Managing In A Declining Industry: Three ways to make a positive difference
01 April 2016 -
As Tata Steel looks to duck out of the struggling UK steel industry, Insights looks at what it takes to be a manager in a sector on the decline
Citing rising costs and an oversupply of steel in the global marketplace, steel manufacturing giant Tata Steel has confirmed plans to sell off its failing UK business, leaving some 40,000 jobs in the balance.
Industry and economic experts have long reported the sharp fall from prominence
Described in the past as a ‘vital’ part of the national economy by Prime Minister David Cameron, official figures actually show steel output totalling £2.2bn in 2014 – just 0.1% of total UK output. Dealing the latest blow to British steel-making, Tata Steel’s decision to offload all or part of the loss-making UK business follows its recent sale of plants in Dalzell and Clydebridge in Scotland, the mothballing of Thai-owned SSI’s plant in Redcar, and the administration of Caparo Industries.
In truth, the British steel industry has been in decline over the past 40 years. The opening up of world markets since the 1950s and 1960s has led to greater competition, particularly from China, which has been blamed for causing the price of steel to halve in the last year by dumping low-cost steel from Chinese producers on the European market.
Rising energy costs, significant labour bills and a lack of protection from the EU and British government, are also seen as contributing to UK steel’s woes.
After paying £4.3bn to takeover Anglo-Dutch steelmaker Corus in 2007, which had acquired British Steel in 1999, Tata claims it has lost some £2bn in UK steel plants, with a daily loss totalling £1m just to keep its Port Talbot site running.
And with its Mumbai executives rejecting a rescue plan backed by union leaders due to it being seen as “unaffordable” and “very risky,” Tata is believed to be writing off its UK businesses to focus on its domestic steel business, which is itself benefitting from the introduction of tariffs against Chinese steel – a move the Conservative government has thus far been reluctant to follow.
How to manage in a declining industry
Steel is not alone in its struggles against brutal overseas competition, high domestic costs, falling demand and the changing patterns of commerce. So here are some insights into managing in a declining industry.
First and foremost, managing in decline affects all levels of a company. The persistent uncertainty and lack of job security makes it difficult for senior and middle managers to maintain focus, morale and clear strategy.
But if the outlook does look bleak, there are heartening examples from business history of companies that were able to survive a trough of decline, and even see a return to growth.
When newly elected President Barack Obama took his first steps into the White House, the American automotive industry was in recession, with car sales at their lowest for 30 years, and some commentators fearing that its domestic operations would collapse altogether. Like its rival Chrysler, General Motors (GM) was in bankruptcy and needed a government bailout to stay alive.
Today, however, both the American auto industry and GM are in relatively rude health thanks to decade-high US demand for trucks and SUVs.
GM’s sales for the three months to December 2015 came in at $39.5bn (£27.5bn), ahead of market expectations of $39.3bn, while net income surged to $6.3bn from the $1.1bn (£0.77bn) recorded in the previous year.
Surviving the dot-com crash
In the digital world, travel retail website Priceline.com managed to survive the dot-com crash in the early 2000s, when hundreds of web companies went out of business.
Through a series of competitor acquisitions and trimming of its product offerings, CEO Jeffrey Boyd was able to return the company to profitability. Today, Priceline is a titan of the travel industry and continues to gobble up competitors such as OpenTable and Kayak.
Its stock is also worth well over $1,000 per share, after nearly being de-listed more than a decade ago.
An honorable mention must also go to the iconic Marvel comics, which endured bankruptcy during the 1990s as the comic book market crashed but has diversified its operations by selling its popular stories to Hollywood movie studios, and turning Iron Man, the Avengers, Spider-Man, and X-Men into billion-dollar franchises – a classic example of using old ideas to enter into new markets.
So how can managers contribute to a successful transition, which may often mean transitioning to a smaller, leaner, but more profitable business?
1. Strategy Re-focus
First off, senior management must look at their businesses’ problems with a sharp eye and utter objectivity.
