LEADERSHIP TECHNIQUESTHAT FLOURISH IN A CONSTRAINED GROWTH ECONOMY

by Tracy Streckenbach, CEO Hillview Consulting, LLC

Understanding Fundamental Differences in Market Timing: Opportunistic Growth Phase vs. Constrained Growth PhaseThroughout the boom years of the housing market, many companies expanded rapidly to capture as much market-share as possible. In a hyper-growth situation, where cash flow is available, hiring is on the rise and market growth is dramatic, companies take advantage of as many available opportunities as possible, simultaneously incubating and launching many new ideas with limited research. They do this with full knowledge that some growth opportunities will not bear fruit and may even lose money before these operations cease. But success in one or more new venture far outweighs the risk and cost of one or more failures. This is characteristic of the opportunistic growth phase.

While placing opportunistic “bets” is logical during phases of extreme market growth, these opportunities must be evaluated differently as hyper-market

growth begins to soften. We saw this during the Dot.com bubble and bust and, more recently, in the commercial and residential building segment. Many business leaders feel at a loss when trying to navigate the transition – and understandably so. Not only do management techniques differ dramatically, but it is difficult to downshift from the high-adrenaline business strategy of opportunistic growth to a more conservative approach of constrained growth as quickly as the market forces change.

Unlike the opportunistic growth phase, the constrained growth phase is often characterized by limited availability of investment capital and human capital, and higher risk associated with the failure of one or more new business ventures. While the limited availability of investment capital is an important factor in a company’s

decision to carefully evaluate new investments during the constrained growth phase, a company’s limited availability of human capital is just as important a

reason for deploying different strategies. In a constrained growth environment, most companies have downsized and each employee is expected to contribute more productivity (often for a lower wage). It is easy to see why new ventures must be carefully considered and why a failure in a new venture can negatively impact a healthy “legacy” business unit.

LEADERSHIP TECHNIQUES THAT FLOURISH IN A CONSTRAINED GROWTH ECONOMY

by Tracy Streckenbach, CEO Hillview Consulting, LLC

Drawing from her extensive experience managing both high-growth start-ups and urgent business turnarounds, Tracy Streckenbach describes important strategies executive leaders should employ as companies enter a phase of constrained growth following a hyper-growth economy. These techniques, says Streckenbach, can be instructive for both start-up and turnaround environments which, as she sees it, are simply two sides of the same coin.

It is difficult to downshift from the high-adrenaline business strategy of opportunistic growth to a more conservative approach of constrained growth as quickly as the market forces change.

Unlike the opportunistic

growth phase, the

constrained growth phase

is often characterized

by limited availability of

investment capital and

human capital, and higher

risk associated with the

failure of one or more new

business ventures.

What Are The Business Strategies To Employ In A Constrained Growth Environment?The single most important concept to build into your leadership team’s vernacular is FOCUS. This critical element of your success is woven throughout each of the techniques below. While it is logical in times of extreme market growth to “place bets” in new business areas, this may not be the case in a constrained growth environment. As companies begin to emerge from a severe economic downturn, a successful strategy demands a keen understanding of your company’s strengths and the discipline to focus your most critical resources in areas where your customers value your partnership the most. As companies emerge from a time of hyper-growth and enter into a nadir in the market, new opportunities are seductive and it requires a constant vigilance to train management teams to stay focused on the company’s competitive advantage.

Understand Your Company’s Competitive AdvantageLeaders who emerge from a crash with a keen eye on the constrained growth phase must clearly understand their competitive advantage in the marketplace. Focusing on what your customers value most about your product, service, or team is critical. It is important to spell out what is acutely meaningful about your company, based directly on your customers needs. This requires a leadership style that is open to soliciting and responding to employee and customer feedback to ensure current and near-term future needs are met. Fostering an environment of open communication with your leadership team ensures you can respond quickly to changing market dynamics.

Study Trends to Acknowledge and Plan for Changes in Product Demand that Emerge In a Market DownturnFocus doesn’t necessarily mean “do what you have always done.” Focus means to clearly target the intersection of your customers’ needs, the traits they value in you, and what

you are capable to deliver. Often, what your customers need from you will change after a significant market downturn. This means your product and service mix will need to change to accommodate new needs. This may include considering lower price-point options, faster delivery, and, often, less complicated/more direct selling messages.

Grow Through Adding Accounts and Highly Correlated Product Groups (see fig A.) Typically, slow growth markets yield downward pricing pressure. For example, suppose you have 100 customers and your average customer purchases 20 units of what you sell each year (products and/or service) at $50 per unit. For each customer, you yield an average revenue of $1,000 per year (20 units x $50) for a total of $100,000 in revenue ($1000 x 100 customers). In a market downturn, some customers will go out of business (now you have 90 customers), other customers will find that their business suffers, meaning they will purchase fewer units from you (now they only purchase 17 units). Requirements for cheaper product alternatives will increase competition (now your average sale price is $45). Although you haven’t changed what you offer or how elegantly you deliver it, your new revenue has deteriorated by 31% to $68,850.

