The Crisis Facing Business: Succumbing to the Madness of the Crowd

One year ago, the Dow was at 14,000, venture capital money was flowing, everyone, including private equity, was chasing deals, and managers were spending money like water as they sought to grow their businesses.

Just last week, according to a presentation by the venture firm Sequoia Capital, we are now in drastic times, expenses need to be slashed, recovery is a long way off, and it's the end of the world as we know it. People are frightened and, to ensure their fright will continue, they spread rumors, spend lots of time watching the financial shows, and, in short, succumb to the madness of crowds. How far has the panic gone and how unbounded is the fear? Last week, Cornell University thought it necessary to issue an e-mail to everyone on its payroll saying that it was in fine condition. This from a university sitting on a $4 billion endowment that has survived many previous financial crises.

I am not an economic forecaster -- and most forecasts are wrong, by the way -- but here are some words of advice to business executives on how to make smarter decisions. First, don't assume that there is going to be another depression or even a deep recession. The level of government intervention in the current financial crisis is completely unprecedented. In contrast to today, at the start of the Great Depression the government curtailed trade by raising tariffs, attempted to balance the budget by raising taxes, the Federal Reserve stood by idly, and it took many new laws and the time to pass them to protect bank deposits and provide oversight to security markets. It seems clear that although completely coordinated international action may not occur, virtually every country in the world seems ready to do whatever it takes -- ranging from backstopping financial instruments and financial institutions to providing economic stimulus on a massive scale -- to prevent an economic meltdown.

Business leaders should remember something else perhaps even more important: Even in the worst economic times, there are companies -- and industries -- that arise and grow and prosper. Remember the late 1970s and early 1980s, with a severe economic downturn and stagflation -- the deadly combination of no growth and high inflation? Apple introduced the first PC in 1977. IBM launched its own PC in 1981. The Macintosh with its game changing user interface launched in 1984. And those are just a few examples. IBM traces its history to the 1930s -- yes, those 1930s. And although there was a technology crash beginning almost a decade ago, Google, begun at about the height of the dot-com mania, charged ahead through the ensuring bust and has thus far survived and prospered. Smart companies understand that the easiest time to gain on the competition is when that competition is in full retreat. Business leaders can't control the macro-environment, so they shouldn't try. Focus on your business, customers, and business model and provide the best value proposition. People are still going to eat, shop, drive and use energy in many ways, travel, invent, work, and engage in financial transactions. There must be numerous opportunities to help them do all of this.

Yet many companies tend to toggle from one extreme to the other. It may seem hard to believe, but General Motors -- yes, the very company that today is facing a liquidity crisis and is shedding dealers and laying off workers -- less than a decade ago spent $20 billion on share buybacks and dividends in just a four year period. Such a manic-depressive management approach is expensive and ineffective. Building training and research and development infrastructure and then dismantling it, only to have to rebuild later, wastes resources. Hiring people with big signing bonuses, then laying them off while paying severance, and even later returning to the labor market to hire yet again makes no sense. This is why the evidence on the effects of downsizing is remarkably consistent: According to peer-reviewed published studies, downsizing does not increase productivity, profits, stock price, or innovation.

Smart, well-managed companies avoid these manic swings in mood and actions. Southwest Airlines, which began in the early 1970s and over the next 30 years was the single highest returning common stock, did not lay anyone off after 9/11 and even now has slowed its rate of expansion but has not cut its overall capacity or, for that matter, its commitment to its customers or its employees. When the dust has settled, it will have a larger market share and enjoy even more loyalty. Kohl's, the department store chain, recently announced plans to continue opening new stores and to use the retreat of some of its financially challenged competitors such as Sears to build customer loyalty. A. G. Lafley, the CEO of Procter and Gamble, has kept that company on a steady course, continuing to invest in new products and trying to gain market share as its competitors cut back. Google continues to introduce new products and services and encourages its employees to innovate and experiment, while Whole Foods continues to open new stores and maintains its commitment to product quality and customer service.

What all of these companies have in common is a sound balance sheet and a sensible, deliberate policy of building value through strategies of sustainable growth that has resulted in the financial flexibility to do what seems obvious -- take business from the competition when the competitors are retreating. The short-term, off-and-on, overspend and then overcut, perspective of people even in the venture capital industry let alone almost everyone else makes no sense -- in good times or in bad. So, one final word of advice. If you and your company are able to provide superior quality, service, and innovation to the marketplace, and all of this is mostly accomplished through a committed, motivated, and superior workforce, you will ensure that you will be the last player standing in your market. And unless your industry is going away, that's a good place to be.