What do business leaders do when confronted by a downturn? Now, just as in previous recessions, their responses tend to fall into four main areas.
They can reduce operational costs and defer capital expenditure. That's the approach adopted by mining giant, Rio Tinto, which is cutting operating costs by $2.5 billion per year and more than halving its capital expenditure to $4 billion.
They can review operating procedures, tighten controls and upwardly delegate decision-making approvals so that expenditure is tightly controlled.
They can narrow the business scope or reduce prices on products and services in the hope that people will buy more.
Or they can cut staff numbers, something that companies such as Sony are beginning to do as it announced plans to cut 8,000 jobs and shut one in 10 of its electronics manufacturing sites.
Looking at these leadership strategies, it is striking that they are all-top down decisions. There seems to be a thinking among business leaders that leadership is best displayed by taking the approach of "call the shots", "carry the ball", "Make decisions!".
So do these type of strategies work?
Well, the stock markets seem to think so, particularly in the short term. It's quite noticeable that shares in companies that take these measures invariably rise. For example, Rio Tinto share's rose 10 per cent when its new measures were announced.
But what happens in the long term?
PriceWaterhouseCoopers reported that following the 2002 downturn, nearly 60 per cent of global CFOs conceded that the costs they were then currently cutting, would creep back into the business within two to three years.
And that's just the cost creep. What happens when the economy starts moving again – are these organisations flexible enough to re-hire, re-train and re-develop lost markets?
What's needed in times like this are not the sort of short-term, top-down balance sheet approaches we see being taken. Rather a style of leadership that is inclusive and cooperative, but still tough might be the way to go.
In this month's Harvard Business Review, Tamara J. Erickson argues that leaders need to take a quite different approach.
- Ask great questions – "Challenge the organisation to respond (to the current situation) by setting intriguing and complex goals. Articulate a compelling mission that will get people to rally"
- Build trust across the organisation – "Don't cut out meetings, or intensify internal competition, or reduce investments in learning. Increase your firm's collaborative capacity by building relationships and encouraging the exchange of knowledge"
- Challenge the status quo – "Ensure that your team is regularly exposed to diverse points of view and experiences"
How might such leadership strategies work in practice?
The simple answer is to ask the people. What might happen for instance, if the company leadership said "We need to reduce costs by 20 per cent - what are your suggestions for doing that?"
They just might find that employees come up with some stunning suggestions. Suppose that staff said "We can reduce costs 20 per cent by taking a reduction in pay - working four days a week instead of five".
Unbelievable, you might say? Well, employees and management at Corus, the huge UK steel maker (owned by Tata of India) have suggested a 15 per cent cut in pay as a sop against job losses.
Now, take Sony's 8,000 electronics job cuts – the equivalent of five per cent of its workforce. How much more would they save if the 160,000 employees decided to take a 10 per cent, 15 per cent or 20 per cent pay cut? And think of the 8,000 jobs this would save.
Would staff be motivated to suggest such initiatives? Well, in today's uncertain times, which would you prefer, a cut in pay or a loss of job? Today, job security is a key motivator.
The question is, are leaders tough enough to take the risk to involve their people?
