Strategies For Difficult (and Darwinian) Economic Times

Charles Darwin has had considerable impact not only on the field of biology but also on theories of industry evolution and management. Within sociology departments and business schools, for example, during the 1970s and 1980s there emerged a strain of "population ecologists" that continues to influence much of the research on organizations and industries today. These scholars see a Darwinian process of survival that occurs at the "population" (the industry) level and has little to do with the actions (or inactions) of individual managers and firms. The argument, in simple form, is that most companies are unable to adapt to major change and that successful companies are mainly those whose structural characteristics happen to match well with demands of the new environment.^a For example, most mainframe computer companies were unable to adapt to small machines and distributed computing, and so they disappeared. General Motors and other automobile makers that cannot efficiently operate at low production volumes and make money with small, fuel-efficient vehicles with tiny profit margins will face the same fate as vacuum tube producers that could not adapt to transistors.

Let me say up front that I do not completely agree with the population ecologist view. I have worked with many companies since the 1980s and believe the actions of managers had an important impact on performance and survival. I also teach in a business school where, we presume, it is worthwhile teaching MBA candidates something about management. But it seems true that many organizations do not seem to be able to change, and that Darwinian processes take place as industries mature, companies fail, and industries consolidate over time. As I have written elsewhere, the U.S. has seen the number of publicly listed software product companies drop from over 400 in 1998 to less than 150 in 2006. The number of U.S.-listed IT services companies has experienced a similar consolidation.^b If we look carefully at other industries—computer hardware, semiconductors, and telecommunications equipment, as well as automobiles—we see similar declines in the number of firms over time.^c

Many of these industries will evolve and change, and even rebound as new competitors and technologies appear. U.S.-based companies like RCA and GE thought the consumer electronics and computer hardware businesses were mature by the early 1970s, and exited—missing enormous opportunities, ranging from VCRs to PCs and Internet services. So it is dangerous to assume that all industries will mature, consolidate, and decline. But what are managers to do when they face difficult economic times in their businesses—especially if, in the long run, theorists tell us the managers’ individual actions may have little to do with the survival of their firms?

First, they should believe in Darwin—the fittest and the luckiest are most likely to survive. Government protection or subsidies are likely only to delay the inevitable. At the same time, however, managers need not believe in the extreme views of the population ecologists. Though change is difficult, something will separate the survivors from the failures. It may sometimes be luck or random processes (the market equivalent of genetic mutations). But managers cannot take that chance. They must assume their actions are relevant and may well make the difference between survival and failure. So what managers do or do not do is more, not less, important in difficult economic times, though the best managers are probably those who foresee and respond to the subtle hints of a changing environment before radical change and economic calamity actually set in.

The companies that survive for the very long term are likely to be the smartest as well as the financially fittest.

Second, once in the throes of an economic crisis, managers must do all they can "to save the mother ship" and make sure they will live to fight another day. Most companies have a set of core activities and people, and then peripheral activities and people. The extra weight may be fine to have around in good times and usually is justified as "diversification" or "future growth areas." But, in bad times, the non-core areas are likely to be cash drains and management distractions, and can easily turn into fatal liabilities. So, when sales start declining, managers should use this period as an opportunity to trim waste and wishful thinking and get back to the strongest foundations of their companies.

The following example is illustrative of the decisions that must be made under difficult economic circumstances. I consulted for a particular software vendor that vastly expanded its product lines during the Internet boom, growing extremely fast but accumulating hundreds of millions of dollars in losses that it viewed as an investment in the future. By the time the Internet bubble burst, the company’s lineup had ballooned to some 144 distinct products, with a huge cash drain because thousands of salespeople, product managers, product engineers, quality staff, and field consultants were needed to design, deliver, and support all these products. I got the finance department to find out exactly which products were selling and which were not. We concluded that customers were really only buying 12 products. Revenues purported to come from the other products in fact were subsidies that came from licensing those 12 products in bundles with the other 132 products. My recommendation was to get rid of 80%–90% of the company’s products and personnel, which I thought would ensure that at least the core of the company would survive. The management team resisted. Eventually, it took five years, a delisting from the stock market, near bankruptcy, and many senior-position departures before the company ultimately downscaled. It is a shadow of its former self but has survived to compete (or sell itself) another day.

In addition to scaling back to the strongest product or service lines, saving the mother ship means saving as many of the best people as you can. Simply cutting staff across the board makes no sense for most technology businesses because they depend so much on intellectual capital. Furthermore, if managers have to borrow money continually or get repeated cash infusions from their investors or their governments, then they are likely to have little or no negotiating power. If they do get additional money, it will be on Draconian terms—and managers should prefer to deal with Darwin rather than Draco (the ancient Greek lawmaker who favored very harsh punishments even for minor offenses).

Finally, I have a third recommendation for managers: Continue to look for opportunities to grow in areas of strength. As long as survival of the mother ship seems secure, then companies should use whatever resources they can afford to take advantage of the environment. Weak competitors will also be contracting but should be worse off, and their customers and talented employees are fair game. The companies that survive for the very long term are likely to be the smartest as well as the financially fittest: managers must be able to anticipate as well as exploit change in difficult economic times.

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