There can't be many readers - or many managers, for that matter - who are looking back at the Old Year with pride and pleasure and looking forward to the New with high expectations. As if the threats to peace from the Middle East, North Korea and global terrorism weren't awful enough, managements face uncertain economies virtually worldwide, battered economic sectors like telecomms, shattered stock markets - and widespread and severe loss of confidence in managerial capitalism.
In fact, 2002 was probably the worst year for management in all post-war history. Tenure at the top has become much less reliable in face of under-performance both in underlying businesses and in share prices. Horrifying scandals like those at Enron and WorldCom - whose directors are by no means alone in their dereliction of duty - have made investors large and small leery of both public statements and published results. Greed at the top, it appears, does not trickle down into wealth at the bottom: it undermines the very shareholder value which it ostensibly sets out to magnify.
THE PAST IS HISTORY
Yet one of management's most important lessons is that you should never live in the past, however marvellous or miserable. The events of 2002 are now history. All that matters is what influence they will have on the present - which continuously turns into the achieved future. Much of that influence promises to be nothing but good. For example, if corporate auditors henceforward strive to ensure that their clients' accounts come as near as possible to the truth, the whole truth and nothing but the truth, so much the better for everybody - including managements.
Thinking Managers has frequently pressed home the truth that accurate numbers are essential to effective management, and that deception of the investors is often self-deception by the executives. Who at Cisco was aware that all its profit was disappearing into employee stock options that were not being properly expensed - or actually expensed at all? Beside this enormity, the real-time, online financial reporting on which the company prided itself was of very little account. Reality and realism have to be the guides.
So if 2002 gave you a hard time, and 2003 looks no better, pick yourself up and start all over again. Be sure to find out first exactly where you are now. Here you can take a lesson from the much-praised boss of British Petroleum, Lord Browne, who has been 'humiliated', in the word used by the Financial Times, by the badly missed production targets revealed in November. Browne has bypassed senior executives to discover 'the true state of the business' from juniors at grassroots level.
The cloud of untruth that enveloped BP, however, stemmed from the chairman himself. His critics claim that he 'created a culture of fear in which executives were afraid to report failure, resulting in an ever-more glossy and inaccurate picture being reported up the chain of command'. Again, the broken rule is one that Thinking Managers has taken every opportunity to stress - that actual management happens from the bottom up, not the top down, and that top-down efforts to drive subordinates to higher performance are often self-defeating.
IMPURE INFORMATION
As Browne himself put one aspect of the problem, impure information results when reports, forecasts, etc. are 'distorted by trying to put things in a favourable light'. BP's directors were ordered to conduct the grassroots level reappraisal, but it is, of course, better to use outsiders who can talk confidentially to the employees. That, as readers know, is the basis of the consultancy work carried out by my own Strategic Retail Identity. It's amazing how much can be learned about a company by unstructured one-on-one interviews lasting no more than 90 minutes. Certainly, BP's 'culture of fear' would soon have been discovered.
You could benefit greatly by asking a trusted outsider to establish the strengths and the weaknesses of your organisation, and to garner the advice of your associates about how best to enhance and exploit the former and eliminate the latter. Never succumb to the comforting illusion that the market or the economy are to blame for your own troubles. Far safer to look for the curable defects within your own zone of responsibility. After all, here you do have the power to act. You can't, however, affect government economic policy.
You can, though, seek to make the best of the economic environment. Any cloud can have a golden lining. Take the extraordinary case of ABB, once the European wonder-company whose boss, Percy Barnevik, was acclaimed as enthusiastically as BP's Lord Browne (voted Britain's most admired manager four years running). Investors in ABB saw their shares rise by 160% in New York and 225% in Zurich in a mere two months as 2002 ended. This wasn't because of any successes, but rather resulted from dreadful failure. When the engineering conglomerate's terrible flaws emerged, its market value fell by 95% to a piddling $2 billion - a bargain basement rating for a company with a dozen times as much in sales.
The gross over-valuation that ABB won in the glory days has thus been corrected with a vengeance. After all, you can't go much further down than 95%. Since ABB still owns many sound and profitable businesses, run by able enough managements, the upside potential must handsomely outweigh the downside risk. That applies to many other companies. The market as a whole still looks high. But the individual shares of Buffet-style businesses - with strong customer franchises, a solid track record over time, sound management in place and profits that exceed the cost of capital - may have nowhere to go but up, possibly fast.
LONG-TERM FAVOURITES
Buffet, of course, is the great Warren, who retained his reputation as the world's greatest investor by avoiding the high-tech frenzy and continuing to build an empire of wholly-owned assets in unpretentious, solid businesses. He has also stood staunchly by quoted shares which are his favourite long-term investments - including such recent disappointments as Coca-Cola and Gillette. The latter is currently providing an object lesson in how to put the past behind you, optimise the present, and build foundations for a sustainable future.
