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(originally published by Booz & Company)


Why Some Companies Are Making the Wrong Moves

Likewise, one would expect all Struggling and Failing companies to accelerate their efforts to improve working capital positions, slash overhead, drive process improvements, and renegotiate deals with suppliers. Surprisingly, many are not. Between one-quarter and one-third of these survey respondents said their companies are pursuing such long-term cash-generation initiatives no more aggressively than they were before the crisis — and in some cases are pursuing them less aggressively.

The same disconnect between appropriate and actual actions was evident in a series of questions about growth initiatives. One would expect Stable companies, given their relatively strong finances and weak competitive positions, to capitalize on the crisis by buying companies with the opposite characteristics (compelling products or brands but weak finances) or by pursuing other growth initiatives. Yet 21 percent of Stable companies are actually pulling back on M&A; the same percentage of Strong companies are doing so.

Doubts about Leaders’ Credibility
The survey found that two out of every five respondents are skeptical of the plans being put forth by senior executives. Even those at the C-suite level — who presumably created the plans — have mixed feelings, with 34 percent expressing doubts. There is even more skepticism about the ability of management to carry out those plans. And the skepticism grows the farther down one goes in the management chain; among managers who don’t report directly to the CEO, 51 percent expressed some level of doubt that their companies’ leaders will be able to implement their crisis plans.

The wavering faith in senior leadership, not surprisingly, is highest within those categories in which the current actions are most at odds with perceived needs. For instance, among the Stable companies (a group that is moving forward too conservatively), only 43 percent of respondents said their senior leadership has defined credible plans, and only 36 percent said management has the ability to carry out those plans. Confidence is even lower at Failing companies — senior leadership’s plans seem credible to only 36 percent of respondents. Confidence is higher at Strong companies, where 70 percent of managers said management has a credible plan and 66 percent said management has the ability to carry out that plan.

If the responses indicate an uncharacteristic amount of doubt and paralysis among managers, it may be explained by an overarching sense that this crisis is so big and fast-moving that there is no way of controlling the outcome. This concern comes through in the fact that 53 percent of all respondents said the structure of their industry will change dramatically as a result of the crisis, versus only 23 percent of respondents who don’t anticipate major structural changes.

Next Steps for Managers
The gap between logical actions and actual actions, and between respondents’ optimism and their faltering confidence in corporate leaders, are symptoms of one major problem from which companies are suffering. Their world view, at the moment, isn’t entirely realistic. This suggests a three-step process that senior leaders should follow as they plan to restructure their companies during the downturn:

1. Get an accurate read on the environment and your position in it. Without an accurate self-diagnosis, the cycle of inappropriate actions will inevitably continue.

2. Choose the appropriate actions. There are many different ways to strengthen the balance sheet or to reduce costs, some for the short term and some for the long term. Similarly, many companies have options for pursuing growth, such as making acquisitions, developing new products, expanding into new markets, or building a stronger talent pool. The key is to identify a limited set of straightforward initiatives that have the potential to make a difference quickly. Needless to say, these actions must fit with capabilities that exist in-house or that are available externally.

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  1. Shumeet Banerji, Neil McArthur, Cesare Mainardi, and Carlos Ammann, “Recession Response: Why Companies Are Making the Wrong Moves” (PDF), Booz & Company white paper, January 2009: The feature-length article from which this piece is drawn, including more-detailed analysis and results of the survey.
  2. Paul Branstad, Bill Jackson, and Shumeet Banerji, “Rethink Your Strategy: An Urgent Memo to the CEO” (PDF), Booz & Company white paper, December 2008: Outlines the need for bold action on the part of decision makers in the face of the downturn.
  3. Peter Heckmann, Fabienne Konik, Edouard Samakh, and Robert Weissbarth, “Restructuring in 2009: Understanding and Responding to the Crisis,” Booz & Company white paper, February 2009: An overview of improvement actions for managers to help weak companies survive and strong companies take advantage of their position.
  4. Booz & Company Web site, “Managing in a Recession”: A selection of articles on the downturn by Booz & Company experts for industries, management functions, and regions. 
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