Bain & Company Finds Most U.S. Executives in Downturn Denial.

Business Editors

BOSTON--(BUSINESS WIRE)--Jan. 30, 2001

Nearly 40 Percent Hinge Bets on Layoffs and Short-term Fixes that Hurt

Long-term Performance

A staggering 70 percent of companies are not fully prepared for an economic slowdown, according to the findings of a new survey by Bain & Company, the global strategy consulting firm.

In fact, among the Fortune 500 executives surveyed, half are in denial and don't expect their industry growth rate to slow or decline, and only 10 percent believe that if a downturn hits, their performance will fall below the industry average - a mathematical implausibility. In addition, 59 percent have a false sense of security that they can outperform their competitors in a downturn. The survey was conducted last week, when economists were predicting that real GDP growth will slow from 5.2 percent in 2000 to 2 - 3 percent in 2001, and several were asserting that the economy is in "zero growth" mode.

"We find that with careful navigation, downturns provide unique opportunities to create upward mobility, but only when companies prepare early for the worst, reduce diversification, lengthen their time horizons and are willing to open their wallets on bargains to shore-up market positions," said Darrell K. Rigby, Bain & Company director. "When it comes to this downturn, executives are headed toward short-term, rash decisions that appear to make sense, but eventually damage their competitive positions and financial performance."

Bain interviewed 100 U.S. senior executives from various industries and found during a downturn in their industry the majority would make easy fixes and take short-term actions as opposed to finding long-term, lasting solutions. Only a handful of business leaders in the survey state that they are likely to use a downturn to their long-term advantage.

Actions executives are likely to perform include:

-- 55 percent would reduce capital expenditures

-- 48 percent would push for price cuts from suppliers

-- 44 percent would reduce marketing and advertising expenses

-- 41 percent would reduce sales and earnings targets

-- 39 percent would implement layoffs

-- 31 percent would exit some businesses

-- 30 percent would reduce R&D spending

-- 24 percent would close facilities

The survey further revealed how likely executives are to change their cry from "all hands on deck" to "man-over-board" through headcount reductions. Bain's survey results show that almost 40 percent of executives are likely to implement layoffs in a downturn. According to Bain research, "when the recession of 1990 - 91 hit, announced layoffs rose by 444,000 - nearly 400 percent - from their 1989 levels." Though managers publicly praise employees as their most valuable assets, history and these survey results demonstrate that executives are almost twice as likely to lay off employees as they are to dispose of physical assets in a downturn.

In addition, executives are more than twice as likely to implement layoffs as to replace senior executives. "Knowing that voluntary employee turnover averages 15 - 20 percent per year, that 85 percent of all industry downturns have depressed volume by less than 10 percent, and the average recession has lasted only 11 months, one might wonder why there is such a scramble to fire, then re-hire and re-train so many employees," said Rigby. "But executives continue to eliminate employees without eliminating the activities they performed. Remaining employees suffer, costs eventually return en masse, and a valuable opportunity is squandered."

Another troublesome finding is the tendency to diversify. Statistically, the same number (19 percent) of executives say they would diversify their portfolio of businesses as would make acquisitions in their current businesses (20 percent) during a downturn. "Successful downturn managers avoid market share-diluting diversification, and concentrate as many resources as possible on playing to win wherever they plan to play," added Rigby. "Evidence on this point is overwhelming. The first priority must be to strengthen the business's core in a downturn."

Bain's 2001 findings and analyses of previous industry downturns and recessions reveal four practices of successful recession-proof executives that create long-term opportunities:

-- Have an Escape Key - Always prepare a contingency plan and have the ability to foresee and adapt to marketplace changes

-- Honor Thy Talent - Carefully examine the short-term vs. long-term costs of training and retention

-- Troll for Acquisitions - Even the greenest of investors can recite the formula for successful investing: "buy low, sell high"

-- Focus on the Core - Fully understands the downside of diversification into other businesses and the risks of diluting market share in times of turmoil

EDITORS NOTE: For more information or a complete set of survey results, please contact: [e-mail]

About Bain & Company, Inc.

Bain & Company is one of the world's leading global business consulting firms, serving clients across six continents. It was founded in 1973 on the principle that consultants must measure their success in terms of their clients' financial results. Bain's clients have out performed the stock market 3 to1. With headquarters in Boston and offices in all major cities throughout the world, Bain has worked with over 2,000 major multinational and other corporations from every economic sector, in every region of the world. For more information visit www.Bain.com .