Into the unknown

Originally appeared in the October 2016 issue of Connected magazine

by Jeremy Derksen

When oil prices hit rock bottom in the spring of 2016 and international firms were laying off staff by the hundreds, Reece Tomlinson, Athabasca University MBA ’10, was watching with a sympathetic eye.

As the former CEO of a construction company in the resource sector, Reece had recent experience managing losses and layoffs. It had been his first opportunity to take leadership of an organization, so he had stepped into the role with excitement. But he quickly realized he’d been handed a company in trouble. He was immediately faced with some very tough choices.

“We had to lay off a large amount of our staff – about 30 per cent – in a period of a few weeks,” he recalls. “It was gut-wrenching. It has the potential to really demoralize staff. It impacts people’s lives…everyone who worked for us I knew personally, I knew their families.”

“For me, as a leader, it was the most challenging thing I had to go through by far,” he says. “It was 100 per cent my decision and it wasn’t easy.” Hard as it was, Reece doesn’t have regrets. “If I was to do it all again,” he says, “I’d make cuts faster and deeper… by the time you start thinking you should do it, you should probably already have done it. It’s the difference between some jobs lost to an entire company lost.”

During the global commodity collapse of the last year, many senior managers confronted dilemmas similar to Reece’s. Oil has climbed up from its market low in March 2016, but forecasters are still cautious. Gold, copper, platinum, and other commodity staples suffered as well. And financial markets are wary.

Lynn Patterson, deputy governor for the Bank of Canada, has estimated it may take more than two years for the economy to adjust to “the commodity price shock.” She also anticipates that a “new economic balance will likely take shape” over that time, with the commodity sector playing a reduced role in Canada’s GDP.

So how does a company navigate through instability as a result of unpredictable markets, socio-economic shifts, and rapid technological advance? From industry to industry, small-and-medium sized enterprises to Fortune 500 leaders, situations may vary but the bottom line is, organizations need to be prepared to deal with sudden and dramatic changes in markets. “If you look at global forecasts for business as a whole,” Reece says, “one thing that we should expect is more uncertainty.”

Forecasts are one useful way to help business anticipate market behaviour, but speculating on the future can only yield so much insight. “Nobody’s got a crystal ball and we all have our assumptions based on risk tolerances and what we think is going to happen in the future,” says Michael Mauws, Professor of Business Policy and Strategy at Athabasca University (AU). “But if you’re realistic and look far enough back in history, you need to be prepared for downturns.”

Beginning in the late 1980s, Michael launched software startups, managed manufacturing firms, hotels, and recreation complexes. He combines that entrepreneurial background with over 20 years of academics, 12 of those with AU (going back to 2004) – so he has some solid experience and history to draw on.

“We’ve got a whole generation of business leaders that have never known anything but low interest rates,” he says. “I’m old enough to remember interest rates of 19 per cent. So I always wonder about the possibility of interest rates going up. I don’t think it’s going to happen any time soon but I’m always looking to see when it’s going up – not if.”

“One of my first investments was a savings bond that returned at 19 per cent,” he recalls. “If you get into an environment where people don’t look far enough back in history to see that things can and have been different, you’re going to make decisions based on things staying as they are.”

On the other hand, getting too accustomed to market inflections has its risks as well. It’s one thing to have the confidence to stand strong in the face of a storm, and another to be complacent when the earth is shifting under your feet.

Business strategy is often viewed as an “aggressive tool” in the management toolbox, says Michael, to exploit opportunities and grow business. But it can also help protect a company against threats to its business. The traditional SWOT analysis (strengths, weaknesses, opportunities, threats) can be useful to get companies looking at all sides of the equation, he says, and watching for the right things.

 

“If you look at global forecasts for

business as a whole, one thing that we

should expect is more uncertainty.”

Reece Tomlinson, MBA ‘10

 

 “The first thing is to have some form of environmental scanning to give you an early warning when things start to turn,” Michael sets out. “And structure yourself in such a way that you can not only scale up but scale down.”

