©2002 Loren Santow Some of the Kellogg faculty who offer insights into strategic leadership: From back (L to R): Robert Kozinets, Daniel Spulber, Keith Murnighan, Leigh Thompson; Edward Zajac, Scott Schaefer, Karen Cates, Mohanbir Sawhney; David Besanko, Shane Greenstein; Sonia Marciano, and Dean Dipak Jain.

Leadership in volatile times
Kellogg School experts share their strategic insights for managing in today’s marketplace

By Matt Golosinski

Leading an organization during the best of times presents challenges for managers, but surviving under volatile economic conditions presents extraordinary hurdles. Nothing has arguably done more to spur recent market volatility than technological innovation. While some prophesied that the New Economy would scrap business-as-we-knew-it, the reality has proven more complicated, with older economic models continuing to rub shoulders with e-commerce innovations, creating a complex hybrid that demands corporate leaders negotiate between the old and new worlds.

Kellogg School of Management faculty provide insights into understanding this hybrid model and point out the hidden advantages a tough marketplace can bring — if organizations pursue the right strategies to bolster competitive advantage. Management innovations in areas such as information technology, marketing, supply chains and human resources offer powerful tools to mitigate economic crises, say Kellogg School experts. Doing the right thing requires vision, as well as the ability to leverage your resources.

“Your people are always your most important strategic resource, and during difficult times their value increases,” says Kellogg School Dean Dipak C. Jain. “Kellogg’s collaborative culture really prepares managers to lead internal teams and drive a firm’s success.”

That success also depends on learning from mistakes, especially since “customers form perceptions about a company not when things go right, but when they go wrong,” says Dean Jain, co-author of the new text Marketing Moves. Often, though, the pace of daily business doesn’t afford managers the chance to evaluate missteps closely. This is where a recession can help.

“Recessions give companies a valuable commodity: more time for managers to review the firm’s strategic focus,” says Jain. “Conversely, in a boom market time is more precious since companies must orient themselves for external action rather than reflection.”

	© Nathan Mandell "The smart companies...actually increase spending in recessionary periods...They build strong brands they capitalize on when the market inevitably picks up." —Prof. Kozinets

Today, managers must reflect on the Internet crash that culminated in the last downturn. If, as the slogan goes, the rules have changed, they have also remained the same, demonstrating the cyclical nature of business wisdom that periodically reinvents itself by remembering what it thought it could afford to forget.

Strategic Rule No. 1 really goes back to Marketing 430: Ditch the herd.

Breaking away from the herd
One common error managers make in a volatile market is to panic and follow the herd’s direction rather than the strategies best for their organizations. “The companies that profit most from bad times are those that don’t resort to massive layoffs and indiscriminate cost cutting, but remain disciplined in pursuing growth guided by a coherent strategy,” explains David Besanko, the Alvin J. Huss Distinguished Professor of Management and Strategy, and Kellogg’s associate dean for academic affairs.

“Recessions offer a great opportunity for companies in leadership positions to solidify existing sources of competitive advantage and build new ones,” says Besanko, who notes that marginal competitors often fall by the wayside and assets can be acquired more cheaply during a downturn.

Quick decisions made under duress, however, can be a manager’s nightmare, says Keith Murnighan, the Harold H. Hines Jr. Distinguished Professor of Risk Management. “Rushing to judgement is the last thing I would recommend,” he says, citing his research published in The Art of High Stakes Decision-Making.

But too often recession — defined as two consecutive quarters of negative growth — brings with it austerity measures that can impede a company’s long-term success. Examples abound. The Sept. 11 terrorist attacks exacerbated an already-listing U.S. economy by throwing political and security challenges on top of economic hurdles. Airlines and the travel industry were hit especially hard, and nearly all carriers drastically cut staff, routes and amenities. Notable exceptions include Continental and Southwest Airlines, Besanko indicates. These leaders looked beyond the slowdown to position themselves advantageously once the economy picked up.

“A recession is a chance to get back to basics and understand your mission, your competencies and your threats,” says Murnighan. Stressful circumstances become an opportunity to try new strategies. He contends that smart organizations recognize a downturn as a chance to gain market share.

