Monday, March 12, 2012

Imperatives in Economic Slowdowns

By Virgil Carter

Since 2008, the economy has slowed and become highly unpredictable.  How can non-profit organizations survive, much less succeed, in such conditions?  Author Richard P. Rumelt writes in a recent article “Strategy in A Structural Break” in a recent McKinsey Quarterly that, “By strategy, I mean a cohesive response to a challenge. A real strategy is neither a document nor a forecast but rather an overall approach based on a diagnosis of a challenge. The most important element of a strategy is a coherent viewpoint about the forces at work, not a plan”.

Rumelt points out, “Although the 1930s were very hard times for the United States, not every industry or business declined. As the economy shifted massively from capital goods to consumer goods, some industries—such as steel, rubber, coal, glass, railroads, and building—suffered greatly, but consumer brands such as Kellogg’s hit their stride. Campgrounds and motels blossomed along highways. Airline passenger traffic grew robustly. Entertainment surged with the growth of the radio and movie industries, and of their audience, during the Golden Age of Hollywood”.

“The wrong way forward”, according to Rumelt, “in a structural break during hard times is to try more of the same”. The break and the hard times are sure indications that an old pattern has already been pushed to its limits and is destroying value.

So during structural breaks in hard times, cutting costs isn’t enough. Rumelt points out, “Things have to be done differently, and on two levels: reducing the complexity of corporate structures and transforming business models”. At the corporate level, the first commandment is to simplify and simplify again.  The goal of simplification is to provide lean central and support services that enable business units to be more effective. 

For the business units, the traditional moves are reducing fixed costs, scope and variety.  Rumelt cautions, “In hard times accompanied by structural breaks, you must rethink the way you manage”.  He suggests several new issues for management improvement:

·         How much extra work results from the way incentive and evaluation systems relentlessly pressure managers to look busy and outperform one another?

·         Which information flows can you omit? Information that doesn’t inform value-creating decisions is a wasteful distraction.

·         Which decisions and judgments can you standardize as policy rather than make in costly meetings and communications?

·          How can you work with customers, suppliers, and the government to simplify their processes so that you can simplify yours?

“Recessions are neither good for the economy nor morally uplifting”, Rumelt observes. “But since we are diving into a period of neck-snapping change, we had better start the process of reformation before it’s too late”.

Is your organization sufficiently reformed?

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