When Growth Stalls

Recession Recovery Scenarios and What Managers Should Do in the Meantime

Sales and revenue growth are stalled at many companies in a variety of industries. As a result, these firms have frozen or reduced laboratory budgets and in some cases have reduced laboratory staffing levels. There are several ways laboratory managers can effectively respond to these situations in order to maintain laboratory productivity.

Alignment

Laboratory managers must work with their staffs to be sure that each work group’s goals and each individual’s work goals are clearly linked to the broader strategic goals of the organization. This is more critical than ever when growth stalls. These goals can change in the wake of staff reductions and company reorganizations. So laboratory managers should reassess their staff members’ goals to be sure that they are still consistent with the changed overall goals of the laboratory and organization. All employees need to understand the company’s strategy and objectives, as well as how their contributions will help the company meet its goals.

If you need to rebuild work teams after some members have lost their jobs, follow the advice in Reference 1.

Morale and communications

In uncertain economic times and especially after staff reductions, laboratory staff members want and need strong leadership. To be effective, leadership must be seen. So spend time with your work groups and staff members. Effective leadership has a powerful effect on staff morale. Low morale can devastate productivity.

Low morale immediately after the announcement of bad news such as staff reductions or a salary freeze is natural. Be sure that your own behavior isn’t the cause of low morale. Giving recognition for excellent performance can improve morale. Even sincerely saying “good work” or “excellent” after hearing a report from a staff member or work group can be beneficial. However, avoid giving overly frequent, insincere thanks.

Clear communications are essential to effective leadership. People’s listening skills are often less effective in stressful situations, so managers may need to explain some things more than once. They need to communicate some things both in writing and orally. In particular, they should carefully explain any laboratory reorganization and the rationale behind it. They should share their expectations for staff performance and progress on projects. Coaching employees is more important than ever. Some employees will procrastinate on assignments out of a fear of making mistakes. Coaching can reduce this problem. Laboratory managers should be sure that they are concentrating on the important tasks and not merely time-consuming ones. They need to streamline work processes and eliminate lessimportant, time-consuming staff duties. They should reexamine the metrics they are using to be sure that they are measuring what is important and not merely what is easy to measure.

Other strategies

Scott Anthony, president of the consulting firm Innosight, advises companies to learn how to “fail cheap.”2 Lowering the cost of experiments is one way to do so. For example, increased investment in computer software to simulate manufacturing processes and product behavior can reduce costs, compared to performing extensive physical research aimed at optimizing manufacturing processes and product performance. (Of course, actual physical testing shouldn’t be eliminated entirely.) The time required to build staff expertise in simulation may make outsourcing this work an appropriate option.

Another way to “fail cheap” is to increase the pace of decision making. This can reduce the amount of time spent on projects that are not achieving the desired goals.

The recession

This recession probably will not be one of short duration. 3 The depth of the economic downturn means that it will take years to eat up the slack created by the recession. Nearly half of the 54 economists surveyed by the Wall Street Journal forecast that it will take three to four years to close the output gap, while more than a quarter say it will take five to six years.4 Daniel Vasell, CEO of pharmaceutical company Novartis, commented that he anticipates it will take the U.S. and European economies “two to three years to come out of this.”5

The nature of the business recovery can have a major effect on the best strategies to use in managing your laboratory. According to a July 26, 2009 Wall Street Journal article, economists have developed five different basic economic scenarios for the coming months.4 They all present laboratory managers with challenges and opportunities. These scenarios are discussed in the following sections.

The jobless recovery

In this scenario, the recession (in terms of gross domestic product decline) ends soon, probably before the end of 2009. The scenario is the most widely held view among the 54 economists that the Wall Street Journal surveyed.3 They forecast a long, slow business recovery. Employers will be slow to hire due to uncertainty about the strength of this recovery.4 Jobless recoveries have become common since World War II. For example, unemployment rose for more than a year after the 1990-1991 recession. A jobless recovery is, of course, very bad news in terms of hiring students and out-of-work scientists, engineers and technicians.

Both consumers who are worried about their own job security and those who are unemployed will continue to restrict their spending. Companies producing goods and services that even unemployed people need to survive and the laboratories that support these companies are more likely to do well in a jobless recovery than are companies producing discretionary spending items. For example, companies that produce food and household cleaning and maintenance items are more likely to do well than are companies producing vehicles, furniture and other costly discretionary items. Firms that manufacture raw materials and ingredients for products seen as necessities are also more likely to do well. For example, firms supplying electronic chemicals and rare metals may do well, as people are increasingly dependent upon mobile communication devices such as cell phones. Cheaper alternatives to costlier products are also selling well. For instance, inexpensive, highly portable netbook computers are selling briskly despite current business conditions.

Several industries will probably face lingering adverse effects from the recession that will show up in their laboratory budgets. For example, pharmaceutical companies will likely face increased competition from less expensive generic drugs. Another factor that could depress drug sales is that many people who have lost their jobs have also lost their medical benefits and may cease taking their medications. U.S. gasoline and diesel fuel consumption has declined. Lower oil prices have greatly depressed refinery margins, and laboratories serving oil refineries have less work. Lower oil and natural gas prices have substantially reduced well drilling, particularly in North America. As a result, companies selling chemicals, equipment and services to the oil and gas industry have seen their revenues sharply decline and have reduced laboratory budgets and staffing.

