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Planning FAQs
Prospering Through the Business Cycle

I'm sure you have heard the expression "A high tide floats all boats". Until recently, many companies were floating on the high tide created by easy money, rapid growth, and low inflation. Under the right conditions, even marginal organizations can appear very successful. They grow rapidly and book reasonable profits. They open additional facilities to access new markets. They expand their products and services to support their aggressive growth goals. These are the organizations that are often recognized as examples of successful companies. However, the high tide they float on often obscures the weaknesses just below the surface. They may be carrying more risk than they should. They may have stretched their resources just short of the breaking point.

On the other hand, some companies are set up to be reasonably successful near the bottom of the economic cycle. These organizations are often diversified to spread the risk of being tied to a single business sector. They are often more conservative, with more cash and less leverage than their counterparts. They tend to have fewer locations than their competitors and more revenue per location. Their growth is slower but their margins are higher. Their strength in the bottom of the cycle allows them to make strategic acquisitions or win a pricing battle with a major competitor. They hire to fill strategic positions when others are laying off long-term employees. They leverage their relative strength to improve their position when others are struggling to survive.

While there are lots of examples of both types of companies, there are few companies that have managed to prosper throughout the business cycle. With longer business cycles, it is very easy to become complacent. The inclination is to evaluate the strategy under the current conditions and give little thought to how well that strategy would perform under other phases of the business cycle. This gives rise to the systemic risk we have heard so much about in the last few years.

The greatest challenge that has emerged from the experience of the last couple of years is managing the business to do well at any phase of the business cycle. This requires a combination of balance and flexibility. Organizations must balance the desire to grow with the need to manage the related risks. Striking the balance is a continuous process as conditions are always changing. As the pendulum swings, as it always does, the organization must exercise the flexibility to take advantage of the opportunities presented by the next phase in the cycle.



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    The Matrix Organization
    There is no such thing as the perfect organizational structure. Every organizational structure has strengths and weaknesses. The matrix structure was developed years ago in an attempt to minimize the flaws that exist in more traditional structures. A matrix structure is used when there is a need for individuals to report to more than one manager. They may report to a regional manager for day-to-responsibilities and a functional manager for sales or production responsibility.

    In some situations the temptation to use the matrix is strong but, as with other structures, the weaknesses must be understood. The greatest weakness is the ambiguity that must be negotiated by the employees. The structure works very well if employees are sophisticated enough deal with this ambiguity. If not, the matrix structure can be a disaster.
    Future Topics
  • Business Leverage
  • Three Essential Skill Sets
  • For more information contact Jim Sisson - jsisson@vantageassociates.com
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