Managing in an Upturn: Focus on Customers and Keep Expectations Low

Executives at a large technology giant like Dell are looking at the same economic data that everyone else sees, which means they have no doubt been watching the first hopeful, although tentative, signs of a turnaround ­– from Wall Street’s best six-month run since 1933 to surveys showing the first increases in consumer confidence in nearly two years.

So, if he were advising corporate leaders at the Texas-based computer manufacturer, would Wharton management professor Lawrence G. Hrebiniak — author of the book, Making Strategy Work – recommend that Dell rehire workers and ramp up its manufacturing?

Not necessarily, Hrebiniak says, noting that top strategists at a company like Dell need to understand their own special place in the computer market — and that the now-anticipated economic turnaround of 2009-10 will not affect every product line in the same way. For example, in the case of Dell, the firm’s success is heavily weighted toward the business-to-business computer market, and the initial evidence is that business clients will be slower in resuming purchases than consumers.

“What they should be doing for expansion is, number one, assessing their consumer strategy to see whether they want to increase their consumer marketing; they have done that before with some retail stores and by working with Wal-Mart,” Hrebiniak says. In the meantime, he adds, Dell could use the uncertainty of the economy right now as an excuse to go to its core business-to-business customers and offer special incentives for placing orders early, which could then justify an increased production schedule.

The type of questions that Hrebiniak poses hypothetically for Dell focus on the same thorny issues that real-life executives are facing in boardrooms across America as a stream of new economic data is — for the first time since 2007 — holding out hope of a sustained economy recovery. At the same time, the new data offers no guarantees that there won’t be a sudden relapse or that the unusual nature of this particular recession — especially its lingering impact on unemployment rates — won’t quash the impact of any turnaround.

Indeed, many experts at Wharton and elsewhere agree that the decision-making challenges facing corporate CEOs and their top strategists are in some ways more difficult in the second half of 2009 than they were during nearly two years of unmitigated recessionary times. That is because managers must make risky decisions on issues like increasing production back to pre-recession levels: Do it too soon and a company could waste millions on unsold inventory, while inaction could lead to significant lost revenue opportunities if the U.S. economic recovery is strong and takes place quickly.

According to Wharton management professor Peter Cappelli, director of the Center for Human Resources, “the big challenge is managing expectations. Good times may take some time to return, and the path may be bumpy. A bad scenario is if companies believe things are [back to normal] and then business hits a snag, requiring more cost cutting and layoffs. So the task is how to prevent companies from getting unreal expectations once business picks up.”

But management experts say the current month-to-month economic uncertainty has an advantage, too, by making it a good time to focus less on short term goals and more on the big picture. That includes shoring up relations with existing customers, looking at shedding unproductive units while strengthening the core brand, and putting an emphasis on branding and on research and development — areas that should not have been abandoned in the first place — in order to be ready with new products when the recession is clearly over.

“This is a moment when clients are re-examining what they need, and they want value for their money,” says Wharton management professor Olivier Chatain. “Clients may be more willing to try new suppliers or switch suppliers, so companies themselves should be looking around for new clients.”

Meanwhile, not everyone is optimistic about the extent of the economic recovery. Some worry there could be a backsliding into what experts call a double-dip recession of renewed losses. San Francisco Fed President Janet Yellen, in a speech near the end of the summer, warned of a less than robust recovery that may be shaped more like a “U,” with an elongated bottom, than a “V,” suggesting a rapid recovery.

Wharton finance professor Franklin Allen looks at the commercial and residential real estate markets as a barometer of economic recovery, and so far that forecast remains cloudy. Allen advises CEOs to “be cautious and to hedge any big risks.” Wharton management professor Ian C. MacMillan suggests the problem is the American consumer, who still faces a crushing debt load and is continuing to cut back spending to the bare necessities. “Many companies used to depend on that type of consumer business, but I don’t see the environment getting better any time in the near future.”

MacMillan advises companies to consider the example of gasoline stations — which increasingly charge less for cash purchases than for credit — and develop similar strategies to lure customers who will pay with cash instead of plastic. He cites consumer electronics giant Best Buy’s aggressive move to open new niches in the crowded retail market, including targeting the growing Latino market, coming up with innovative uses of the social network Twitter, and offering lower price “private-label” TVs.

A recent report by Deloitte Consulting LLP entitled, “Here Today. Where Tomorrow? Taking Action in Uncertain Times,” describes the current status of the U.S. economy as “lumpy and bumpy” and stresses that the uncertainly is causing too many executives at the more than 100 major companies it surveyed to fret about short-term issues and ignore big-picture strategy. Deloitte’s study warned that firms are fixating on “concerns like liquidity and customer retention, not worrying about forward-looking areas like talent, profitable growth and structural change.”

Clearly, many executives are struggling to read the tea leaves of an economy that is finally posting some of its first, very tentative upbeat economic data in roughly two years. For example, July data showed an expected rise in new home sales — up 7.2% with the help of federal credits for first-time buyers and reduced interest rates — while a separate index showed home prices rising again, although still below the 2007 highs. There is also an upbeat tone to consumer confidence, which jumped at a larger-than-expected rate in August but is still well below the mark of a healthy economy.

The biggest conundrum facing corporate strategists involves some grim forecasts regarding employment and the pace of rehiring when compared to other recent economic slowdowns. Right now, the U.S. unemployment rate remains near its recent peak, at 9.7%, and some experts are predicting a so-called “jobless recovery,” with many firms trying to do more with less and in no hurry to re-hire or fill positions that were slashed at the nadir of the recession.

