In Praise of the Pessimists

Imagine for a moment you're in a building that's filled with smoke, and you read reports from the outside world that says the structure is on fire and the worst is yet to come. Would you prepare for the coming flames, or would you look all around you and say "what fire?" Chances are very good you'd get the hell out of that building.

Now, imagine you run a major corporation and are reading reports from the International Monetary Fund that say the global recession is worse than anyone could have predicted. What's your reaction? Will you take significant steps to deal with the crisis, or will you look at the numbers and scoff?

According to a new survey conducted in March and released Tuesday by the Boston Consulting Group, the companies that are paying the most heed to dire economic predictions are leaders in their respective industries while lower-tier players prefer to see the situation with a more optimistic attitude. But in this case, at this time, blind optimism doesn't pay off.

In the survey of 439 companies with sales of at least $1 billion from seven leading economies--the US, the United Kingdom, Spain, Italy, France, Germany, and Japan--the "haves" find themselves in a stronger position to survive the downturn, while the "have nots" are doing themselves no favors.

The survey found:

· 55 percent of market leaders grew revenues in 2008, compared with 40 percent for the second and third players in a market and only 22 percent of companies outside the top three

· 58 percent of market leaders increased profitability in 2008, with less than a third seeing declining profits, compared with only 21 percent of companies outside the top three seeing improvements

What is it about the companies on the lower end, the ones who aren't heeding the economic warnings? Are they plain dumb?

"They are not dumb," the study's two authors, David Rhodes and Daniel Stelter, wrote in an email response to Portfolio.com. The pair described the reaction from these companies as being closer to denial. "Since the 1980s or even longer, we have not experienced such a severe recession. Managers, like all human beings, are basing their decisions on experience. This time we all run the risk of being surprised when we face a new situation. In other words, they are basing their 2009 projections on their 2008 experience and typically while they may expect a 'U' shaped recession, they hope and plan for a 'V'. And many believe that their own companies will outperform."

To avoid falling into this perception trap, the authors lay out 10 actions to beat the downturn. The most important piece of advice in their eyes: "Taking the risks associated with a downturn very seriously: if they do this, they will then prepare very early and seriously and they will be on top of both their cost base and their cash position. Part of this means managing for cash, as cash is scarce and expensive."

In other words, be ready to run when someone yells "fire."

by J. Jennings Moss

To read more about the Boston Consulting Group survey, click here.