Ram Charan has advised some of the world’s most successful business leaders for more than 30 years. He has worked with General Electric, Ford, DuPont, EDS, Honeywell, Universal Studios and Verizon. The author of “What the CEO Wants You to Know,” Charan has two degrees from Harvard Business School and has taught at Harvard and at Northwestern’s Kellogg Graduate School of Management.
Q: What is the most important piece of advice you can give a business on dealing with a recession?
A: There are three points. The first one is what I would call inside-the-business oriented. That is, in any recessionary time, be extra vigilant about keeping your “A” players, because if somebody is doing better, then the head-hunters will go after your “A” players. If the “A” players are not in the communication line, are not involved in dealing with the real issues, then you run the risk of losing them. That is what really makes a company better, the “A” players. No. 2 is that it is a major responsibility of the leadership of a company not to confuse recession with the fundamental problems of an industry or technological obsolescence. For example, in the personal computer business, is a decline because of a recession or is it a reflection of a fundamental change in the growth rate of the industry? There is also the question of whether some portion of demand is going to be replaced by a different technology, the Internet, for example. No 3: Recessions don’t last 10 years in America. A recession could be nine months, 15 months, six months. The challenge here is to manage for the short term. Manage the business for cash. But you also must understand there is a light at the end of the tunnel. This is the time to establish the right balance, to build beyond the momentary storm and come on much stronger so that when the recession is over you go like gangbusters.
Q: Should a company’s attitude toward customers change in a recession?
A: Don’t forget your customers have a recession issue also. How do you connect with them? How do you help them? How do you see their problems? How do you become a hero to them? How does the sales force perform more constructively, less arrogantly than it did in the flush times of the 1990s? You must bring your break even down, but if you are going to cut your business, cut properly and deeply enough. There is nothing more devastating to a company than slicing in small increments what you needed to do properly just once.
Q: How much should employees know about business troubles during a recession?
A: Communication is a most important thing. Get people involved. Get them to see what is unknown. People fear the unknown more than anything else. All of this information must be connected to the external realities that surround a business. Talk to the customers. Talk to the users. Look for early warning signs. A recession could be an opportunity for you if you manage your balance sheet right. Be sure you don’t let your core strengths, such as information technology or efforts to change to digital technology, get depleted. In most industries that kind of work will be very important and should not be pushed aside by recessionary problems.
Q: How will a business owner actually know whether there is a recession?
A: Business people are people of reality. The first thing they begin to sense is that end-user demand growth rates have started to decline. Now, are there other things that a customer might buy whose demand begins to decline before demand for your product declines? Call the industry leaders and search for early warning signals. Printed numbers are obsolete and not very helpful in this process. I have many clients who call other people in their industry to see what they are experiencing. What is happening in other industries? Federal Reserve Chairman Alan Greenspan calls CEOs of many industries all the time to find out what is happening to their demand and that is how he incorporates his thinking with other economic data. He is the most practical of all of these guys in the arena of economics.
Q: Are recessions real or are they merely something that develops because of the mindset of customers worried about bad economic times?
A: When somebody loses his or her job, it aligns the brain cells very quickly. Caution prevails. That is where you see consumption going down, which leads to lower growth or slowdown or recession. But there is one more reason behind recessions. Companies do some strategic planning for the following year, if not for two years. Most of these publicly listed companies are driven on a quarter-to-quarter basis. They begin to see through a variety of early warning signals that chances are strong that demand will decline. Most of them already have excess capacity. Therefore, they can cut their own capital plans and that causes a slowdown in the economy as well. Both of those reasons combined can create an economic slowdown, and that has already begun. That is where we are now. When Greenspan says growth is close to zero, that means that some of the numbers have to be negative, by definition.
Q: Are recessions inevitable?
A: It is human history. In any human group of any kind anywhere, there will be excesses. Six percent growth in the gross domestic product is unsustainable. The pendulum is going to swing back. We had excesses in the valuation of dot-com companies and that has to be corrected too. Investors and securities analysts in the 1998 and 1999 period were like lemmings, with everybody following each other into heavy investment in dot-com companies. Many of them did not do due diligence. That was absurd speculation. Some well-known people got sucked in, and now that has to be corrected, and it is being corrected, and severely. The business cycle is a man-made economy. There will be excesses and they will be corrected. Japan has been going through a correction for, what, 18 years because its politicians have been unwilling to actually solve the problem. In our case, we have some very, very capable people on the monetary and fiscal side. Their actions have already begun. Job cuts have begun too. But the process has to work through before the psychology comes back into line.
Q: What is the message to the average person concerned about a recession?
A: Keep your discipline of doing your work right. Focus on the task you are performing. Nobody can take away your good values, good performance, your confidence. Say by chance an employer gets hurt, you will find a job elsewhere. Have the self-confidence to realize that. We live in a robust economy. It goes up, and it goes down, but it is much less volatile than other economies. If you are working today, keep your values intact and work well with other people, you have nothing to worry about. There is a reason for that statement. Let’s say unemployment goes to 4, 5, even 6 percent. The people who have no values and no workplace discipline will be weeded out faster. That situation corrects itself too. But keep an eye on the process, because everyone knows a company cannot afford to lose its stronger players.
Q: When the news created by reports of recession is so upsetting, how should people avoid panicking about losing their jobs or their investments?
A: Panic is a human thing. But the people who run each company now have to take a strong leadership role. Give people facts. Communicate with them. Tell them what is happening. Show them numbers. Show them data. Align people’s hearts and minds. Under those conditions, there is no need for panic. Actions have already been taken in Washington to shorten the cycle of this slowdown. It will take a few months for the interest rate cuts to work, but they will work. There is no question that some kind of tax cut will eventually take place and that will affect the cycle too.
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This is an edited transcript.
