Recover Strong

Volume 10 Letter 6

Research suggests that 85% of market leaders lose their leadership position during a recession. Consider the following: Over a two year period, Sony, in the early stages of the 2000 dot com recession reduced R&D expenditures by 12%. The workforce was chopped by 11% and capital expenditures were sliced by a whopping 23%. The happy result of this chain saw massacre was that the Japanese corporation increased its profit margin from 8% in 1999 to 12% in 2002. However, the bad news was that sales growth crashed to a meager 1% from the 11% it was in the years prior to 2000. Since then Sony has struggled to find any market growth.

Suffering from déjà-vous in December 2008, Sony announced another cost cutting target of 2.6 billion dollars. The plan called for the elimination of almost 16,000 jobs worldwide and delayed investments in many areas including a much needed LCD TV factory – one of its core businesses. In electronic book readers, gaming consoles and TVs, Sony is becoming a distant ‘also ran’ in each category to the Amazon Kindle (and soon Apple’s iPad), Microsoft & Nintendo game consoles and Samsung TV’s. One can only speculate on the result and wisdom of these latest cutbacks as Sony continues to fall further behind in its core markets.

Cutting costs across the board is rarely a good strategy. Generalized cuts steal attention from core initiatives stifling projects key to the future of the company. People become pessimistic and cynical leading to a decrease in innovation and productivity. Additionally, trying to do more with less most often results in lower quality and higher customer dissatisfaction.

Contrast Sony with Staples Office Supply during the same 2000 recession. Like Sony, Staples closed down underperforming stores but also invested in areas of growth. For example Staples increased its workforce by 10% to support the high end products and services they were introducing. Simultaneously, Staples reined in their operating costs focusing on supply chain efficiencies. By post recession 2003 sales at Staples reached 14.6 billion – double 1997 sales of 7.1 billion.

What lessons can we draw from both Staples and Sony?

  1. Have a strategic plan. A strategic plan leads to clarity and understanding between business leaders, managers and customers, creating optimism and drive. Staples had a clearly communicated plan to grow in selective areas.
  2. Cut budgets selectively: Cut where needed but hold the line and if possible increase investments in core and growth areas. Staples increased their workforce while they closed underperforming stores
  3. Stay close to your customer: Sounds old but companies that judiciously do market research have a clearer vision of where to invest and where to divest. Staples continued to invest in high end products as they cut underperforming stores
  4. Improve operational efficiency: Find partners and outsource non core activities.

As we slowly recover from this recession lay the groundwork for future success following these simple strategies. Tough to do but well worth it. Recover strong!

For the full story on Sony and Staples see” Roaring out of Recession” by R Gulati, N Nohria, and F Wohlgezogen HBR March 2010 p63-69

Recent Posts