Sunday, February 22, 2009

Richard Rumelt’s 9-point hard-times survival guide

I like Richard Rumelt. I wrote about his “predatory leap” metaphor earlier. I am convinced of his wisdom: “Being in the right industry does matter, but being good at what you do matters a lot more, no matter what industry you’re in.” In a recent article in McKinsey Quarterly (registration required and is free), Richard gives a 9-point survival guide for the hard-times. You may find it useful:

1. If you can’t survive hard times, sell out early. Once you are in financial distress, you will have not bargaining power at all.

2. In hard times, save the core at the expense of the periphery. When times improve, recapture the periphery if it is still worthwhile.

3. Any stable source of good profits – any competitive advantage – attracts overhead, clutter, and cross-subsidies in good times. You can survive this kind of waste in such times. In hard times, you can’t and must cut it.

4. If hard times have a good side, it’s the pressure to cut expenses and find new efficiencies. Cuts and charges that raised interpersonal hackles in good time can be made in hard ones.

5. Use hard times to concentrate on and strengthen your competitive advantage. If you are confused about this concept, hard times will clarify it. Competitive advantage has two branches, both growing from the same root. You have a competitive advantage when you can take business away from another company at a profit and when your cash costs of doing business are low enough that you can survive in hard times.

6. Take advantage of hard times to buy the assets of distressed competitors at bargain-basement prices. The best assets are competitive advantages unwisely encumbered with debt and clutter.

7. In hard times, many suppliers are willing to renegotiate terms. Don’t be shy.

8. In hard times, your buyers will want better terms. They might settle for rapid, reliable payments.

9. Focus on employees and communities you will keep through the hard times. Good relations with people you have retained and helped will be repaid many times over when good times return.

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