So what can you do to counteract this downward pressure and meet your own revenue forecasts?

A.) CANNIBALIZE YOURSELF – If you don’t someone else will. Find less expensive products that meet new pricing demands.

B.) ADD NEW CUSTOMERS – If each of your customers will buy fewer units and each unit is cheaper, you must add customers just to stay EVEN. Think more broadly about your potential customers and where they could come from; consider new industry segments or a more global

customer recruitment effort. Very often changes in market forces produce new potential customers naturally shifting from other areas of the economy, even in a downturn. Find them.

C.) ADD HIGHLY CORRELATED PRODUCTS – If your products are sometimes substituted for other products, start learning about these substitute products and study the complexity involved with offering a broader line of products. Be careful – this could go against the tenet to FOCUS if it is not managed correctly. New products must be highly correlated and in high demand by your current customer base.

As companies emerge from a time of hyper-growth and enter into a nadir in the market, new opportunities are seductive and it requires a constant vigilance to train management teams to stay focused on the company’s competitive advantage.

Clarifying Key Performance Metrics and publishing them widely will be an important. It will help recondition employees about which activities yield a net financial benefit to the company.

Fig A.

Typical Run-Rate

100 Customers

x 20 units ea.

2,000 units total

x $50 ea.$100,000 Annual Revenue

Constrained

Growth Run-Rate

90 Customers

x 17 units ea.

1530 units total

x $45 ea.$68,850 Annual Revenue

Rev 31%

Measure Results, Not ActivityThe business adrenaline that exists in a time of hyper-growth is palpable. Anyone who lived through the Internet boom in the early 1990’s can surely call up the “feel” of the constant urgency to MOVE or LOSE. In times of hyper-growth, companies train their employees to avoid “analysis paralysis,” make quick evaluations, and move forward into iterative planning and implementation phases. During these market conditions, it is better to try and fail than to blunt financial results because you lost the first-mover advantage.

Conversely, during a phase of constrained growth neither excess cash flow nor idle human capital exists to simultaneously explore a large number of potential opportunities while reliably meeting budgets and maintaining cash flow from your base products and services. During this phase, maintaining budgets and forecasts for your core business alone simply takes more time and energy.

Often, there is a re-training of work style that needs to take place for leaders who find themselves in a constrained growth stage, having just emerged from the adrenaline of the hyper-growth market. Because the company’s momentum tends toward MOVE or LOSE, there is too much moving and not enough traction as the market cools. Clarifying Key Performance Metrics and publishing them widely will be an important tool. It will help recondition employees about which activities yield a net financial benefit to the company after considering any loss in traction that may simultaneously result in your core business as a direct result of bifurcating your focus.

Coach Your Team On What NOT To Pursue… Right NowIt can be difficult to let go of an idea your team has nurtured. During a phase of constrained growth, a willingness to eliminate a lower-performing business segment or an idea where time and money has been invested is a mandatory executive leadership action. Few leaders have experience in making these difficult decisions, and almost none enjoy making them. However, as a requirement for growth emerging from a market nadir, you must be willing to de-emphasize and then focus. The step of de-emphasizing or eliminating underperforming divisions or projects is precisely what frees up the resources (people, time, money) you need to reinvest in your core business and closely aligned “substitute” product or service areas.

Reward Key Leaders and Give Them True AuthorityWhile many companies see the need for a decentralized organizational structure, few follow through with decentralized authority. Why? The underlying reasons are typically two-fold. The first is often an inability to clearly communicate the company’s goals. The second, quite simply, is a fear of losing control. If your leaders don’t clearly understand the company’s financial and strategic goals and how success will be measured, they will likely not make the decisions you would make. It is incumbent on the president of the company to make these goals clear and to measure and disseminate results widely.

In a down market there is a tendency to rein in control. However, a more effective approach is to provide a laser-focused picture of where the company must go and encourage decentralized decision-making authority.

Executive leaders should employ a keen FOCUS as they move through a constrained growth economy. Consider employing the techniques below to ensure the “urgent” doesn’t overtake the priority of the “important.”

Identify and publish Key Performance Indicators that will put the spotlight on results that yield financial business benefit.

Clearly identify where you are going as a company; define what you plan and expect to accomplish.

Identify and capitalize on your competitive advantages.

Define multiple avenues for growth (products, markets, segments) which are highly correlated to your current strength position(s).

Share results openly and support true operational decision-making authority at lower levels in your organization.

Limit distraction by closing under-performing units and retraining leaders to FOCUS, FOCUS, FOCUS.

###

Tracy Streckenbach is the CEO of Hillview Consulting, LLC. An experienced CEO, COO, and Board Member, Tracy has led business start-ups, turnarounds and client

engagements for both Fortune 500 and Middle Market companies in many industries including high-tech, insurance, telecommunications, finance, construction, and national defense. She excels in hyper-growth market development and urgent turn-around management and possesses a unique triad of abilities including: strategic positioning, organizational management, and critical process and technology implementation for a targeted and repeatable outcome.

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