Tuesday, April 17, 2001

A Profitable Decline

Anybody can succeed during periods of wild growth; you really earn your spurs managing through declines.

Growth makes everything easy. Promotions, raises, bonuses, even fancy new buildings and corporate masseuses make it a cinch to keep your employees happy and play the benevolent capitalist. The problem is, growth can't last forever.

No company can grow for 20% a year forever. It's simple mathematics. If the world's economic output is growing at 2% per year, a company that grows faster than that will eventually account for 110% of world GDP.

Back in 1999 and 2000, there were a number of companies whose stock market valuations seemed to assume just that: total world domination.

However, every growth story must come to an end, and most of them suffer hiccups along the way.

Take Cisco Systems. Cisco is the ultimate growth stock. It has a near-monopoly on the routers that form the backbone of Internet infrastructure (at last count, still doubling every 6 months). It has one of the world's most admired CEOs, and has created thousands of millionaires among its employees. It may very well be the single greatest venture investment in history.

And yet, just this week, Cisco learned that even the greatest growth story can come to an end.

As a result of a 30% drop in revenue, Cisco will report its first quarterly loss ever, and the outlook for the future is extremely cloudy.

What Cisco management needs to do now, is to manage a profitable decline.

Contrary to popular belief, you don't have to grow to be profitable. Some companies have been extremely effective at making money in declining industries. Computer Associates has made a living as an IT bottom-feeder, vaccuuming up legacy companies and serving their shrinking but profitable customer base.

It's not easy. You have to cut expenses to the bone. After all, you can't control revenues, but you can always control expenses. Simply refuse to spend money, and count on your team's creativity to do more with less.

You have to be ruthlessly efficient, and squeeze every last dollar out of your sales. That means watching sales costs like a hawk, and pounding your receivables on a daily basis. You should also stretch out your own payables as much as your creditors allow.

But if you can manage a profitable decline, you'll be able to make money in any environment. And, if your business begins to grow again, you'll be in an even better position to grow profitably.

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