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Management Resource Library

Management Realities

(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.

The Realities

Some of these emerging management realities that pertain to all organizations (not just the Fortune 500) are:

  • Liquidity is king. “Cash Flow” is now the name of the game. An article in Forbes predicts we’re probably coming to an end of what could be called “the time of the bottom line”. Preoccupation with the profit and loss statement and earnings per share as the alpha and omega of a company’s performance has led to woeful neglect of cash flow. The tracking and management of cash flow is now fundamental to every organization as the cash flow impact must be evaluated for every major operating decision.
  • Survival is foremost. Growth should not be taken without careful consideration of the ability of the organization to digest it financially and organizationally. Peter Drucker emphasizes that the first social responsibility of business is to maintain the wealth-producing and employment-producing capacities of the resources entrusted to the enterprise and its management. The key is to continue sound growth (which increases both survivability and profitability) but avoid excessive risk (no matter how attractive) that jeopardizes the very existence of the organization. Currently, there are many companies on the brink of extinction because of operational over-extension due to excessive growth. A 1960’s game plan just won’t cut it in the 80’s.
  • Impact of inflation. Inflation is no longer an annoying transitory phenomenon – it is impacting all organizations in dramatic and sometimes tragic ways. The historic earnings figures have become less and less useful as a reliable performance indicator due to gyrating inflation and the impact it has on the replacement of factories, equipment and inventory. The need to adjust for the impact of inflation is crucial if we are to intelligently and effectively manage our organizations. Peter Drucker, dramatically highlighting management’s accountability, has stated, “Not to adjust for inflation is slothful and irresponsible”. Simply stated, we have to adjust for the reality of inflation – we can no longer ignore it!
  • Productivity – key to progress. A distinguishing characteristic of most industry leaders is their substantial productivity of capital as compared to their competitors. One often-mentioned example is General Electric which has attained its leadership position by generating about twice as much work out of a dollar as Westinghouse does. The critical importance of productivity and its associated rewards can best be illustrated by the Japanese auto industry which produces 45 cars per man year compared to the U.S. average of 25 cars per man year. The “definition” (in terms meaningful to the organization) and persistent management of productivity is a fundamental management responsibility in the 80’s.
  • Acceleration of change. The acceleration of change (technological, economical, political, and social) has become an integral part of management reality. Successful managers in the 80’s must enhance their skills in anticipating how accelerating change will specifically affect their organizations and in developing an appropriate response strategy. Reaction timing must be improved in the 80’s to insure the survival, growth and profitability of all organizations.

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:

  • Manage for liquidity.

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.

  • Control growth.

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 for inflation.

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.

  • Define and manage productivity.

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.

  • Anticipate change.

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.