Its relatively new CEO, Jim Kilts, is a 54-year old outsider, a turnround expert who was not intimidated by the 30% fall in Gillette's shares, or the five-year long failure to grow either sales or earnings, or the scandalous 'trade loading' shenanigans (whereby the channels were stuffed by artificial means to boost quarterly results). Since moving in, Kilts has seen profits rise by 15% in 2002 on a 5% sales rise: that's a splendid example of what I call 'income gearing'. If a company has $8.4 billion of sales, like Gillette, tiny increases in margins flow through into hale and hearty gains in earnings. Kilts duly got the higher margins through tried and trusted, well-worn rules of management. According to Fortune:
'At the beginning of each quarter...direct reports must present him with a list of written objectives they expect to achieve. Each week they have to write a one- to two-page memo outlining what kind of progress they've made on those objectives. Then, at the end of the quarter, Kilts grades them from one to 100. Your pay, your promotions (and yes, your job) depend on your grades. Anything consistently below 80 is unacceptable'.
TOO HEAVY-HANDED
Now, the 'or-else' approach sounds too heavy-handed for my taste (it explains why ten of those 14 direct reports are new to their jobs). But Gillette plainly needed much tighter discipline. The trade-loading was by no means the only sign of bad business. Gillette had become so poor at collecting money, and so good at paying bills, that working capital as a percentage of sales had risen to 36%, against a tiny 1% for Procter & Gamble. Because the company didn't count sales on a daily basis, the trends weren't visible until after the quarter ended - much too late for remedial action. Then, the company had 24,000 different package types, all soaking up warehouse space and money.
Kilts used competitive benchmarking to cut overheads by 4%, reformed the supply chain and abandoned double-digit growth targets for a modest 3 to 5% rise in annual sales. That may be too modest for a company which should be vigorously seeking new opportunities. But turnround men are traditionally far better at righting wrongs than creating new rights. The lesson from Gillette is that within every company, no matter how successful, there are bad practices, covered up by success, which diligent managers can always unearth and put to rights.
By the same token, within every company, no matter how unsuccessful, there are good attributes (and good people) that provide the means for stepping out of the dark into the light. It's essential to look on the bright side of reality as well as the bleak. Your self-analysis, remember, includes strengths as well as weaknesses, opportunities as well as threats. Even the overall economy has some shining spots - including the much maligned internet phenomenon, whose excesses have wrongly received the blame for the burst stock market bubble (communications giants destroyed far more capital).
Here are some silver, or golden linings, from the clouds of 2002:
• Online retail is booming, at up to ten times the pace of US shopping overall. In November British online sales topped £1 billion. Annual sales by eBay, the auction champions, are expected to soar by 60%.
• The stock market high spots referred to above now include, not only battered recovery situations like ABB, but stars of the exploded dot.com bubble - shares in the fast-growing Amazon doubled in 2002.
• The realism over CEO performance shown in Gillette's lower growth expectations has become widespread as the cult of the celebrity CEO (thank heaven) has waned.
• Customers (witness the online boom) are still highly receptive to new products, processes and possibilities. That's a great help for the flood of innovations and innovators that are transforming many markets - for example, in medicine, where targeted drugs, aimed at highly specific symptoms, are changing people's lives for the better.
KONDRATIEFF CYCLE
If you believe in the Kondratieff cycle, none of the good news will come as a surprise. World economic growth slowed down markedly in 1973, thanks to the oil price shocks; the down-cycle, following the prescribed 20 or 25 year duration, lasted until the mid-1990s. The up-cycle should - again in theory - continue until, say, 2013. But what, sceptics may say, about the dangers of deflation? Could the West follow Japan into a prolonged period of stagnant growth, financial crisis (only look at the pension problems in Europe), and corporate struggle to survive?
According to writer Eamonn Fingleton, though, Japan's fate is by no means to be deplored and pitied. The standard of living has soared as its cost has fallen: the trade surplus was 2.4 times higher in the 1990s than the boomtime 1980s: savings as a proportion of GNP are double Britain's: investment per job in manufacture has been running at double the US rate: net foreign assets have nearly quadrupled in the past four years: and the Japanese dominance in many key high-tech industries is stronger than ever.
Here, too, reality and received views are in conflict. Without doubt, however the US war machine is deployed, and whatever the results, many other problems will arise in the civilian arena. But one man's problems are another man's opportunities. And opportunity in 2003 will knock louder than ever.
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