By Jim White, PhD
You survived the recession.
Now make sure you survive the recovery.
Look around and you have to question if we are in a recovery at all. Even in the fourth quarter, well into the recovery calendar, the U.S. economy grew at a 2.8 percent annual rate in the fourth quarter, revised from 3.2 percent, which is, once again, slower than previously calculated.
On the other hand, US company profits in 2010 reached record level highs and 2011 is poised for more of the same. U.S. businesses earned profits at an annual rate of $1.659 trillion in the third quarter, according to a Commerce Department report. But what companies do to create these profits is where the concern lies—for them and for you.
Earnings are good, unless …
Any recession changes our behavior—and not necessarily for the good. The temptation during down times is to maximize earnings any way you can. But for many companies, these earnings are the result of lowering costs rather than increasing revenues. Cutting costs to create more efficiency in your operations is good and necessary. But, relying on cost cutting as a way to show a growth in earnings robs your company of its long-term health. It weakens the company from the inside out. You have be creating backlog, filling the pipeline with customers, new markets, innovation, new products and services. This is called creating value. The point is to steel yourself against external factors with long-term solutions.
You only get five years.
Short term earnings growth can also be deceptive because it works, but for no more than five years in virtually every case. My own experience and the research shows that historically no enterprise can last longer than five years operating on this kind of short-term strategy. Growing earnings faster than sales is not sustainable. In other words, companies are rarely able to grow earnings faster than revenues for more than five years and survive by doing so. What happens when external factors like long-term recessions, static recoveries, and other external factors push past their expected durations? You cannot sustain long-term profitability using survival techniques.
Why is this a problem right now? Because we are not out of the woods yet.
Cutting costs to increase earnings, or increasing earnings at the expense of long-term value creation, pulls the plug on your revenue pipeline you should be filling right now, especially with no end in sight to the barrage of factors that threaten from the outside. While we may be on a path, albeit very slow, to recovery in some sectors of the economy, other external factors are already gaining a foothold around us.
Uprisings in Africa and the Middle East, for example, are causing an increase in crude oil prices. Just today, crude oil headed for its biggest weekly gain in two years as concern about the turmoil that has cut Libya’s output may spread to other parts of the Middle East. Crude oil for April delivery climbed 5 cents to $97.33 a barrel at 9:12 a.m. on the New York Mercantile Exchange. Prices for futures closest to expiration are up 13 percent this week, the biggest gain since the five days ended Feb. 27, 2009. As gas prices rise even a few more cents, consumers will take a hit at the pumps, which cuts back on consumer spending and sends us right back to the stalemate economy of the past two years.
Maybe recovery is an outmoded idea.
Or maybe we just need to think about it differently.
I’ve experienced eleven recessions and recoveries since 1970, many of them when I owned OEMs and was involved in distribution. Other times I was involved as an owner or developer. Each time it has been clear that recovery is not about enduring the downturn or even staying ahead of the curve. It is about creating your own curve. Innovation is key. When I was working for a contractor in 1974, we found ourselves without access to cement allocations. I developed our own working plant, and by doing so was able to get in line as a producer for raw materials.
Sound extreme? Not really.
Need calls for innovation. Answer the call and you create real value, not just a band-aid. Find your way through the mess, not around it. Every downturn should make you stronger. I’ll outline some ideas to jumpstart your own thinking as we move forward with these Rebound articles.
The point is to create value for your company that also helps make you more immune to external threats.
Normally we think of creating value as something we do for our customers in order to keep them engaged, on board, and looking to us as their trusted source not just of products and services, but for a total approach to business that helps them make money and in turn does the same for us. Yes, absolutely. But, you have to view yourself as your own customer and create continuous value for yourself as well.
A fundamental principle of corporate finance is to create value by increasing cash flow. You do this through revenue growth and returns on invested capital (ROIC)—in short the right people doing the right things at the right time and continually leveraging assets—doing both to create sustainable revenue.
Examine your own business model.
Get outside the walls of your own industry. What’s working and what’s not working—for you. What are you seeing, and what are you not seeing? Any company large or small can do this using the people and resources you already have in place. Now is the time to toughen up, innovate, and move yourself forward, no matter what is happening around you. Rather than cut costs, try something new that will work long-term. The truth is, more opportunities abound in a recession (or a slow recovery) than at any other time.
Jim White, PhD, is CEO of TES Asset Management and Consulting Group and Tractor Equipment Sales, Inc., in San Jose, CA. http://tesamg.com. He is Founder and CEO of JL White International, Inc.
For more information, please contact:
Susan Kendrick, Senior Marketing Consultant
susan@jlwhiteinternational.com