Laboratory managers serving industries that are recovering nicely from the recession and seeing their workloads increase can more effectively make the case for increased budgets to support overtime work. While top management may still be reluctant to hire new laboratory staff members until they become more certain of economic trends, these laboratory managers may be able to make the case for funds to support outsourcing or hiring temporary laboratory staff.

The V-shaped recovery

The so-called V-shaped recovery is a rapid growth of sales and profits to prerecession levels, followed by continued economic growth. This is the kind of economic recovery everyone hopes to see and is the second most common prediction of the Wall Street Journal panel of economists.3 While growth rates will vary from one sector to another, laboratory managers could see their budgets return to prerecession levels fairly quickly, giving them the flexibility to hire new staff members. However, one issue they could face may be becoming victims of their own success in managing to maintain good progress with a smaller staff. If a laboratory manager is able to maintain new product commercialization rates and technical service levels with a reduced staff and budget, it may be difficult to convince top level management that additional laboratory staff members and an increased budget are needed.

Hyperinflation

The huge budget deficits in the U.S., Europe and Japan caused by economic bailout programs could result in hyperinflation.3 To pay their debts, the governments of these countries may print more money, further fueling inflation. In this case, prices would rise and the purchasing power of consumers and businesses would decline. Hyperinflation could substantially raise interest rates and make borrowing funds needed to expand businesses more difficult. Firms that borrowed heavily to finance mergers and acquisitions could benefit by paying off their loans with these inflated dollars.

As their money is worth less, consumers purchase smaller amounts of goods and services. This could lead to a W-shaped economic curve, in which gross domestic product first increases as a result of economic recovery; hyperinflation makes further business expansion more difficult, and then the gross domestic product declines as the nation again slips into recession. This scenario results in a long-lasting second recession on the heels of the first.

An increase in commodity prices means that the companies that produce those commodities (and their laboratories) will do well. These companies include those producing food and other agricultural products, as well as oil companies and oil field services firms.

The impact on laboratories is the same as the jobless recovery. Laboratory managers who increase spending levels and hiring during the recovery phase could find themselves in difficulty when the economy turns down again. It could become necessary to again reduce laboratory spending and staffing levels. Having a second staff reduction, even a small one, within months of the first can have a very negative impact on laboratory staff morale, engagement and productivity.

Deflationary spiral

Deflation is an increase in the value of money. With decreased demand associated with a recession, companies may have excess production capacity for many products. They reduce their prices to promote sales.3 Justin Lin, the World Bank’s chief economist, has said, “Significant excess capacity has built up, and unless this is addressed, we will face a deflationary cycle and the [economic] crisis will become protracted.”6

Consumers and companies, and their laboratories, may delay purchases, expecting that prices will decline further or business conditions and their profits will improve.

Decoupling of U.S. and foreign economies

Decoupling of the U.S. domestic economy and rapidly growing economies such as those in China and India could mean that countries could recover from the recession at greatly different rates.3 One such scenario has the U.S. recovery lagging those in some other countries. Currently, China and India still have growing economies, although the rate of expansion is substantially lower now than in the first several months of 2008. Rising incomes in China, India and some other countries could promote sales of U.S. agricultural products and equipment companies that make products that improve farming efficiency.

Each of these economic scenarios will affect laboratory budgets, hiring, and instrument and equipment purchases differently. Effects will vary for laboratories serving different industries. Special factors such as corporate indebtedness also can intensify or mitigate the degree to which these scenarios affect individual companies’ laboratories. These scenarios will also affect venture capital availability, an important consideration for laboratories associated with start-up companies.

References

1. Borchardt, J.K., “Rebuilding High-Performance Work Teams,” Lab Manager Magazine, May 2009 (http://www. labmanager.com/articles.asp?ID=258).
2. Anthony, S., “3 Ways to Fail Cheap,” Innovation Insights, March 30, 2009 (http://blogs.harvardbusiness.org/anthony/ 2009/03/why_focusing_on_innovation_ suc.html).
3. Gangloff, Mark, “Make Money, Whatever Happens to the Economy,” Wall Street Journal, July 24, 2009 (http://online.wsj.com/article/ SB124856957170681503.html).
4. Izzo, Phil, “Economists Foresee Protracted Recovery,” Wall Street Journal, May 14, 2009 (http://online.wsj.com/article/ SB124223735808916011.html).
5. Anonymous, “McKinsey Conversations with Global Leaders: Dan Vasella of Novartis,” McKinsey Quarterly, July 2009 (http://www.mckinseyquarterly.com/Strategy/ Strategic_Thinking/McKinsey_conversations_ with_global_leaders_Dan_Vasella_of_Novartis_2401).
6. Anonymous, “World Bank Warns of Deflation Spiral,” The Telegraph, July 15, 2009 (http://www.telegraph. co.uk/finance/financetopics/financialcrisis/5836488/ World-Bank-warns-of-deflation-spiral.html).