Consumer Anger, Anxiety and Lack of Trust

The number and length of layoffs is not the only aspect of this recession and possible recovery that feels different from previous downturns. Even as the stock market and other economic indicators improve, many consumers remain bitter towards Wall Street and other corporations over reports of huge executive bonuses — given rampant abuses in the home mortgage market and a $700 billion government bailout of financial institutions. That means that rebuilding consumer trust remains a top priority for Corporate America — an area that company marketers should begin work on immediately, regardless of the short-term outlook.

“Some consumers are feeling that they can no longer trust the traditional ways of doing business. This [attitude] will stay with us for a long time,” predicts Yoram (Jerry) Wind, a professor of marketing at Wharton. “It’s an opportunity to build better and more trustworthy strategies with the customers — and now is the time to start.” He says that clients of financial services firms — who watched brokers pocket large fees regardless of how the market performed — are some of the angriest consumers; as a result, these companies may want to assess making their fee system more closely tied to performance.

It’s an opportunity “to show clients that you love them,” adds Chatain, noting that he was surprised to read a recent article about credit card companies raising interest rates on longtime customers, even after the bad publicity about executive compensation and government bailouts. “What they are doing is asking for customer disloyalty down the road. If a firm can show its clients that it will help them through these difficult times, they will remember that. The small things can make a difference.”

MacMillan suggests that some companies deserve credit for understanding the anxiety consumers are feeling as the recession drags on, and for developing innovative programs in response. He cites Hyundai, which earlier this year launched its “Hyundai Assurance Program” to guarantee that car buyers could return vehicles without losing money if they are laid off within 12 months of making the purchase.

Indeed, several leading CEOs agree the downturn has been a good time to refocus on customer relations, including what can be done to garner goodwill that might translate into dollars when spending finally picks up. For example, Home Depot CFO Carol Tome told Fortune magazine that the leading home improvement chain recently launched the “power hour” for those times when consumer traffic is heaviest. During power hour, all employees are expected on the selling floor as a way to create a service-oriented environment that will ensure that customers keep coming back.

Wharton’s Wind agrees that moves focused on building a closer relationship with core customers — either on the business-to-business side or rank-and-file consumers — are a critical priority that requires immediate attention, regardless of whether the so-called “green shoots” of mid-2009 are the real harbinger of an economic recovery or merely a false alarm. “The game is to change,” Wind says. “Those who succeed will be ones that focused on fundamental issues as the financial crisis and the recession intensified. If competitors are cutting back advertising or cutting their sales force, now is the time to increase or maintain them.” He also joins other experts in hailing the rise in social media — which happened concurrently with the recession — and says that some companies now may find popular Internet sites such as Facebook and Twitter to be a valuable tool for reconnecting with customers and restoring loyalty, if handled in the right way.

In addition, companies that have made steep cuts now have an opportunity to think strategically about their future — whether that means expanding into adjacent lines of business or opting instead for a tighter focus on the core market when the inevitable turnaround hits, says Hrebiniak. “They can look at where the growth is going to be so that they think not only short-term but also long-term.”

For that reason, many experts say that it’s critical for businesses to maintain a viable research and development operation for the future, even if there is a short-term need to keep current production costs low. “One thing you definitely don’t want to do is cut research, R&D,” Chatain says. “If you do, you lose a lot of knowledge. You always want to have some new products in reserve so that when times are better, you are ready to hit the road running.”

Greg Paw, the president of Hankook Tire America, recently told a trade publication that Hankook’s strategy during the economic downturn has emphasized not cutting back on marketing and branding activities, as well as looking at ways to become more productive, especially through new technology. “Our focus is on efficiency,” Paw told Tire Review. For example, “we know that many dealers have reduced their inventories and are looking for smaller but more frequent deliveries. Our new web-based ordering system is designed to reduce the amount of time a dealer needs to spend placing and tracking their orders.”

Given this recession’s substantial layoffs and uncertainty about large-scale rehiring in the short run, Chatain suggests that another area of opportunity can be found in products or computing software that increase productivity. Companies that sell these types of products and services should be ramping up production and marketing now, he adds. For industrial companies that are more cyclical in nature, says Hrebiniak, the decisions become more difficult. The $3 billion federal-funded “Cash for Clunkers” program that sparked a surge in automobile sales over the summer, with an estimate of more than 690,000 new vehicles sold, has now created something of a dilemma for American and foreign carmakers, he states.

No one can accurately predict whether the uptick in sales will continue past the end of the program in late August, says Hrebiniak, and that means it is difficult to manage both inventory and employment. But he notes that automakers can make better decisions if they look more closely at the data and understand the variations within the marketplace, such as what appears to be a long-term decline in demand for foreign luxury cars as well as so-called “gas guzzlers.”

Wharton operations and information professor Morris A. Cohen acknowledges that inventory management — along with hiring — are the most difficult issues facing executives right now. The unique aspects of this downturn make it hard to use the normal predictors — such as advance orders of machine tools — as guarantees of a long-lasting turnaround. “[We are in] the worst downturn since the Great Depression, which means that perhaps what happened over the last 20 years doesn’t apply,” he says. “Maybe this is [like the] one-in-a-hundred-year flood. People are more risk averse. They are saying that just because it worked out this way the last three times, doesn’t mean it will work out this time.”

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