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Soundview Executive Book Summaries
As inexorably as the sun rises and sets, the business cycle moves from a bright and healthy expansion and prosperous peak to a dark and often difficult recessionary trough and then back once again to prosperity. So, how can the modern executive team strategically and tactically manage through the various recessionary and expansionary phases of the business cycle to gain competitive advantage over rivals? Peter Navarro tackles this question in The Well-Timed Strategy, analyzing hundreds of companies that run the gamut from well-known behemoths such as DuPont and Citigroup to much smaller niche players such as Isis and Xilinx.
Strategies and Tactics of The Master Cyclist Executive
Timing is everything. Consider, for example, a "Master Cyclist" CEO such as Johnson & Johnson's Ralph Larsen, who studiously follows key leading economic indicators, who accurately anticipates an approaching recession, and then implements an appropriately "well-timed strategy." Navarro contrasts Larsen with "Reactive Cyclist" CEO John Chambers of Cisco, who he claims failed to read numerous signs that the March 2001 recession was on its way. While Cisco was forced to write off more than $2 billion in excessive inventory, J&J's stock price was soaring when the recession hit.
What all CEOs need is to keep an eye on the management "wheel" that provides an overview of key functional areas of marketing and pricing, production and inventory control, and human resource management. Add to the wheel risk management, the strategic implementation of capital expenditure programs, and the tactical timing of acquisitions and divestures. Navarro stresses that a careful understanding of this wheel will help any business executive team dramatically improve company performance.
Cutting capital expenditures in anticipation of recession is a prudent defense, but a proactive Master Cyclist might consider a potent offensive weapon and increase capital expenditures in anticipation of a recovery. This tactic applies to acquisitions and divestitures (the Master Cyclist knows that it is precisely at the trough of a recession that the labor pool is at its deepest and highest quality) to developing new products and retargeting old markets.
Countercycling Your Capital Expenditures
Nothing can get a company into more trouble than ramping up an overleveraged capital-expansion program into the teeth of a recession, Navarro warns. Readers can take a page out of J&J's playbook; DuPont's highly sophisticated forecasting team pays shareholders big dividends as the company prospers by cutting back on capital expenditures in anticipation of the recession. The Master Cyclist goes on the offensive through the implementation of a well-timed countercyclical expansion, remembering the following key points:
- The Credit-Crunch Dangers of Overexpanding Into a Recession. Top executives can easily fall prey to a "build the empire" syndrome.
- Protecting the Cash Flow Through Countercyclical Retrenchment. Countercyclically cutting capital expenditures in anticipation of a possible recession is an important defense strategy, preserving cash flow at a most opportune time.
- The All-Important Well-Timed Countercyclical Expansion. A true Master Cyclist also goes on the market-share attack by countercyclically increasing capital expenditures during a recession so the company is ready for the recovery.
Master Cyclist Marketing
The Master Cyclist marketer is adept at tactically changing both the marketing messages and the product mix to fit the customer's changing "moods" across the business cycle seasons. Navarro points to El Pollo Loco's value proposition of cheaper dark-meat specials for dark recessionary times that allowed this not so "Crazy Chicken" to boost revenues and profit margins. And Singapore Airlines retargeted its market toward first-class and full-fare customers flying transcontinental routes to smooth out the effects of business cycle volatility while boosting profit margins.
The Master Cyclist marketing team also understands price elasticity — how sensitive buyers are to changes in price. Raising prices in the face of "price-elastic" product demand will decrease — not increase — profits.
Master Cyclist Risk Management Wheel
Navarro sees three major components of the Master Cyclist "risk management wheel." These are:
- The hedging of general business cycle risk. Using tools such as business unit and geographical diversification typically accomplish this. Other tools include natural business hedges, outsourcing and offshoring.
- Hedging — and often opportunistically leveraging — the more specific risks associated with movements in commodity and oil prices, interest rates and exchange rates.
- A wide variety of so-called exogenous shocks. These include shocks to the economy from war, terrorism, drought, disease, earthquakes or tsunamis. The onset of such shocks can create opportunity for the Master Cyclist executive team to develop new products or markets.
By diligently following the macroeconomic calendar, your Master Cyclist team can effectively become your own forecaster. By watching how the stock, bond and currency markets react to each piece of economic news, you can build both financial market literacy and a savvy business cycle "sixth sense" about where the economy is heading and how your business can strategize accordingly. Copyright © 2006 Soundview Executive Book Summaries