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(Note: this article was written 3 decades ago but it illustrates how change is the only constant of management reality)
The business environment has seldom appeared as bewildering, hostile or unpredictable as it does today. Fluctuating inflation and interest rates, in addition to a myriad of energy, technological and competitive concerns, impact the managerial process at every organization. The 1950’s and 60’s, earmarked by steady growth and a relatively stable and predictable economic environment, are long gone and the turmoil of the 70’s has increased to bring us the new management realities of the 80’s.
Like it or not, we as CPAs must deal with these new realties if we and the organizations we serve are to survive and prosper during the decade ahead. Robert Ringer, via his “theory of reality,” reminds us that reality isn’t the way we wish things to be, not the way they appear to be; but it is the way they actually are and, we either acknowledge reality and use it to our benefit, or it will automatically work against us.
One vivid example of how dangerous it can be to ignore reality is the beleaguered U.S. auto industry. Our failure as a nation (we can’t just blame Detroit or the Arabs for this one) to recognize the reality of the world oil situation led us down the “primrose path” by keeping U.S. gasoline prices at half what the rest of the world was paying during the 70’s. The penalty for our self deception is the loss of industry leadership (if not the industry itself) to those countries that faced and dealt with the ‘reality of oil” after the 1973 embargo.
Some of these emerging management realities that pertain to all organizations (not just the Fortune 500) are:
What Can Be Done!
The realities must be dealt with as an integral part of organizational planning, information development and decision-making processes. Some specifics for us and our clients to consider are:
Plan, monitor and “manage” cash flow. If cash budgeting and planning is not part of the normal routine, then make it a part! At today’s interest and inflation rates, it becomes painfully clear how expensive it is to “carry” excess inventory and to grant loans to customers via excessive accounts receivable.
Continue to push for growth, but only growth that can be controlled and that does not jeopardize the very existence of the organization. Remember the first responsibility of management is to ensure the continuing survival of the organization.
Adjust financial statements to disclose the impact of inflation. There are methods available, requiring a modest amount of time and expense, that allow management to assess the magnitude of the effect of inflation by restating cost of goods sold and depreciation. Consideration should also be given to adoption of the LIFO (last-in, first-out) method of accounting for inventories. Under the right economic conditions, adoption of LIFO can provide more meaningful financial information and generate additional cash flow to the company because of reduced federal and state taxes.
Specifically define what productivity means to the organization and then persistently manage the key resources (capital, crucial physical assets, time and knowledge) to consistently improve productivity. Manage the key assets in the organization. If most of the assets are tied up in inventory, then concentrate there. The concept is to develop strategy and operations planning with productivity goals in mind.
Be constantly alert for how change will affect the organization. Even though it’s impossible to predict all change, we can improve anticipation of changes affecting key performance areas and develop alternate response plans for the organization. It is painfully clear that Detroit did not have a well-planned response strategy to $1.30 per gallon gasoline even though the handwriting was on the wall for years. The crucial point here is to think through how current economic, political, social, technological, etc. trends will affect the organization and develop a response strategy so that we are not constantly “surprised” by what has happened. The competitive advantage will be significant for those organizations that can successfully predict and adapt to the changing years ahead.