How to Write A Strategic Plan
During This COVID Economic Downturn
A constant search for answers caused me to look back at some of the work we did on managing construction concerns in cyclical markets. I took a look at the teaching in Managing the Profitable Construction Business, a book my colleagues and I published in 2014. Here are some excerpts that may be helpful in this time of market disruption.
Reacting to Cycles
“Construction is extremely cyclical; however, the [down] cycles are rarely analyzed to understand their fundamental conditions or symptoms. Another challenge is that management often cannot react correctly to the cycle the company is faced with because the organization is usually still reacting to the last cycle the company experienced, while simultaneously attempting to anticipate the actions needed to be successful in the next [up] cycle.” (Managing the Profitable Construction Business, Thomas C. Schleifer, Ph.D., Kenneth T. Sullivan, Ph.D., John M. Murdough, CPA, John Wiley & Sons)
Learning to Juggle
Managing in a downturn can be a lot like learning to juggle while going up and downstairs. “When market conditions change, managers tend to get stuck in the present mode, thinking that that way of operating was necessary to be successful in the last [current] cycle…”
The Stair-Step Concept
“The greatest challenge when a company grows or shrinks in size is managing overhead… A company’s overhead structure doesn’t… grow or shrink gradually in proportion to volume changes. G&A tends to grow and shrink in a stair-step fashion…”
Picture a graph with total sales revenue in dollars on the vertical axis and time in years on the horizontal axis. Starting in the bottom left, if revenue is growing for some years the line would be sloped up and to the right; and after that, if it declines, the line would slope down to the right. If overhead is on the same graph and growing, it would not be a straight-line following revenue but stair-stepped to the right. When overhead is put on, it is an instantaneous cost. The overhead line would go straight up. If overhead remains constant the line becomes horizontal to the right until more overhead is put on, and then it would be represented by a straight line up again and so on looking like stair steps. This is a profitable model because the overhead is put on after revenue growth occurs. Graphically the stair steps are under the revenue line. This works in our favor because we are continually working with not-quite-enough overhead which converts instantly to profit.
Contrast this with a declining market. We have a built-in reluctance to reduce overhead prompting us to wait and see if the market continues to decline. Most wait quite a while until compelled to reduce expenses at which point the overhead line goes straight down in the amount of the reduction and then horizontal over time. If we are forced into another reduction, the line goes straight down again and so on. These similar stair steps however are above the revenue line not below as during growth–a graphic indication of excess cost, some might say wasted costs. This model shrinks profit or causes loss.
The implication is that we should have cut sooner, but we can’t be certain the decline will continue so we hold off. It would be advantageous in both growth and decline if we knew in advance how deep and how long they will last, but it is far less important in growth because the overhead delay causes profits. Fortunately, in a downturn, there are economic indicators that provide signals about how deep and how long. Unfortunately, they are not widely known, appreciated, or trusted in the construction industry. No room for details, but briefly the construction market follows and lags the US economy by 12 to 18 months. The depth and length of a US economic downturn can be translated to indicate the timing, depth, and length of the subsequent construction market reaction (decline). The current downturn in the US economy had a different cause than typical cyclical downturns, but the impact on the construction market was exactly the same as the prior eight downturns since WWII.
An understanding of the overhead stair-step process should be helpful in planning for and managing through this market decline. How far a construction enterprise can fall in volume before being forced to make a change in G&A varies firm to firm but cutting overhead sooner is a less-risk-more-profit alternative. A good rule of thumb is to start belt-tightening as soon as a decline in the US economy appears to be going to last longer than six months. We should know and plan in advance who and what we would cut in what order if the market declines. It is simply prudent management.
It is always appropriate to go back to past experiences and remember the lessons learned. Sound management principles are always sound.