As Reece saw from experience, during periods of unchecked growth some businesses don’t take the time to put those warning systems in place; instead, they rush ahead to meet demand. “Most businesses, you have times where it’s all out, everyone is moving quickly – it’s easy to spend money pretty quickly at times,” he says. “It’s important to look back and see what could be shaved off.”

A company that knows its vulnerabilities and is nimble enough to scale can certainly react better when markets drop. But there are other ways to limit exposure and increase competitiveness at any time – lessons that can be learned before fortunes plummet.

“When you’re in any kind of economy, the playing conditions are the same for everyone so you really have to look at your business from a different lens,” says Reece. “It’s easy to grow at five per cent, 10 per cent when the market’s growing five or 10 per cent.” Michael is a firm believer in “stress-testing” business models. When a company tests its assumptions under different market conditions, it can help gain clarity about what the business actually is and does. “If the goal is survival and year over year return to shareholders, know the business you’re in and don’t be lured away by potential windfalls,” Michael cautions. Some businesses, he says, “need to decide whether they’re going to play it safe or get greedy and expose themselves to the vicissitudes of the market.”

Having been through some difficult times in his first role as a leader, Tomlinson is heavily focused on building corporate resilience. A major part of that, he says, is investing in culture. “I’m a huge proponent of corporate culture; it’s the single most important aspect of whether a company can succeed or not. Time and again, companies with strong corporate culture outperform the market dramatically.”

In the wake of the commodity collapse, a lot of companies made moves to trim their balance sheets, primarily by cutting staff. “So many businesses today, especially in oil and gas, have reduced their workforce by 40 per cent,” says Debby Carreau, AU MBA ’10, founder and CEO of Calgary-based Inspired HR. Debby has assisted in downsizing and restructuring with major firms across North America. The company currently provides outsourced staffing solutions for 400,000 positions across the continent. “We’ve seen three significant rounds of layoffs,” she recounts. “Many companies have made huge rollbacks or cut benefits. They’re re-evaluating what’s meaningful, what they need to keep, and what can be clawed back to save jobs.” What’s more, she says, is that there is a ripple effect. “There’s been a lot of change in human capital in the oil patch, but even one or two industries removed as well.”

Now CEO at Intraline Medical Aesthetics, Reece leads a company that develops luxury products for spa treatments and elective medical procedures. He oversees a staff of 10, with clients in nine countries, and he’s looking to double the workforce and expand into at least three new countries in the coming few years. While the company is not directly linked to global commodities, he is conscious of how their business is impacted by trade in those commodities.

“Many of our customers are in countries that have heavy reliance on the resource sector,” he explains. “So whether it’s pricing pressure or credit pressure, it certainly has lingering effects for us as a company. When people have shortages in discretionary income…you notice it as a business.”

Both Debby and Reece have learned from the experiences of the last couple years. In Reece’s view, companies need to be responsive to market pressures, and where possible, proactive. Anticipating market shifts and taking a step back to evaluate strategy and re-align with the market can help ensure both customer loyalty and profitability. “Your customers need change,” he argues. “They have different requirements than they did two years ago and you need to evaluate your model and figure out how you can continue to provide the services customers need, while still operating a competitive model.”

The balance of risk and opportunity is part of the ebb and flow of business. The recent collapse in commodity prices did hurt some businesses, says Michael, but what is the big picture?

“The implications are much different for commodity producers than they are for those that use commodities as an input in the production process – for them, this may represent an opportunity,” he reflects. “Is it really a crisis or just a short-term business cycle that creates an opportunity to lock in lower prices or pick up assets at distressed prices?” If he were putting the question to leaders in the commodity industry, says Michael, the first things he would ask are, “What are you doing to stress test your business model, and how well did it prepare you for the events of the last few years? Looking ahead, what would you do differently in your strategic planning?”

In that sense, being resilient as a business is a process of constant learning and re-evaluating. “You have to be prepared for things to take a downward turn, but on the other hand you want to be poised to capitalize when things take a turn for the better.”