Commentary: Sequestration is symptom of bigger challenges

March 10, 2013

The controversy over sequestration and the federal government debt ceiling should be put in perspective. These events — even if they should be resolved to anyone’s satisfaction — are not the conclusion of anything. Rather, they are symptoms of much deeper challenges. Such challenges seem to entail a “new normal” that could last for many years. And they present dangers and opportunities for managers.

The odds seem greater than ever, and rising, that America and the world will experience a longish stretch of disappointingly low growth. I earnestly hope that I’m wrong and that today’s buoyant stock market is right. But recovery from credit-related slumps is slow. Therefore, I believe that the best strategies for the long term will include considerations such as these:

Expect disruption and intensified competition. A future of low growth and austerity means that more companies will face a dogged share of market fight in order to sustain growth. Your firm can grow, but only by taking someone else’s lunch. Gentlemanly agreements not to poach a competitor’s clients, or intellectual property or employees may fall by the wayside. Also, in times of financial austerity customers become more receptive to the lure of disruptive innovations. Low growth may make some managers sleepy. Instead, you must stay very alert to changing rules of competition.

Relentlessly restructure, reinvent and renew — because you can be sure that your best competitors will do so. In particular, identify the true “core” of your business and focus on improving it. Defer, delay or discontinue the “nice to haves.” In a time of austerity, it is easy to be lured into other businesses than your core. A recent article in [the Harvard Business Review] by Evan Hirsh and Kasturi Rangan, “The Grass Isn’t Greener,” argues that high performance is less a matter of jumping into other industries than it is of gaining a strong competitive position within your core industry.

Stay flexible. Austerity breeds uncertainty about the field of competition; therefore flexibility becomes extremely valuable. Flexibility is another name for real options and is evident in leasing (with cancellation clauses) rather than buying; in modular, rather than fixed, manufacturing operations; in dual-fuel rather than single-fuel boilers; and in redundant sources of supply. Generally, flexibility entails the avoidance of large fixed costs. Therefore, stay lean and asset-light. Now is not the time to relax your discipline on head count, working capital or capital spending.

Innovate through small bets. Experiment before jumping into a new business or project with both feet. In the hysteria of a rapidly growing market, project managers may recommend a major investment to grab market share before the competition piles in. But in an environment of austerity, the opportunity may be a mirage.

Robert F. Bruner is dean of the University of Virginia’s Darden School of Business. This column was adapted from his blog.

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