Here’s an interesting article by Pankaj Ghemawat in the MIT Sloan Management Review discussing how managers can balance the financial risk of investing with the competitive risk of not investing during an economic downturn. Some key findings:
- The competitive risk of not investing can be higher than managers think.
- Knee-jerk cutbacks can do more harm than good, especially around choices involving your employees.
- Downturns can provide opportunities to buy assets at bargain prices.
- Judging whether investment is cost effective needs to encompasses competitive and financial considerations rather than just the one or the other.
It’s tough to be an executive trying to decide whether your cost structure and investments are aligned with market realities, especially in an era where doom and gloom media literally surrounds you 24×7. This article does a nice job emphasizing the importance of having a very clear competitive strategy and the need for continued investment to grow that differentiation and value. This becomes especially important during economic bust times because others may pull back, allowing leaders to continue investing even modestly and come out with a much better competitive position. This is true of assets but especially true of employees, all of whom carefully watch how leaders respond in challenging times and who can be fantastic sources of innovation and efficiency. Loyalty is very much like competitive position – it’s relative to the options available to employees, so the more leaders treat employees like valuable assets the more likely they will stick with the organization when the boom cycle returns.