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Profit Warnings

By Tom Lambert

Republish: EasyPublish™ Published: 04Nov2008 Word count: 951 Viewed: 203 time(s) Get Free Content For Your Site

While the world's stock markets compete only on their sentiment-driven panic, Warren Buffett gently advises that "there are bargains to be had out there." A few are listening. Others - generally far less successful others - insist that indebtedness is understated, economies will collapse in spite of the best efforts of an underfunded IMF and world trade will grind to a halt.

Sometimes I am glad that I am not wealthy. Many rich people must be worried by now as falling profits and collapsing hedge funds threaten their wealth whereas I, a member of the "church mouse" faction of the wealth divide, have hardly a care to further furrow my ancient brow. Che sera, sera.

A massive threat to profits?

With some pundits claiming that earnings could fall overall by 40 percent by the end of 2009 there is much talk of "profit warnings". If I were a rich man I would not "have a rich man's wife - with a proper double chin". I would probably have lonely sleepless nights as I waited for the profit warnings to be published.

If Adrian Cattley of Citigroup, who predicts a ten percent fall this year followed by a 30 percent fall in earnings next year is even close to being right, there will be many for whom the hours of darkness will be long. We may even have a political party that chooses as their campaign song, "Things Can Only Get Worse".

An alternative?

Mr. Cattley points out in the "Financial Times" this week that many business people are prolonged, if not eternal optimists. They are slow to recognise that things are no longer what they used to be and that a profits warning is a little late at times. He believes that profit warnings will come. They may not be timely, but like British train services "we are getting there."

Optimism

I am reminded of a doctoral student of mine who worked in a senior sales management position for an international insurance company in Australia. His national sales team had grown to hate Australian optimism. As part of their sales spiel they would draw attention to potentially costly disasters and the statistical evidence that they would occur only to have the potential customer reply soothingly, "Don't worry mate. She'll be 'right".

Personally I would like to read that business leaders are neither whistling in the dark nor showing undue pessimism. They could for example issue honest and appropriate assessments of the perceived dangers, but combine these with clear strategic statements that offer an "avoidance or contingent strategy" designed to avoid, or mitigate, the worst effects of any downturn. That is the traditional approach.

Business is business

In my days with GM a dealer from the then troubled island of Cyprus told me how terrorists cleared his business premises of everything of value before burning it down. They then sold back his stock, records and equipment to him at what he regarded as a very fair price. When I indicated my surprise he looked at me with the expression of one that is being gentle with an idiot. "War is war, but business is always business", he said. Apparently he was selling from his burned out site within 24 hours and continuing to make a living.

Global trade may slow, but it will not come to a halt in any recession. Historically, world trade falls between four and six percent in most recessions whether they are short and deep or long and relatively shallow. This one may be different. It may even be as bad as some commentators are predicting, but -and this is a vital but - the world of business will not stop turning. It would be wise for business leaders the world over to continue to believe that there will be trade to be enjoyed for those that think strategically and are prepared for both the good and bad times ahead.

Threats and (possibly) opportunities

Strategists will not have forgotten that there are two types of threat that can throw a company off course in any marketplace. One type can be avoided if we take the right action now. Under "normal" circumstances "Avoidance Threats" are easily dealt with. Experience tells us what to do. We do it and the threat goes away.

If the pundits are right, however, the current and future situation is almost impossible to predict so we move into the world of contingency planning. If I had money invested in your company I would want to know that you are doing your best to ensure that if the Australians are over-optimistic, you have at least thought through what might happen and have got solid contingency plans in place. Normally "Contingency Planning" aims at dealing with emergent threats. I would like to suggest that in the present situation it might be valid to design contingency plans to exploit unexpected opportunities.

Allies

Businesses can thrive in almost all situations. People will not beat a path to your door for a "better mousetrap" unless they are bothered by mice, but if you offer products and services that satisfy needs, wants and desires that people are prepared to pay to fulfil you can always find a customer.

Your problem, in difficult times, may be finding that customer with only your own, costly resources. You need customers that value your continued existence so greatly that they will go out and "shake the bushes" to have business beating a path to your door. That is Customer Engagement. Customer Engagement should have been part of your contingency planning for any and all market conditions. But - and here is another vital but - it is not too late. Start today and you'll see, "she'll be 'right mate".

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