Putting your head in the sand won’t help

Don’t worry so much about today’s cash register; plan for how you would like it in the future.

The cash register is not turning over; the phones are not ringing; stock is on the shelves and not moving – has the end of the world come?

To many, this is a heaven-sent opportunity. Ever heard of Cisco, the world’s largest provider of internet networking and communications equipment? John Chambers is the founder and CEO of the company and in a recent interview for the Harvard Business Review he explained his success on the basis of the company’s philosophy of anticipating trends in the market.

Just one illustration was the ability of Cisco to anticipate the relevance of voice and communication using the internet. Because the company saw the trend earlier than most, it is now in a commanding position in this market segment.

This ability to anticipate trends has dominated the approach of Cisco in downturns. Chambers points out that in these situations, most companies tend to reduce their resources whereas Cisco increases resources and enters markets aggressively, with the result that as you come out of the other side of the downturn, Cisco has taken a march on its competitors.

It is illuminating to read his response to the question of how does Cisco react to the current economic conditions.

“We have become pretty good at tapping opportunities from economic down cycles. In the face of everyone – 1993, 1997, 2001 and 2003 – we became even more aggressive in our investments in existing and new market opportunities.

“At the same time our competitors often became very conservative. Remember the Asian crisis? Most economies were contracting. I knew that Cisco’s competitors were making a potentially major mistake by dramatically cutting back their resources there, so we did the reverse.

“Straight into the economic downturn we decided to increase our resources and send a number of senior executives to expand our presences in the region. Within a year, we gained the number one market position in almost all the Asian countries.”

What Chambers didn’t mention was his financial strategy of always keeping a few billion or more dollars in the tin for the time when it will come in handy. While Cisco is great in anticipating trends and seeing the other side of an economic downturn, the company has been conservative in so far as the preservation of cash is concerned, so when the opportunity comes to take advantage of the fact that competitors are pulling in their horns, Cisco can jump ahead of the market and position itself for the rebound.

As the rebound comes, it has resources already in strategic locations to take advantage in the turn of events whereas competitors which have downsized and perhaps saved a few dollars come back to find a monster down the street raking it in from their once good customers.

So, what a great opportunity presents itself at the moment for those companies that are experiencing a slowdown in sales. They are not pressed with day-to-day operational issues and should have employees who are not as busy as they once were.

Time to take a breather and think about how the world is going to look in your market area as we come out of the downturn.

Companies that wait and see when the upturn will come and take a breather in the meantime, rather than spending a lot of time and effort trying to work out or anticipate how things are going to be, will be the ones that get into difficulties.

Strangely enough, they will feel that they have weathered the downturn quite well by cost cutting and keeping an eye on expenditure. The damage comes later when things turn around. When that happens, the companies that have been in there anticipating events and planning for them will suddenly move ahead of the pack, and those that thought they managed the downturn well will realise that they were actually sleeping on their watch.

There are lots of good things happening at the moment, and if they work in some rough and ready fashion, we are going to come out of this downturn perhaps more quickly than we may be hoping at the moment.

Inflation is falling in China as are interest rates. China has a massive surplus largely invested in low yielding US treasuries. It has the ability to put this to better use by investing it in urgent social projects in China, and can do so in the knowledge that inflation is on the way down and not on the way up. China is more advanced in bringing inflation down than almost any other country.

Despite the complaints of banks that interbank lending is difficult and the cost of wholesale funds are still expensive, the evidence is tending the other way, which suggests that the borrowing costs of the banks are falling and not rising.

The price of oil has dropped dramatically (despite the depreciation in our dollar) – have you noticed the price of petrol at the service station? Interest rates are falling dramatically and we will soon be in the situation where we have the low cost of money and the low cost of energy. Without exception this cocktail has traditionally reignited economies.

If you didn’t keep any money in the tin when times were good, let’s hope you can ride out this next little period and learn the lesson that having a few dollars in the tin in bad times gives you an enormous advantage.

Louis Coutts left law and became a successful entrepreneur. His blog examines the mistakes, follies and strokes of genius that create bigger, better businesses. Click here to find out more.

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