Economy: The perils of positive thinking

A new study finds companies should have cut more to prep for a long, slow recovery.

It sure seemed like the world had enough layoffs, sell-offs and frantic corporate restructurings in 2009. But apparently not, according to a recent study by Boston Consulting Group. BCG surveyed nearly 450 executives at companies with more than US$1 billion in revenue in seven countries about their plans and expectations, and concluded that businesses have not done enough cutting or rethinking to prepare for the slow growth ahead. And that could mean even more turmoil in the next couple of years, not less.

“We’re having a longer period of lower growth than we’re used to,” says Daniel Stelter, a senior partner at the BCG in Berlin. “I would have expected to see companies fundamentally reassessing their businesses, to do things that go beyond having everybody fly coach or removing cookies from the conference room.”

Instead, Stelter says, most firms are only taking short-term steps, such as cutting administrative and travel spending, or renegotiating supplier contracts. They are reluctant to take the more difficult – but necessary, according to BCG – cost-cutting measures to thrive in the coming months. Only 26% of the executives said managing cash flow is a priority this year, while 13% intend to shutter non-core businesses. Fewer than 20% said shoring up balance sheets and restructuring debt are priorities. Ignoring debt could be particularly worrisome, given the way enormous debt loads already sank many companies last year.

The reason few executives are planning to make the difficult moves is not because these measures have already been implemented (results don’t differ drastically from previous BCG studies), but instead because the executives are simply optimistic about the economy. They’re not totally blind to the tough times ahead, however. Large percentages of respondents expect to see lower profits this year, and contend consumers will be far more price sensitive than in the past. They even contend growth will be much more difficult this year. The executives just don’t expect these conditions to last much longer than a couple of years. And that’s taking a gamble, according to the BCG. “They should not assume that, because right now the sun is shining, the bad weather period is over,” Stelter says.

The pace of the economic recovery is a point of debate, but the consensus borders on pessimistic. Chief economists at a meeting this month of the Economic Club of Canada said not to expect a quick recovery, and there was also little positive news at the annual meeting of the American Economic Association in January. The depressed housing and commercial real estate markets were of major concern, along with the heavily indebted U.S. consumer. Donald Kohn, the vice-chairman of the Federal Reserve Board, cautioned that tight credit conditions will likely slow any improvement in the economy or in the unemployment rate in the U.S.

Companies that don’t prepare for a period of slow growth could soon find themselves struggling to stay afloat, or vulnerable to a takeover. The effect on the economy at large is harder to determine. Certainly if a corporation determines layoffs are necessary, conducting them now or later is negative either way. But Stelter recommends executives start thinking now about how to adjust their businesses to avoid rash decision-making later on. “If you act early, you act in an orderly way,” he says. “If you’re acting under pressure, the damage for your own organization and the economy is likely to be much bigger.”