© Nathan Mandell "During the boom there was a sense that students were less inclined to pay attention to subjects like finance... [Now] there's been a reengagement with academics." —Prof. Marciano

Mohanbir Sawhney, the McCormick Tribune Professor of Electronic Commerce and Technology, cites Dell Computer as one example of a company leveraging its market strength to grow even during a recession.

“Dell has advertised massively, cut prices and has stolen a lot of market share,” says Sawhney, who has published widely on the subject of e business strategy, including a text titled The Seven Steps to Nirvana. “Similarly, while we see Kmart go out of business, we see Wal-Mart produce record sales because, at root, they are a more efficient business,” Sawhney explains. The winners in the last recession, he says, are those companies that leverage technological advantages to enhance operational effectiveness.

Marketing, too, is another way to make an impact when the Dow Jones goes south — if you defy the herd. Companies that cut their advertising back to the bone when times get tough, are pursuing the wrong strategy in most cases, says Marketing Professor Robert Kozinets, who along with colleage Professor John Sherry has investigated trends in retro-marketing that position the marketer in a role Kozinets likens to a “psychoanalyst of the collective unconscious.”

Noting marketing trends after Sept. 11, Kozinets says there has been a need in the collective American psyche to retreat into more comfortable, safer times when the ground didn’t seem to be shifting. “That’s part of marketing’s job now, to jump on board this important task of cultural reassurance,” he says, citing the example of the travel industry working with President George W. Bush’s public statements reassuring people that it’s safe to get back on planes after the terrorist attacks.

Nostalgia in advertising isn’t new, Kozinets points out, but marketing as part of “the architecture of reassurance” mutually supporting a social structure is a more recent development.

Marketing trends today are completely different than those in the high-tech late-1990s when advertising was all about the future, insists Kozinets. “Although there was still a hunger for the past then, it was a utopian, 1950s-style past,” he explains. “Now it’s much more about the people and comfort and community of the past. Lots of flags, lots of militaristic stuff, lots of paradisiacal golden youth stuff.”

Ultimately, he says, these are the aspects of what products must tag themselves onto so that they appeal to the common mood of unease, especially when larger social events combine with a recession.

“The smart companies are the ones that actually increase spending in these recessionary periods,” Kozinets says. “Time after time we’ve seen companies who consolidate their gains while their competitors cut back build very strong brands that they can then capitalize on when the market inevitably picks up.”

Kozinets points out that during a recession advertising markets sink, so marketers can get excellent deals and “more bang for the buck” since the marketplace tends to be less cluttered. As well, this recessionary environment can create opportunities to re-examine marketing assumptions. “It’s a classic ‘buy smarter’ rather than ‘buy more’ strategy that emerges during a downturn,” he says. “Once you have budget cuts, everyone suddenly rediscovers basic marketing concepts like targeting.”

	© Nathan Mandell "The toughness of a market environment makes a difference in a firm's ability to take competencies developed in their home market and extend them outside that market." —Dean Besanko

“During the boom times, there was a sense that students were less inclined to pay much attention to subjects like finance,” recalls Marciano. “The attitude was you don’t really need to know this stuff to do well; you just need to get out there and get going. After the Internet bust there’s been a reengagement with academics.”

Daniel Spulber, the Elinor Hobbs Distinguished Professor of International Business, isn’t surprised by this trend. “What makes a successful manager is the ability to rise above the crowd and gain a broader strategic perspective. That’s something that we’ve always emphasized at Kellogg,” says Spulber, who is director of the Kellogg International Business and Markets Program, which is founded on a serious interdisciplinary approach to understanding the world economy.

“We haven’t abolished the business cycle, all the New Economy rhetoric notwithstanding,” Spulber adds.

When it did seem like the Internet economy would push stocks ever higher, exuberance grew infectious, poisoning reason and expectations. Then came the tech crash. What happened? Well, reality, say some Kellogg professors. It turns out that even the coolest computer software couldn’t rewrite the underlying economic rules.

“Technology is a double-edged sword,” explains Sawhney, citing associated managerial challenges. For instance, businesses don’t yet know how to manage distributed organizations or truly create win-win relationships with partners, he says. “Technology is the solution, but it’s also the problem. What got us into this recession was an abrupt slowdown in capital spending on technology.”

