A Perfect Time to Invest
Craig Barrett, Recently retired chief executive officer of Intel
There is a general rule in business life: market share is won or lost during transitions. These periods can be times of technological or economic change, or when buying habits or other norms shift suddenly with a new generation. For example, the movement to digital from film cameras abruptly moved market share to Sony from Kodak. When Americans switched to fuel-efficient cars from SUVs, Toyota won customers from Detroit.
We should expect to see similar changes in market share as companies respond differently to the financial crisis. The analyst community will be lauding major cutbacks in spending and head counts, and moderating production capacity to align with demand makes sense. But companies that cut back on research and new product development do so at their peril. In the high-tech marketplace, for instance, companies that cut deep into R&D will probably fall behind competitors who continue to invest. In autos, aerospace, consumer electronics and many other industries, the same imperative holds true: you cannot save your way out of a recession, you can only invest your way out.
The United States has put itself into something of a competitive struggle with other countries in part by cutting back on investments in basic research in the physical sciences over the past two decades. It makes no sense to repeat this mistake at the corporate level.
CEOs must screw up their courage to buck the conventional wisdom of Wall Street and invest through the downturn (after all, by now we should recognize that Wall Street is hardly wise). It's time for long-term thinking in an environment that has too often been dominated by quarterly statements.
Gaze Into the Crystal Ball
Jim O'Neill, Head of global economic research at Goldman Sachs
Corporate leaders somehow need to judge how long the global slowdown will last. If the slump turns out to be severe but only short-term, companies that reduce inventory and cut back staff too aggressively will suddenly have to restock and rehire just as aggressively. But for most CEOs, especially those running public companies that risk falling stock prices, it seems easier to cut and take the risk. The equity markets are likely to remain unforgiving of companies that are too optimistic and don't cut costs.
Faced with such uncertainty, it is extremely difficult for business leaders to quell the anxiety of their staff; indeed, it might be irresponsible to try. That said, the crisis has demonstrated that we live in an era when capitalism needs to be managed. More than any time since World War II, governments that intervene to smooth the economic cycle will better handle the crisis. President Obama may be a blessing. It's an idea that many business people, influenced by the Reagan-Thatcher revolution, find difficult to accept, but this is the new era that we have entered.
The downturn should provide opportunities for CEOs to buy cheap assets. The best business leaders don't get blinded by a crisis and can see the difference between a cycle and a persistent trend. On almost any measure, many stocks are now so well priced that we may all look back in a few years and regret not having bought more. The only dilemma is which!
Down and (Not) Out in Detroit
Bob Lutz, Head of global product development at General Motors
As Vice Chairman, I'm close enough to our CEO, Rick Wagoner, to understand what General Motors is doing. For a while, we have to seek stability, and focus on conserving cash. We can't spend a dime that we don't absolutely have to spend. But you can't live long term by just playing defense, so at the same time we're aggressively pursuing our next product lines—vehicles like the new Buick LaCrosse, Cadillac CTS Wagon and SRX, Chevrolet Equinox and so forth—as well as the increasingly high-technology vehicles, like the Chevrolet Volt and Cruze, that get higher mileage and are environmentally sound. We also continue to play offense, despite our constrained budget, in China, India and other emerging markets, the areas promising the most growth.
I don't believe anyone in the automobile industry, including the large European and Asian companies, is thinking, wow, it's great that our competitors are all losing money; this is our chance to swoop in and grab share. Everybody is minding their own business, conserving cash, seeing how much they can bring costs down and focusing on getting through this period of extreme economic hardship. But you can't just assume this downturn is going to last forever. Good companies will strike the right balance and invest so that they're ready with highly competitive products when the market turns around.
It's wrong to whistle past the graveyard and project an optimism that isn't really there. Our employees are intelligent people. They follow the news. They are aware of the challenges. It's best to be honest with them. The situation we're in requires sacrifices from everyone—employees, executives, suppliers, dealers, stockholders and bondholders. The list also includes municipalities, states and the federal government because of lower tax revenues collected from normally profitable businesses. I think our CEO projects exactly the right tone. He very calmly states that we're in a very severe situation, it is going to take time to get through this, it will cause a lot of pain for a lot of people, but we have a plan, and if everyone works together I am very optimistic that we will get through this. That's an entirely honest statement, and it is always delivered with a great deal of conviction because Rick believes it himself. It tells employees they have a leader who is rightfully concerned, is being honest with them and is confident in the future.
