Business Week just ran an article in this week’s edition (Nov. 2, 2009) on, What’s Holding Tech Back. The subtitle was/is, “The surprise surge in demand for PC’s and handsets has the industry scrambling to get the supply chain humming.” Now, before you hit the snooze button, hang on for a moment. This will be worth it!
When the downturn occurred, what did most chip makers do? Exactly, they cut production, closed down plants, and went into survival mode. The problem, of course, is that it takes months to bring dormant factories back to life. So, what’s happening now?
If you remember that today’s solutions ALWAYS create tomorrow’s problems, you’ll know exactly what’s happening. Now, companies like Nokia are reporting losses for their handsets saying,“We could have sold more phones in the third quarter [if it wasn’t for] the capacity constraints (i.e. if we could have purchased more component parts, we could have sold more).” And chip makers and others are losing out on revenue they could have been making had they not done everything they did over the last two years to reduce capacity.
Interestingly, the article highlights one company, Linear Technology, that made a different choice. Instead of closing down a plant or two, they decided to keep all four of their plants open and all of their employees on payroll–unlike their competitors, Instead, what they did was to stage a rolling factory shut down, which has allowed them to get back online and fill NEW orders within two to four weeks.
- Remember, today’s solutions always create tomorrow’s problems.
It doesn’t matter what choice is made. In a closed system, every choice has both positive and negative implications (some of which we can anticipate and others which we can’t). The trick is to make sure you’re actually evaluating the possible future implications (both positive and negative) when you’re making a decision.
For example, if you decide to take on a big client (let’s say a Walmart or GE kind of client), that could be good. But the first rule of entrepreneurial finance is that growth sucks cash. Even worse, a lot of elephant clients like to manage their cash conversion cycles on the backs of smaller companies (often paying from 100-200 days late–which, of course, your banker discounts because anything past 90 days doesn’t count).
In other words, while pursuing and landing that big account might have driven you and your company for the past twelve months, if you haven’t stockpiled cash or secured access to cash beforehand, the next six months may be devastating. On the other hand, not landing that big client, may have significant consequences of its own.
So, every time you’re faced with an important decision, especially a strategic decision, as the CEO, you need to make sure you’re looking at the potential negative outcomes from that decision–and not just the positive ones (because they are there).
As the Business Week article points out, it’s currently taking 18 weeks (four and a half months) to fill orders for megahertz crystals (a key component of cell phones). And why is that? Because too many players decided to cut production by closing down plants over the past two years. Now, if we went back in time I’m sure the CEOs of those company’s thought that was the wisest course of action–but was it?
To your accelerated success!