That slowdown came as a result of a startling discovery, says Professor Shane Greenstein who studies the computer industry structure and behavior. “We saw this IT consulting industry grow up to a very large scale to take the new technology and mediate between where users were and where they wanted to be,” says Greenstein, the Elinor and Wendel Hobbs Distinguished Professor of Management and Strategy. “Then what happens? It turns out IT becomes a luxury good.”

© Nathan Mandell "Technology remains the lifeblood of competitive advantage. It's not the guys in the dot-coms who are winning the technology race; it is Dell and GE and Walmart." —Prof. Sawhney

Greenstein notes that demand for technology in operational areas remained strong; what cooled was the demand for the rate of change. Since IT consultants billed themselves as change-management gurus, they bore the economic brunt when companies reduced their demand for tech services — whether because these companies represented one-time clients, dot-com firms ramping-up, or organizations preparing for a Y2K menace that never materialized. In the end, demand dried up and so did employment for a lot of consultants.

“In every recession there are people who invested in a set of skills that became obsolete,” says Marciano. “But it’s unusual for this obsolescence to occur so soon after the investment. The compression became so pronounced.”

This compression, spurred by dynamics in the tech sector, say Greenstein and Sawhney, is another element of the dot-com crash. While computer processors may double their speed every 18 months, these efficiencies require about five years to be translated into processes that businesses find profitable.

Spulber agrees. “Economic change is rarely painless,” he says. “The key is for businesses to realize they can’t necessarily stick with the tried-and-true, but that they must adapt well.”

Innovating through tough times
Top companies, Kellogg experts say, are the ones adapting well, and developing an agility that allows them to respond more quickly to market challenges. If technology presents hurdles for corporate leaders, it also ranks among the management innovations that offer ways to strengthen business in good times and bad.

Supply chains, for instance, have benefited by advances in automation and communication, growing leaner than ever before. “Leaner chains mean the supply chain can meet customer demand with lower levels of inventory. At the beginning of a downturn or recovery, a leaner chain can react much more quickly,” says IBM Distinguished Professor of Operations Management and Information Systems Sunil Chopra.

Sawhney remains convinced that technology is as essential to strategy now as before, but fears that some students regard tech as a relic of the e-commerce era. “Technology remains the lifeblood of competitive advantage. It’s not the guys in the dot-coms who are winning the technology race; it is Dell and GE and Wal-Mart,” Sawhney insists. “Business school graduates need to have an appreciation of how these tools mesh with strategy.”

One way technology impacts strategy is by helping marketers understand their customer better — and doing so in real-time through Internet communications. Sawhney has researched what he calls collaborative marketing, where customers, via online and other communications devices, become an integral part of an organization’s marketing activities from idea generation through new product development and customer support.

The trend for marketers has been to grow closer to their customers and through these bonds to weather downturns more effectively. It remains a tricky proposition.

Kozinets cites challenges in constructing these relationships. The consumer’s short memory requires marketers to build customer bonds on an almost daily basis, keeping their focus and understanding their target. One critical mistake some Internet companies made involved misinterpreting their mission and market position, Kozinets explains.

“Some of these dot-coms wasted a ton of reach on things like Super Bowl ads, paying a fortune for a mass audience when they should have been finding out who their audience was,” says Kozinets, emphasizing that strategy drives marketing. If a company doesn’t have a strategy, he observes, they tend not to have market segments, in which case they waste resources by talking to people uninterested in buying their product.

	© Nathan Mandell "IT consulting grew to a very large scale...Then what happens? It turns out IT becomes a luxury good." —Prof. Greenstein

Marketing and strategy can assume a postmodern twist too. Professor Edward Zajac points to his research into what he calls “symbolic management” as one new way some companies have been handling the downturn.

“Firms don’t just market products, they market themselves,” says Zajac, defining symbolic management as an organization’s effort to influence perceptions by gestures that may or may not be connected to actual action. Stock buyback announcements represent one example of symbolic management that Zajac, the James F. Beré Professor of Management and Organizations, has studied.

