The bottom lines may be the same, at least at first. But there is a profound difference in the long-term profitability and competitiveness of companies that renew and regenerate rather than retrench.
In times of economic distress, retrenchment and cutting costs is typically the first reaction, and bringing costs in line with revenues is indeed seldom wrong. During the long upswing of business, costs grow unquestioned in many companies. Many unnecessary costs go unchecked - hidden by the flow of revenues.
But there are two major ways for managing officers to respond to an economic downturn: one is to retrench, cut costs, pull back; the other is to renew, revitalise, grow stronger. (There is of course a third way: do nothing and hope for the best - but let's not deal with that here. And this choice is always available.) Ah, the choice to make.
Strangely both responses look the same at first: they both reduce costs. But they have a profoundly different effect on the long term profitability, competitiveness and potency (yes, potency!) of the company.
Retrenchment
Retrenchment, at best, even when it is done superbly, merely leaves the company unimpaired. But retrenchment is rarely done that well. Done less than perfectly, it produces a weaker, frightened organisation that has lost muscle, market, bone and spirit. Business literature and oral histories are full of ugly examples.
Renewal
Renewal, though - that's different. Though it always results in greater efficiency, at least as great as a 'cut-back' would achieve, its effects are positive. Leanness, agility, assertiveness, morale, strength, vigor are the terms that are used by those who experience it; not smallness, slowness, timidity or weakness, the connotations of retrenchment.
Renewal always creates a stronger company, aggressive, motivated and mobilised to command its future. Renewal gives a surge in profits, and always gives a leaner, fitter company. The savings that are realised are invested in its future or sent to its bottom line, for that ensures its future.
Renewal really means the reversal of the corporate aging process: a return to a younger, stronger state. Something that companies can do forever and, sadly, people cannot. The symptoms of retrenchment though are the symptoms also of age.
Why do many managing officers choose retrenchment only, not renewal?
Many truly have not heard of Corporate Renewal, or think it is just a nicer word for cut-backs. Some really think it is not possible. Some think it is something only charismatic leaders can achieve. Some think that turnaround or the return to profitability is the best that can be done. And many do not know how it is done. For it is never taught in business schools. And those who know and do seem never to be teachers.
Some are embarrassed, because the language of corporate renewal and regeneration is often thought of as unbefitting to business, as if leadership and management were robotic exercises of intellect and not the mobilisation of human heart and hope and will and vision.
Also, in past years of plenty, many managers were appointed who had never experienced the pinch of famine, who had never learned that it is possible to strengthen organisations in the face of diminished opportunities. Who had never learned that the very need for retrenchment brings with it an opportunity, the opportunity to renew.
Is renewal difficult?
Strangely, corporate renewal is easier and often quicker than retrenchment and, stranger still, costs less, always less. Strangest of all, it is most easily done when financial crisis or the economy can be cited as the reason. Renewal is in fact an innate and instinctive response of any organisation to attack or adversity, but only when its leader can accept the challenge.
What should be done?
- If business conditions and good common sense say cut costs, then do so. But do it through renewal not retrenchment.
- If cutbacks have already happened and were done well, corporate renewal will provide more savings.
- If cutbacks were done badly, then renewal is essential - if only to repair the damage.
- If cutbacks have yet to happen, then a golden opportunity to renew and regenerate is there to take.
Are there things a CEO must know, must do?
Yes. Both "business" things and things that drive performance. The business things he knows already; they teach them in the business schools and discuss them at every meeting of the board. The things that drive behaviour, though, the factors that impel performance, these he innately knows as well. But they may be harder to articulate.
But there is a process that will work. And, because it is based entirely on human drives, on people things, it will evoke the very innate knowledge needed while it drives the decisions and the change.
How should that be done?
- The manager must throw down the gauntlet to his team and to his people, demanding a reinvigorated, leaner, more aggressive company, one altogether fitter and more dynamic than it now is. And give them hope. All leaders can do this - if they have confidence.
- The team must take the challenge and respond. Respond not just logically, in the intellect, but also viscerally, in the belly. Mobilise the emotional drives of the company. Muster its willingness to confront the challenges - and not just those of the economy, but also those of its soul, which are its real challenges. Evoke its willingness to sacrifice and collaborate and create.
- Declare war upon the enemies of its survival: In its marketplace, like competitors; in its soul, like the cancers of ill will and lack of courage.