CEO Jamie Dimon did when his team acquired Bear Stearns for $2 a share. Here's the lesson: "The urge is to become more cautious, but for executives, 'the best companies approach down-turns as a chance to get ahead of competitors,' says Steve Schaubert, a senior partner at Bain. 'While rivals may be retreating, they purposefully and quickly find ways to gain market share: by improving customer service, investing in new products or improving their supply chain.'"