In Planning for 2009,
Don't Turn a Revenue Slowdown
into a Revenue Growth Stall

With third-quarter planning and budgeting season now fully underway, we are registering a ton of concern from finance and strategy executives in EXBD member companies about the degree of uncertainty they face as they plan for 2009.  Dealing with the double threat of spiraling input prices and softening demand is quite literally unprecedented in the management experience of most senior executives and is creating havoc for even the most seasoned teams. (A finance exec at one leading CPG told us that they have revised their strategy fully three times across 2008!)

As we review the strategies that management teams are pursuing to cope with these challenges, we would remind readers of Stall Points that short-term decisions can have long-term consequences.  Actions that are taken to deal with close-in economic concerns can unwittingly hamper recovery long after those concerns have abated.  For example, our census of EXBD member companies reveals that management teams are pursuing some mix of the following three actions: (1) Pass input price increases on to customers, (2) Reduce costs elsewhere in the business, and (3) Take the hit to profit, or profit growth.  While individual company circumstances will dictate which of these strategies is most appropriate, the experience of companies that have suffered long-term revenue growth stalls suggests that there are right and wrong ways to pull these levers.  Some observations that might be useful as you plan for the balance of 2008 and 2009:

(1) Remember that customer responses to price increases can harden into long-term behavior change.  One of the most consistent patterns we spotted in our research on large company growth stalls was the tendency for customer behavior changes to "stick."  So, for example, if your premium customers are trading down in your product range, or defecting outright to lower-priced competitors, do not expect them to spring back to their former patterns of behavior once economic conditions improve.  The lesson: In modeling the impact of price increases, plan for the worst.    Customers who defect as a result of the increase are by no means likely to return in the future, and customers who trade down in your product range in response to economic concerns are likely to become comfortable with those decisions.

(2) Some cost cuts carry unexpected long-term consequences.  Not just in this environment, though especially in this environment, it is essential that management teams ensure that they are operating in a competitive cost position.  (If you'll forgive the editorial, this is a time when membership in the Corporate Executive Board is especially advantaged, because each of our program canons contains a wide range of up-to-the-minute, proven cost reduction practices and approaches.)  If your management team is currently exploring areas to reduce cost, here are some cost-cutting don'ts drawn from companies that hit stall points:

- Exercise the greatest care in cutting customer and market sensing activities, such as market research, marketing and strategic planning.  You would be surprised at the number of stalled companies that, upon inspection, were sailing without a rudder.  Uncertain times call for redoubling external customer and market sensing, and for increasing the frequency with which senior executives review this information.

- Do not assume that funding for long-term innovation projects can be turned on and off like a spigot.  This is the time to examine closely the degree to which both basic and applied R&D expenditures foot to company strategic priorities, and to continue funding for those activities that offer payoffs in the mid-term horizon.

- Average up the workforce in difficult economic times through targeted, ambitious external hiring.  If you are planning across-the-board salary and hiring freezes, stop and rethink your strategy completely.  This is precisely the time for a contrarian, targeted approach to talent acquisition and retention.

(3) Voluntary growth slowdowns work--too well.  For reasons we don't quite fully understand, there is a momentum behind growth that, once lost, is devilishly difficult to recover.  If you and your team are on the verge of agreeing to a "growth time-out," don't.  

We'd like to amplify any of the issues in this post that readers are interested in discussing further.  Please post your comments to this blog, or, if you are a member of the Corporate Executive Board, reach out to any of us for help and guidance.