Look back at the company's last period of sales and performance success, and draw up a timeline of how the good times turned sour. What changed? Did a new competitor take your customers or has the whole market changed?
Seek input from customer-facing employees. Their front-line perspective could provide valuable insight into how your company needs to change. By narrowing down two or three main reasons for the company's decline, bosses can use their findings as a framework to alter the firm’s strategy and change its direction. You may also be able to create space and a platform to do small experiments with alternative business models.
“There is often a short window of opportunity to do something differently,” said Amy Edmondson, a professor at Harvard Business School and author of Strategies for Learning from Failure.
By acknowledging and acting upon the fact they had missed out on several technological shifts, IBM managed to survive its own crisis in 1993 when it posted, at the time, the biggest loss in the history of corporate America: $8bn (£5.6bn).
Bridget van Kralingen, general manager for IBM North America, said at the time: ”Sometimes companies must fully transform their portfolios. Companies in a crisis need to look at their entire portfolios, rationally and candidly, and figure out what they have that customers want today and what customers will want tomorrow. Then get rid of anything that does not fit the resulting model, and invest in the growth opportunities.
“In our case, the information technology industry was rapidly becoming commoditised, and we determined that we needed to shift our portfolio to a more balanced mix of high-value offerings. That meant growing our services and software businesses, both through internal investments and through acquisitions.”
2. Track Your Cash
Cash is at the heart of all business, and especially in a declining market. A successful turnaround really comes down to one thing: reducing the outgoings and increasing income.
Cash flow problems are a notorious killer of small-and-medium-sized businesses, and managers must get a handle on their finances by working out which investments in the business are generating or burning cash – and filtering out the latter.
Fundamental questions such as: is investing in contracted staff going to be more financially rewarding in the short term than hiring full-time workers? Or how much more positive net cash can I generate by investing in, say, a new delivery truck? Managers must be able to account for every direction their cash is being spent and earned..
Doug Yakola, a senior partner in McKinsey’s Recovery & Transformation Services, explained: “Keeping track of cash isn’t just about watching your bank balance. To avoid surprises, companies also need a good forecast that keeps a mid-term and longer view. For example, failing to pay attention to the cash component of capital investments routinely gets companies in trouble.
“Project net present values can look the same whether the return begins gradually at year two or jumps up dramatically at year five. But if you’re not focusing on the cash that goes out the door while you’re waiting for that year-five infusion, you can suddenly find yourself with very little cash left to run the business, sending you into a spiral you may not recover from.”
3. Managing Redundancies
An unpleasant, yet often inevitable, part of managing in a declining industry is redundancies.
Great managers, however, make the process as smooth as possible through strong communication, honesty and effectively managing the emotions and expectations of all involved.
The first phase of good redundancy management begins when those initial warning signs of potential redundancies surface. Being honest and straight-talking, managers should keep all employees informed so they know what is happening, when it will happen, which parts of the business are at risk and above all else why change is happening.
Giving staff plenty of time to understand the process, managers should also offer themselves to answer any questions. This can be an opportunity can to calm fears and limit angry outbursts. Also, if your organisation is providing career transition support for your ‘at risk’ employees, it will be a boost to offer this opportunity at an early stage to reduce the negative impact at such an emotional time.
Finally, managers must also pay strong attention to the workers who have survived the job losses, who are likely to also feel sensitive and low on morale.
In a manager’s redundancy planning, he/she must include measures such as group meetings, incentives and other rewards to keep staff focused on performing at their best. Managers should also spend time at the ‘coal-face’ to ensure that remaining staff are not overloaded with work, that they understand the need for the staff cuts made and feel that the situation has been managed fairly and, importantly, that they feel visible and valued.
CMI members can find advice and checklists about managing redundancies and other aspects of managing in a declining industry at ManagementDirect
Share your own experiences and tips on managing in decline @InsightsCMI
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