COPING WITH A REBOUND
After two years of slowing orders and stagnation, our company began to experience a gradual uptick. Our customers were increasing the size and frequency of their orders. Though we remained wary—after all, this might be only a temporary blip—we saw a glimmer of relief. As I walked through the plant on my morning tour, I was smiling again and telling everyone that although caution was in order, a recovery could well be in progress.
Sure enough, we soon saw that it was. We could tell that the rebound had staying power when our customers showed less concern about prices than our capability to deliver on time. After a few months, when the rumble of employee dissatisfaction with the excessive overtime drifted up to my office, we could hardly doubt that we were experiencing the consequences of a full-fledged recovery.
Our industry was classically cyclical, often swinging between oversupply and shortages. But no recession, affecting the entire economy, had hit us as hard as the recent one. In earlier recessions the effects had been muted.
During those days the industry was still young, still at the cutting edge, and perhaps growth was unstoppable. But the most recent recession had struck our industry well into its maturity. Furthermore, there were vastly more players competing with one another.
At one point the recession had come dangerously close to doing us in. Our panic and sense of helplessness at that time were seared in my memory. It must never happen again, I thought. Somehow we must make ourselves less vulnerable. One way would have been to stop growing and let the profits accumulate. But we were too entrepreneurial to pursue such a safe course. Moreover, to stagnate is to die—if not from competitive pressures, then from boredom.
Another way to increase our safety would have been to diversify our product line. Fortunately, our aspect of the industry encompassed a broad customer mix: from plastic film to carpet fibers, from wire insulation to toys. Unless a recession is long and deep, not all industries suffer to the same extent at the same time.
The field was segmented into commodity and specialized product lines. We could broaden our line or launch a research project to develop new products. We did both.
We invented a patentable product in solid form that, for some applications, was better than our standard one. Matching the competition, we also developed a product in liquid form that had begun making inroads in the industry. This involved some new machinery. But we avoided expanding the range of our regular manufacturing capabilities and sought customers in new industries for whom we could make products with the equipment we had. As time passed, this policy proved too conservative. By not upgrading our equipment, we missed servicing entire industries with highly profitable products that our competitors, with newer facilities, were taking on afresh.
Those were years, similar to today, when the capital gains tax was still low, the inflation rocket was sputtering, and talk of an income tax reduction held promise of sustained prosperity. It seemed certain that the rebound would become a solid upward curve. Our company, for the first time in its fifteen-year history, became not only debt free but a net lender. It owned CDs paying 12 to 15 percent, just about what the company was then earning on each sales dollar.
Everything we did went right. In a couple of years we got used to it. But in good times, costs—often those we thought we had under control—tend to ratchet upward. The hourly workers (we were nonunion) pressed for increases above the cost-of-living increase they routinely received each year. Even the salesmen, whose pay was in part based on commission and who were selling and earning more than ever, demanded an increased base salary which we were compelled to meet. Though material costs had also climbed, we could easily pass them on. Still, the most we could do as new competitors entered the scene was to hold our prices and, in some cases, drop them. Our best choice was to “make it up in volume,” as they do in supermarkets. That meant grow, grow, grow.
But I had no wish to take on the task of becoming a larger organization. So I sold the company at what I thought was the high or near high. Some years later, when I visited the main plant, business was down drastically. The cycle had turned. The capital gains tax was historically high, the income tax had climbed, and money was tight. It was recession all over again.
Why do we humans so often fail to realize that prevailing conditions can’t go on forever? Change is the single most constant feature of life. Depend on it.
Sure enough, we soon saw that it was. We could tell that the rebound had staying power when our customers showed less concern about prices than our capability to deliver on time. After a few months, when the rumble of employee dissatisfaction with the excessive overtime drifted up to my office, we could hardly doubt that we were experiencing the consequences of a full-fledged recovery.
Our industry was classically cyclical, often swinging between oversupply and shortages. But no recession, affecting the entire economy, had hit us as hard as the recent one. In earlier recessions the effects had been muted.
During those days the industry was still young, still at the cutting edge, and perhaps growth was unstoppable. But the most recent recession had struck our industry well into its maturity. Furthermore, there were vastly more players competing with one another.
At one point the recession had come dangerously close to doing us in. Our panic and sense of helplessness at that time were seared in my memory. It must never happen again, I thought. Somehow we must make ourselves less vulnerable. One way would have been to stop growing and let the profits accumulate. But we were too entrepreneurial to pursue such a safe course. Moreover, to stagnate is to die—if not from competitive pressures, then from boredom.
Another way to increase our safety would have been to diversify our product line. Fortunately, our aspect of the industry encompassed a broad customer mix: from plastic film to carpet fibers, from wire insulation to toys. Unless a recession is long and deep, not all industries suffer to the same extent at the same time.
The field was segmented into commodity and specialized product lines. We could broaden our line or launch a research project to develop new products. We did both.
We invented a patentable product in solid form that, for some applications, was better than our standard one. Matching the competition, we also developed a product in liquid form that had begun making inroads in the industry. This involved some new machinery. But we avoided expanding the range of our regular manufacturing capabilities and sought customers in new industries for whom we could make products with the equipment we had. As time passed, this policy proved too conservative. By not upgrading our equipment, we missed servicing entire industries with highly profitable products that our competitors, with newer facilities, were taking on afresh.
Those were years, similar to today, when the capital gains tax was still low, the inflation rocket was sputtering, and talk of an income tax reduction held promise of sustained prosperity. It seemed certain that the rebound would become a solid upward curve. Our company, for the first time in its fifteen-year history, became not only debt free but a net lender. It owned CDs paying 12 to 15 percent, just about what the company was then earning on each sales dollar.
Everything we did went right. In a couple of years we got used to it. But in good times, costs—often those we thought we had under control—tend to ratchet upward. The hourly workers (we were nonunion) pressed for increases above the cost-of-living increase they routinely received each year. Even the salesmen, whose pay was in part based on commission and who were selling and earning more than ever, demanded an increased base salary which we were compelled to meet. Though material costs had also climbed, we could easily pass them on. Still, the most we could do as new competitors entered the scene was to hold our prices and, in some cases, drop them. Our best choice was to “make it up in volume,” as they do in supermarkets. That meant grow, grow, grow.
But I had no wish to take on the task of becoming a larger organization. So I sold the company at what I thought was the high or near high. Some years later, when I visited the main plant, business was down drastically. The cycle had turned. The capital gains tax was historically high, the income tax had climbed, and money was tight. It was recession all over again.
Why do we humans so often fail to realize that prevailing conditions can’t go on forever? Change is the single most constant feature of life. Depend on it.
posted by Hugh Aaron at 3:39 PM
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