The simple fact is there is no incentive for Americans to buy more-expensive, fuel-efficient automobiles when gas prices are low—so, yes, we do need a better, honest dialogue with the federal government, one based on mutual trust. With President Obama's election, there is a lot of optimism and hope among Americans. And I don't discount that. I'm a great believer that the emotional component will help turn things around. But beyond the emotional component, a stimulus package must make credit available to consumers and get consumers confident and liquid enough to buy cars and homes. It is vital. We cannot let the economy stagnate at this level of industrial production.
We also very badly need a national energy policy. It seems our industry always disagreed with what the government wanted us to do, and often the government wouldn't listen to us as to why. We need a productive dialogue, and workable fuel economy and emissions regulations. We cannot plan future products if we don't know the price of fuel three or four years from now.
Peaks and Valleys
Reid Hoffman, CEO of the social-networking Web site LinkedIn
Silicon Valley is still in a growth mode. but we're BEING much more careful. When we look at a proposal, instead of saying, "That's good, we'll just hire people for it," we wind up doing one or two of them with existing staff. It's important to identify the key metrics on how the economic environment is affecting your business. Almost no one who is doing serious business today was alive during the Great Depression.
Silicon Valley firms are highly adaptive. And there are opportunities now. It's easier to recruit from companies that are not doing so well. But I don't buy the notion that this is a time to get rid of poorly performing employees. You should be doing that month by month as a normal business practice.
Workers are naturally fearful in down times. Even though we're privately held, we give quarterly results, showing our employees what our expenses and our profit-and-loss statement look like. Being transparent lets them know what they need to do to help the company.
Setting the Example
Diane Swonk, Chief economist at Mesirow Financial
So many CEOs are so focused on defense that they may be missing real opportunities. If you only play defense, you will not be on the right side as the economy bottoms, let alone turns. For us, for instance, there was an opportunity to attract talent and clients as our Wall Street counterparts imploded. The new blood is helping to buoy profits today and will put us in a whole new position on the other side of the crisis.
CEOs must deal with employee anxiety. By being both defensive and opportunistic in tough times, they can send a key message to employees: healing is not just a process of treating symptoms, but of finding a cure for the illness. You are more willing to give of yourself if you believe your company is trying to stay alive and healthy for the long haul.
As a corporate leader, it's extremely important to lead the drive to cut costs with change in your own lifestyle. Given the income inequalities that emerged this decade, it would be wise to avoid adding insult to injury by asking your employees to absorb pain that you should be sharing. I know corporate leaders who are giving up drivers and trading down on their vehicles along with other creature comforts before they ask anything of their employees. Relationships really do matter with both clients and employees. CEOs who have given up on this philosophy will be behind the curve.
The public trust has been justifiably shaken in both our private- and public-sector leaders. Everybody is looking for an easy cure these days, and there are none. We all would be better served by CEOs who are willing to find solutions rather than bailouts.
Taking Advantage of Adversity
John Rowe, Chairman and CEO of Exelon
One thing I have learned in my 25 years as a CEO is that a constant focus on fundamentals, including risk management, is necessary to survive downturns and position any company for the recovery. Because of our financial discipline, Exelon has reported steady results despite today's faltering economy, and we are currently pursuing the acquisition of NRG Energy, another energy company—a deal with the potential to deliver significant value to investors in both companies. We have seen opportunities come out of economic adversity. It is not simply bluster. And I believe that other opportunities for consolidation in our industry will present themselves, allowing companies to build new plants and meet future energy demand in a cost-effective and environmentally friendly manner.
Utilities will play an important role in meeting those energy needs while the country makes the transition to a low-carbon economy. Because our role will be so crucial, I recently joined leaders from major U.S. companies and other groups to advise the new administration and Congress on climate-change legislation that can reduce greenhouse-gas emissions—without further slowing the economy. Sound energy policies and appropriate regulation that reflects business input and provides a degree of certainty can create jobs and spark innovation. But for this to happen, the government must take swift action to develop a comprehensive policy that includes economywide climate legislation, support for energy efficiency, an economically responsible approach to renewable energy, investment in nuclear plants and clean coal, and commitment to competitive energy markets.