Adapt or sink without trace

BY ROD ORAM

OPINION: The world's worst recession in 80 years is bringing out the best in some companies. Responding rapidly, decisively and creatively, they are leaving their competitors for dust.

Their gains go far beyond short-term survival. As strong leaders, they are redefining their sectors through bold new strategies and agile new management skills.

Above all, they are learning to manage in real time. While competitors respond to stale data trickling in from markets, the new breed of executive reacts instantly to fast-changing conditions.

They know they need to. Even when the global economy begins to recover, they expect markets to remain highly volatile. Predictability is a comfort gone for good.

Some of the largest companies are proving the most agile. General Electric, for example, is pioneering real-time management even in long-lead time, capital-intensive businesses such as aircraft engines and power plants.

Similarly, Wal-Mart, the world's largest retailer, announced 10 days ago an environmental rating system it will apply to all its suppliers over the next three years.

Customers will make better-informed purchases. But the biggest benefits are internal. Pollution is waste, Wal-Mart says. It will use the system to drive resource efficiency. Its goals are lower prices and higher environmental standards.

Here in New Zealand, the economic traumas are much less intense, at least for many companies in domestic markets. They're coping with lower sales and no signs of real recovery. But they aren't suffering collapsing markets, deep losses and capital destruction that the likes of car, construction and banking industries are overseas.

But some New Zealand companies are intensely exposed to the great global contraction. A few, such as Air New Zealand and Fletcher Building, are performing brilliantly. Anticipating the precipitous decline in demand, they reduced capacity and costs, strengthened balance sheets, rejigged strategies and plunged into quick-time management.

When trouble hit, they were much better prepared than their competitors. As a result, their results are holding up better, giving them more scope to deal with further challenges. In contrast to Air New Zealand, Qantas is racking up large losses as it scrambles to cut capacity to meet falling demand.

The few New Zealand exemplars, though, are heavily out-numbered by slow responders. When the global economy was in freefall from last September to this May, some of our most international companies consistently underestimated their response.

Fisher & Paykel Appliances and Nuplex were two of the worst. Their managements destroyed hefty chunks of shareholder value and came close to irreparably damaging the companies. Desperately seeking new capital, F&P sold 20% of its shares to Haier, the Chinese appliance maker, thereby losing its independence.

Two critical characteristics separate thrivers from strugglers in this deep, long recession: the ability to spot trouble coming and to act boldly before it hits.

Jonathan Ling, chief executive of Fletcher Building, says he and his chief financial officer, Bill Roest, had a couple of advantages, they had been through tough recessions before this is Ling's fourth and their operations in the United States, United Kingdom and Spain succumbed much earlier to steep declines in housing starts.

He admits Fletcher didn't tackle the overseas downturns as quickly as it needed. But it was able to apply the lessons here.

Still, it wasn't easy to convince management teams of Fletcher's New Zealand businesses to plan very conservatively for the 2008-09 financial year. Housing starts had peaked here at 32,000 in 2004 and were down to 22,000 at an annual rate when the teams were drawing up their plans for last July's start of the financial year just ended.

Unable to persuade the teams to pull back their forecasts, Ling and Roest accepted their plans with one proviso: the teams had to scenario plan for 15,000 house starts a year. They had to identify how they'd cut capacity, costs and staff, and what market conditions would trigger those steps. The bottom line was to earn a reasonable return on a 40% reduction in sales with some 20-30% spare capacity.

The teams didn't believe they'd experience such dire conditions. So they were far more creative and bold in their thinking, Ling says. Yet, less than three months into the new financial year, house starts had indeed slumped so low.

The retrenching plans were triggered by October, enabling the company to cope with a market that continued to fall fast to only 12,000 starts by the end of the financial year, barely half the rate forecast at the beginning.

The group has reduced its worldwide workforce by 2200 to 20,000, with half the cuts here, it slashed capital spending by 75% and, in contrast to past recessions when it mothballed capacity, it axed deeply this time. It is investing in new technology and plant to achieve far greater efficiency and sophistication of products when the upturn finally comes. To finance these deep cuts and the massive rebuild, Fletcher rapidly raised $526m of new capital. Yet, its share price has risen strongly, against management's expectations. They understood why on a roadshow overseas. Analysts and investors said they couldn't care less about earnings in these brutal times. Instead, they were investing only in companies with strong, conservative balance sheets and aggressive management teams. These survivors will scoop up the best assets of failing competitors and lead their sector's recovery.

Air New Zealand was even quicker off the mark. By the middle of last year, it had already reduced its long-haul capacity by 14%, trans-Tasman by 10% and domestic by 4.5%. Doing so before the decline in traffic meant, for example, it could still get $50m apiece for two ageing Boeing 747s it sold and leased back. By the time it needed to take out a third 747 this year, the plane was virtually worthless. Parked at Auckland airport, it is being mined for spare parts.

"If businesses can adapt more quickly than their competitors, they can remain profitable," says Rob Fyfe, Air New Zealand's chief executive. The emphasis on achieving ever-faster reactions to market conditions is being driven right through the company. "I talk constantly to the 11,000 staff about moving with speed."

Gone are the days of 12-month plans. Now capacity and network decisions are being made monthly. If for example a trans-Tasman flight is looking lightly loaded several weeks out from departure, the airline will try to swap the scheduled Boeing 767 for a smaller capacity Airbus A320.

With a view to reducing fuel and emission costs, the airline is a world leader in biofuels. Flight tests suggest a 50-50 blend of Jet A-1 and oil from jatropha plants will yield a 1.2% fuel saving and a 60-65% emissions cut. It plans to have biofuels meet 10% of its needs by 2013.

Telecom and Auckland International Airport are two other big companies worth watching for their new strategies and management skills.

Paul Reynolds is leading a total rebuild of Telecom. The speed, confidence and success of its launch of its new mobile network is an example of its new culture and dynamism.

Similarly, Simon Moutter and his new team are making big changes at the airport. Having inherited the fruits of a big building programme, they are now intent on achieving operational excellence and working with airlines to build new routes.

For example, they believe they can get at least 50% more passengers a year maybe even 100% through the newly enlarged international terminal without further expansion. To do so, they are adopting very demanding management techniques such as Six Sigma, pioneered by General Electric, to drive continuous improvement in arrival and departure processes.

It's exciting to see a handful of New Zealand companies using the recession to vastly improve themselves. But they are the exceptions.

Many companies are showing symptoms of coming out of this long, deep, hard recession weaker, not stronger.

- © Fairfax NZ News