This article first appeared in the January, 2004 edition of the Jacksonville Business Journal
The economic cycle is now firmly on the recovery path and in the beginning stage of a new growth period. This shift brings the need to look at the world differently and determine whether we should change some of our business assumptions and decisions.
The last three years have certainly been difficult. Leading an organization during difficult economic times, business downturns, layoffs, shrinking markets and tight money requires a cautious style and conservative rules regarding business decisions.
During difficult times we focus on cost reductions, performance improvement, increased efficiency, maintaining market share, delaying capital expenses, reducing our risk profile, deferring new hires, delaying expansion or new product development, reducing inventory, etc. We establish a "mean and lean" decision-making orientation.
The dilemma is to know when the "tighten the belt" model begins to create missed opportunities and artificially suppress growth rather than take advantage of the beginning of a new growth cycle.
The Danger of Premature Growth
Our dilemma is to charting a course that has the right balance between growth and security. When companies push the growth button too quickly, they invest (spend?) and hire in anticipation of future revenue. They commit their expenses in front of the growth curve. If the growth cycle continues to move as expected, they bet on the right horse. Their cash flow catches up to their expenses and they have built the capacity and infrastructure to convert the business growth into sustained expanded market share.
But if they push the growth button and hire people or make major investments too early, they may find themselves with an excessive debt burden while they hope the market will catch up to them. Their debt structure may impact profitability and their ability to respond to new market shifts. The sins of past decisions impact their degrees of freedom.
This model contributed to the burst of the technology bubble. Companies grew their business in front of their revenue, based on aggressive growth expectations. They solved problems with more people rather than productivity enhancements, or modified business models for larger scale requirements. As soon as the economic cycle slowed, cash flow requirements overtook them and they were forced to cut back. This created the opposite downward spiral until the market finally bottomed and began to recovery.
Hopefully, the lesson of excessive growth and "irrational exuberance" will be replaced with a more considered approach to the new growth cycle.
The Danger of Excessive Conservatism
On the other hand, the reverse orientation is just as bad - maybe even worse. Some leaders are fundamentally cautious. The past several years have rewarded that cautionary orientation. These leaders had companies that suffered less severely, and were able to manage through the difficult cycle with fewer consequences.
However, that same level of caution may now hold a company back and cause it to shrink in an expanding market. If excessive caution is used in decisions regarding new product development, expanding into new markets, building more capacity, adding key personnel, etc. the company that fared very well during the downturn may now suffer comparatively during the expansion and growth years.
When Is It Time to Hire More People?
The point at which new hires are approved is a good company's risk indicator. Companies that are oriented toward growth and are willing to take some risk for the potential reward will hire people before they actually need them to meet current demands. Personnel expansion is their leading indicator. They want new employees in place, trained, and ready to take advantage of new opportunities. They know that new employees will help create more business and find opportunities. Their challenge is to determine just how far in front of the growth curve they are willing to be.
Other companies use new hires as a lagging indicator. They do not add more people until they are forced by current business demands. This safer course protects profitability. On the other hand, it does not allow for new employee orientation and training time and may create performance or service issues, costing the company some current business along with the inability to adequately seek new opportunities.
Finding the Right Balance
Finding the right balance between a conservative and aggressive approach is not easy. It is unique for each industry, geography, company culture and leadership style.
But leaders do need to think hard about their major orientation toward risk. We make business decisions based on our assumptions about the world today - and what our world is likely to become tomorrow.
Times and economic conditions are changing - and will continue to do so. This is the time for leaders to examine the fundamental assumptions that have been guiding their business decisions for the past several years and determine whether they remain the same for successful leadership in the year ahead.
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