Boom generation can't cope with downturn

Jul 09 2008 by Nic Paton Print This Article

They might like to present of image of relaxed omnipotence, but the current downturn has been a rude awakening to managers on both sides of the Atlantic, most of whom have spent their formative management years only knowing boom-times.

According to research by consultancy Hay, more than half of UK business leaders now ruefully admit they had the wrong strategy for coping with an economic slowdown and were ill-prepared to deal with its consequences.

The poll of 120 business leaders also identified a startling lack of forward planning for when the economic cycle did finally change and a lack of recession experience among senior and middle management.

And such management short-sightedness and complacency has not been confined to this side of the Atlantic.

In the US, while eight out of 10 executives bullishly believe their companies are better prepared for a downturn than their competitors, few have admitted to taking any practical measures beyond cost cutting.

Research by Boston Consulting Group has argued that too many firms, even when there are clear warning signs of tough times ahead, fail to plan ahead adequately.

The result is often what it terms "cyclical overshooting", or panicked, costly and excessive cost-cutting that is made too late in the day and which in fact is far more damaging than it need be.

The Hay study found that most firms had been preparing for a slowdown for just ten months on average – the exact point at which the credit crunch hit.

Just a quarter of the business leaders polled even confessed they had only been preparing for the past six months, whilst close to a fifth astonishingly admitted they had only just begun their preparations.

Now reality has finally set in, their prognosis is stark. They forecast that the slowdown would hit profits by 1.3 per cent on average over the current financial year, a fall equivalent to £900m across the economy.

Larger companies with more than 1,000 employees expected to be hardest hit, with profits predicted to slump by 2.2 per cent on average, Hay found.

Worryingly, not only did more than half have the wrong strategy in place for the current economic conditions, but more than a quarter had made no changes whatsoever to their strategy in the light of the new climate.

Four out of 10 had simply readjusted their performance targets in response to the economic slowdown.

Of the fifth that had developed a strategic response to the economic turmoil, nearly half conceded their company would be too slow to implement it.

What's more, despite a clear awareness of the need to adapt their business strategy, more than three quarters of the UK businesses polled were not taking steps to do so.

This was despite the fact that the majority agreed the current economic situation would fundamentally change the business environment, with more than six out of 10 forecasting slower growth in Western economies.

Close to half predicted a shift in economic power to emerging markets, while nearly a fifth believed the UK economy would be radically different after the current downturn.

Longer term, well as being ill prepared to weather the current economic conditions, business leaders admitted they were not in a position to capitalise on any subsequent upturn.

Of the third of business leaders who had created a new strategy for downturn, a paltry 13 per cent had formulated plans for when the market recovered, said Hay.

Russell Hobby, associate director at Hay Group, said: "British businesses have been caught out by the downturn – and now risk missing the recovery too. Business leaders must recognise that it will not be business as usual after the current economic strife.

"Planning for the recovery starts now. Economic turmoil can reward aggressive strategies. Only firms with agile business models will stay competitive in both downturn and recovery," he added.

"Now is the time to acquire talent, market share and customers from weakened competitors, and maintain bullish investment in R&D to leapfrog those who have lowered their sights," he continued.

Four out of 10 said their organisation suffered from an inability to know what to prepare for or accurately to forecast economic cycles.

Nearly half said pressure for short-term results from shareholders, while a quarter added that an overly risk-averse board were factors that impaired their firms' long-term strategic response to the slowdown.

"The greatest challenge faced by Britain's business leaders is executing the right strategic response to the downturn," said Hobby.

"The keys to execution are intangible: talent, relationships and knowledge – and so are the first to suffer from knee-jerk responses to economic uncertainty," he added.

A lack of leadership experience and vision was identified as one of the primary reasons for UK companies getting their response to the downturn wrong.

Having witnessed the longest period of economic expansion on record, Prime Minister Gordon Brown's generation of "boom" leaders confessed they lacked the experience required to lead in a bear market, said Hay.

Close to half of the business leaders polled cited their leadership team's lack of experience of managing in a downturn as a serious threat to their business.

A similar proportion confessed to lacking the vision required to lead companies through economic turbulence.

"Business leaders need to be finely tuned to a constantly changing environment during downturn, and ready to react accordingly," pointed out Hobby.

"Conditions can change overnight; clues and signs about customer behaviour are found in the strangest places.

"A keen market antenna, combined with decisive action and a cool head, is essential if UK business leaders are to ensure their firms survive the downturn and thrive when the economy picks up again," he added.