Corner Office-Crisis as Change Agent

Corner Office-Crisis as Change Agent

Effective leaders utilize crisis to force change.

Addiction counselors use a common analogy to demonstrate how alcoholism is a progressive disease. They say that if you put a frog into a pan of boiling water, it will jump out faster than you can say “leap frog!” However, if you put a frog into a pan of room-temperature water and then slowly turn up the heat, the frog will stay in the water and will not attempt to escape, even while it is being boiled alive.

Why? Because the frog does not notice the gradual change in temperature. The point is that addictive behaviors start out casually, with minor unacceptable behavior. Over time, the behavior grows more and more out of control, yet it is still accepted and becomes the “new normal.” Often, it takes a major crisis, such as spending time in jail or losing a spouse, before the addict will attempt to change his or her ways.

But to some extent, isn’t that the same for all of us, not just addicts?

Human Nature to Avoid Change

As a country, it has taken a major recession to force changes in our behavior. For instance, it doesn’t take an IQ of 140 to realize that for years the U.S. auto industry was offering gas-guzzling and emissions-spewing vehicles that were not competitively priced. We went along for years with complacency—even though we knew that General Motors couldn’t last forever with things the way they were.

Despite many minor turnaround plans under the old management regime, nothing substantial changed until GM’s major cash crisis last year that put its fate into the hands of the government. Now GM has new leadership under the watchful eye of an “auto czar” and is implementing a “reinvention plan” so that it might be a profitable, competitive company once again. Why did it take a crisis to make those changes?

Another example is health care spending and funding. According to Medicare, national health expenditures have grown from $666 billion in 1990, to $1.4 trillion in 2000, to $2.4 trillion in 2008, significantly outpacing average annual growth in the overall economy. If this growth continues, national health expenditures will reach $4.4 trillion by the year 2018 and make up one-fifth of our gross domestic product. Medicare is projected to be bankrupt by 2017, along with many more small businesses and families who can’t afford health insurance.

This problem is now a national crisis that is consuming the attention of our president, Congress, and most Americans. Yet haven’t we known for years that health care spending was out of control?

And, last but certainly not least, another example is the collapse of Fannie Mae, Freddie Mac, and other Wall Street firms a little more than a year ago, and the resultant global economic recession. Anybody who was conscious at the time knew that the stock market was overheated, that the derivatives market was highly speculative, that the subprime mortgage market was risky, and that too many people were making too much money without providing real, lasting value.

But it took a major Wall Street crash, high unemployment, and a recession to get our attention, didn’t it? Now consumers are forced to save money instead of spend it, banks give loans only to the most creditworthy customers, and making outrageous amounts of money on Wall Street is now considered poor taste rather than fashionable.

Effective Leaders Don’t Wait

As business leaders, we have to remember that frog in the hot water: Don’t wait until things get so painful that you are forced to jump at change to avoid complete failure.

One thing is clear: Crisis is a powerful motivator for change. By the same token, inaction is the worst response to the unknowns of a crisis, and knee-jerk or rash reactions can be just as harmful.

Effective leaders look ahead to anticipate and proactively manage risk to create a business that sustains both good times and bad. They act to avoid cash-flow crises, rather than wait until the CFO informs them that the company can’t make payroll on Friday. A knee-jerk response to a crisis can create a sense of panic in a company. Good leaders know it’s always better to be humble and seek input from others, put their egos aside, and admit they don’t have all the answers. And that will allow them to see something critically important: the hidden but substantial opportunities that exist in a crisis.

So if you want to be an effective leader, what should you be doing now?

Determine your company’s exposure. First, confront and quantify some potential outcomes head on. For instance, what would happen with a 25 percent decline in sales or a 10 percent decline in prices? What would be the effect of your top three to five customers or suppliers going out of business? How will consumers’ reduced capacity for debt impact demand for your products? With credit constrained, how will you finance your operating needs? And, what effect will the increased costs of debt and equity have on your ability to achieve profits?

Manage your company’s exposure. Experts agree that liquidity through cash flow and access to capital are the keys to a company’s survival during an economic downturn. Managers must understand their company’s revenue sustainability, cost base, asset base, and outstanding liabilities. Also, the company’s market position and future prospects should be analyzed to determine competitiveness.

Given the lending climate, the earlier debt renewal negotiations commence, the quicker change can be implemented. Also, lenders are more understanding of companies that actively resist insolvency than those that allow the situation to deteriorate.

Businesses can free up capital in a number of ways, including renegotiating supplier and customer payment terms, looking to external service providers, entering into collective buying arrangements, scaling the business back to its productive core by disposing of noncore businesses and assets, outsourcing IT and back-office functions, and adhering to strict investment and capital allocation guidelines.

Think inside the box. Instead of plans to grow market share, it’s a good idea to look internally for ways to operate more efficiently, extract more margin, and produce more profit. A smaller, profitable company is better than a larger one that’s losing money.

Be adaptive and proactive, not reactive. Although we all tend to be reactive and averse to change, the best leaders are the ones who can overcome conflicts, set clear long-term priorities, and focus on proactive goals to serve their customers and generate cash for sustainable success. Past successes can lull a business and its management to sleep. It’s easy to slip into the mode of “What worked in the past will work again.” Effective leaders have learned the importance of change the hard way.

 

In the end, today’s best leaders are using the current recessionary crisis to implement positive changes that probably should have been made anyway. They are the ones seizing the present feeling of urgency and panic to direct change to productive ends and to create longer-term value.

While a crisis can be the best change agent, it doesn’t always have to be that way. If you can get ahead of the problem and look into the future instead of reacting to the past, you and your business will survive the recession and see better times ahead.

Recession or not, here’s to the power of change!

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