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 / Spring 2008 / Issue 50(originally published by Booz & Company)


Upturn Thinking in a Downturn Year

Why it’s important not to lose sight of long-term goals during a recession.

The collapse of the telecommunications market in the early 2000s was difficult for Lucent Technologies, the communications systems supplier that had been spun off from AT&T in 1996. In 2001, telephone service providers — a major customer group for Lucent — reduced their capital expenditures by 29 percent. To deal with this decline, Lucent’s CEO, Henry Schacht, commenced a major restructuring program. Total head count was reduced from 106,000 to about 62,000 through restructuring, attrition, voluntary retirements, outsourcing, and the sale of businesses. Then in January 2002, Patricia Russo was named CEO, with a mandate for restoring the business to profitability. Most of the attention paid to Lucent, by insiders and outsiders, was still focused on the short term.

But not all of the attention. Within a few months of taking the position, Russo launched an initiative to identify new growth areas for Lucent. The objective was to start new businesses before the recovery was complete. These new businesses would make use of Lucent’s core capabilities and provide a revenue and income stream that would be more stable and could grow even when the telecom hardware business was in decline.

The growth team conducted a short and intense study, drawing on an outside firm for help. This resulted in a proposal later in 2002 to create a new services business. Eventually named Lucent Worldwide Services (LWS), it was aimed at a diverse customer base and insulated from the business cycles of telecom infrastructure equipment. For the subsequent merger of Lucent Technologies with Alcatel, Lucent’s services business was one of the compelling strategic rationales.

Nearly all industrial corporations are subject to business cycles. Lucent’s story shows how important it can be to think about the next upturn even during a downturn.

At first, this seems counterintuitive; after all, in the midst of sales declines and the buildup of unplanned inventory and capacity, corporate leaders naturally turn to austerity measures and restructuring efforts to reduce capacity and control expenses. And these reflexive actions should be applauded. They have been responsible for the relatively shallow recessions of the past few years.

However, a mere recovery from crisis is not enough to deliver sustainable success. During World War II, for example, the famines of 1944 led some military planners to look ahead to the war’s end and how they would help Europe rebuild its shattered farms and infrastructure — an effort that became the Marshall Plan. Similarly, the long-term success of companies may be determined not just by how well they handle a downturn, but also by their foresight in preparing for the upturn.

The upturn SWAT team that Lucent applied to create LWS is one successful technique for this. Another is a combined long-term and short-term planning process, which has been used effectively by Cummins Inc., the manufacturer of  power generators and diesel engines for trucks, buses, and construction equipment. Cummins, based in Columbus, Ind., operates in a market that is accustomed to recurring business cycles. For example, truck owners tend to “pre-buy” their fleets just before stricter emissions regulations take effect, and the entire industry (engine makers, truck manufacturers, and truck operators) has become adept at flexing production capacity to match the expected heavy sales volumes.

At Cummins, this cyclical market had created a culture in which, as one executive put it, “We are really good at doing crisis.” In 2001, after the September 11 terrorist attacks, and in the subsequent slowdown of the U.S. economy, the company decided to handle the crisis a little differently. The downturn was severe: Cummins suffered a net loss of US$2.66 per share and a revenue decline of nearly $1 billion from the previous year. The company’s sales to the core heavy-duty truck segment fell by nearly 50 percent from their 1999 levels.

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