“When there’s a very bad day in the stock market, you invariably see companies announcing buybacks. They’re sending a message to investors that says ‘Everything’s fine,’” says Zajac, noting that the firm may then not follow up on the buyback if the market responds favorably to the announcement.

While Zajac remains “agnostic” about symbolic management and says it’s no substitute for a good product and careful cost controls, he believes that clever firms have figured out that they need to manage symbols as well as substance. “Ignoring the relevance of symbolic management can limit a company’s growth options, based on its inability to convince an external constituency about the value of their strategy,” Zajac explains.

Rediscovering the power of a handshake
Just as marketing’s role has expanded to assume broader significance for top performing organizations, so too has the importance of relationship management with both internal and external constituents.

Ranjay Gulati, the Michael L. Nemmers Distinguished Professor of Technology and E-Commerce, has researched the importance of managing “relational equity” and discovered that the leading organizations are those best able to build and leverage close relationships with customers, suppliers and alliance partners. The value of these relationships are greater than the sum of their parts, Gulati notes. These leaders redefine organizational boundaries to render them more transparent and permeable, sharing knowledge and strategy freely.

Gulati’s survey of 113 Fortune 500 firms presents quantifiable data that reveals how top performers build more collaborative relationships with customers along a variety of continuums, including information sharing, computer communications and customer input for product development. Gulati’s findings show a sharp discrepancy in the longevity of customer relationships between top performers and bottom performers.

“The top companies are building deeper and longer relationships,” says Gulati. “They also move beyond the selling of products and services to offer ‘solutions’ for customers.”

Tapping the power of these relationships demands subtle negotiation skills, as well as the ability to communicate win-win outcomes for all involved. Egos can present challenges as can unclear goals, says J. Jay Gerber Distinguished Professor of Dispute Resolution and Organization Leigh Thompson. Perceptions of fairness in a negotiation are crucial, she says, as is the “win-win discovery process” among the negotiating parties.

“Some people have a faulty notion of win-win,” Thompson notes. “We don’t mean meeting a partner half-way. We conceptualize it as finding a way for both parties to push out into mutual discovery of new terrain.”

Trust is essential to building these successful relationships, says Management and Organizations Professor Karen Cates. “While in the short-run some companies may view it as expedient to assert a more powerful position, they risk damaging customer, employee and supplier relationships,” Cates says.

© Nathan Mandell "We haven't abolished the business cycle, all the New Economy rhetoric notwithstanding." —Prof. Spulber

Relationships with external constituents are key, but so is a firm’s relationship with its internal constituents, says Professor Scott Schaefer. Employee relations can grow explosive during a recession, he notes. Indiscriminate firing of personnel, while perhaps meeting immediate economic goals, can tarnish a company’s reputation in the market, which is why most companies don’t take layoffs lightly, despite the numbers of people let go during a recession.

“Beyond the costs associated with hiring and replacing people — which have been estimated to run as high as one or two times that employee’s salary — managers need to worry about how their actions will affect their ability to attract good people in the future,” Schaefer says. Managers must communicate the firm’s economic straits to their employees honestly and in a way that’s credible.

Hidden advantages
More generally, explains Schaefer, a recession can help a firm in unexpected ways. During down times companies are forced to review their overall strategies to ensure their focus remains aligned with the market. During good times, it’s easy for initiatives to get the green light without much scrutiny, says Schaefer.

Another advantage a recession offers managers is the chance to hone their leadership skills. Companies such as General Electric which enjoys a diversified business portfolio, says Besanko, actually view recession as “a way of building managerial acumen.”

“The toughness of a market environment makes a difference in terms of a firm’s ability to take the competencies developed in their home market and extend them outside that market,” Besanko says.

Perhaps the most profound hidden advantage of the recession is the perspective it has afforded on globalization, and the link between politics and commerce, suggests Spulber.

“Has there been a change in the international economy? Most definitely,” Spulber says. “The really major change, one not yet fully understood, is that for the first time in almost a century we have near-unanimity around the world on the subject of a market economy.

“Globalization is much more than a fad; it’s a fundamental change in the world economy.We see now how economic prosperity and political freedom go hand in hand.”