Companies should ask themselves three critical questions as they move from the cost cutting model to the expansion model.
The challenges managers face will be very different from those of previous years. During the recession, most companies knew what to do: cut costs. But in recovery, the corporate muscles that were not exercising have to get in shape again. In preparation, directors and managers would do well to ask three basic questions.
What is Success?
From the post-war to the 1970s, a company's success was judged by a mix of indicators, including its economic performance, its reputation with customers and employees, the value of its actions, and its responsibility to society as a whole. In the 1980s and 1990s this changed: New academic theories, the boom in acquisitions and mergers, the prominence of shareholders, shifted the focus to "shareholder value"; all too often through the narrow prism of short-term changes in stock prices. This creates problems when companies try to manage the next era of growth while avoiding the pitfalls of the previous period.
First of all, aren't we rewarding and punishing management teams for something over which they have relatively little control? Research suggests that the relationship between a company's fundamental economic performance and its stock price in the short term is weak at best. Some factors outside of management's control, such as investor perceptions and general market conditions, can have a significant impact on the stock price. Did CEOs really deserve to get rich from the rising tide of the 90s? Also, some strong management teams were penalized, undoubtedly unfairly, during the break.
Second, how do you adjust the time frames for shareholders and management? Institutional investors hold stocks, on average, for less than a year; and even for shorter periods, hedge funds. However, the results of managers' investments and strategic decisions come in much longer periods. It is necessary to have a tight and understood alignment, not only of the objectives and expectations, but also of the times involved. We should ask ourselves if a more multidimensional definition of success is not necessary. Management must be evaluated for what it can control: the economic performance of the business and the institutional strength of the organization.Both financial and non-financial goals should be set and risks should be determined taking into account the total value of the company in the long term. A more balanced view of success and the time over which it is measured, will ultimately be beneficial for shareholders (and society), because they will encourage more innovation and growth.
How can we nurture talent?
The world is not short of capital looking for opportunities. With the arrival of recovery, the scarce resource for most companies will not be capital, but talent.
Many management teams thought they could win the war for talent during the 1990s boom, handing out stock options and bonuses to their employees, and letting them wear jeans on Fridays for work (casual Friday). When the recession came, there was an abrupt change from "We value your talent" to "You are disposable." Options evaporated, bonuses disappeared, and layoffs came swiftly - in some cases brutally. All of this ripped the fabric of many firms, leaving employees steeped in cynicism. Trust must be earned again and a new pact must be forged between companies and their employees.
Today employees recognize that they are unlikely to have a "job for life" like their parents' generation had, but managers also have to recognize that the requirements of the most valuable employees are evolving. Money is important, as always. But people in their work are increasingly seeking meaning, social connection and identity. The best companies will create jobs and roles where employees feel that they have some control over what they do, where professional relationships are valued, where the balance between life and work is more than just verbiage and where social responsibility is created and employer ethics. Companies that translate these principles into concrete practices and build the organization's social and knowledge capital,they will establish a source of competitive advantage that is difficult to displace.
What is the role of business in society?
During the 1990s boom, business was generally viewed not only as a source of wealth creation but also as the engine of growth and employment in the world - a positive force. With the crisis came scandal, backlash, and loss of faith. The pressures come not only from activists, but also from the mass media, politicians and non-governmental organizations.
Some of these criticisms are clearly valid. Market economies depend on integration in order to function; Companies must adhere to the values and standards of the communities in which they operate, as most businesses do. The drive for growth must not be at odds with social sensitivity and respect for the environment. However, acting defensively only gives activists material. Leaders should demonstrate greater confidence in their moral position as creators of wealth, opportunity, and improvement in living standards; and they should work proactively to build trust between their organizations and society as a whole.
These three questions must be high on the strategic management agenda. By attending to these points in greater depth than in previous growth and recession cycles, companies can generate more lasting growth.
