By Kathleen Geraghty, TFI Quarterly Forum

Here is a priority topic for almost everyone (even optimists). Following our recent webinar, called “Managing through the Downturn,” we had an exchange with participants about signs indicating that a company is overreacting in a downturn-economic environment. We also talked about best practices that can be leveraged to overcome these adverse overreactions.

A common overreaction, which can have negative long-term effects on companies, is making across-the-board decisions to reduce investments, compensation, and head count by the same percentage—in all divisions and functions. Our interviews last quarter revealed a number of corporate-wide directives to reduce expenses or headcount without consideration for the performance of a business unit. There is no denying that cost reductions are necessary and this broad-brush tactic may be an expedient way to achieve a corporate target, but they can be damaging to technology roadmaps and employee commitment–both critical to innovation. Overreactions are also evident when companies take steps that contradict their own long-term strategy. For example, if the strategy is differentiation, then price discounting in the short term could be dangerous.

I believe that overreactions have a few common characteristics. They typically are driven by a person or small group within the company, rather than by a cross-functional team better equipped to consider the wider implications. Overreactions are often based on external input that may be incorrect, or by framing an issue from a biased view. For example, it can be tempting to pattern expense reduction after competitors’ tactics, but instead it may be the perfect opportunity to boldly contradict prevailing trends and demonstrate a long-term commitment to the market and team.

Prevention of the pain triggered by the examples above is somewhat intuitive. While cross-functional decisions–requiring some degree of debate and consensus–take more time, they should defend against overreaction. This of course assumes the company is not suffering from group think as well. Employ thoughtful decision process, according to a disciplined set of criteria, to help guard against this reaction. In an era of vulnerability, even the corporate and operating strategies that establish our market position can be at risk. Communication that reinforces the company’s commitment to these strategies along with the discipline to resist short-term decisions that dilute or contradict them is the optimal response in a downturn or anytime.

At last month’s Green Manufacturing Conference in the UK, led by my colleague Pamela Gordon, a discussion ensued about making investments in both product R&D and operations processes during the downturn. This response makes sense in some instances, because this investment can be a leverage point that will catapult these proactive companies to competitive advantage by the time the down turns up.

What is your company doing during the downturn that will increase competitiveness? How are you combating overreactions?

Posted by Pamela J. Gordon, May 1st, 2009

Filed to Lean Practices, Logistics, Outsourcing

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