Duke Strategy Professor Will Mitchell argues that rather than bailing out firms, we should build stronger businesses and employees via reorganization and education.

Recently, I filed a post on the value of allowing firms to reorganize, while using public resources to support education rather than bail outs. Today, let’s look at an example of the success of this strategy, which is right here in North Carolina.

Learn from North Carolina. North Carolina is a great example of the success of education and reorganization. I have been here eight years. In that time, the state has largely lost its tobacco and textile industries, and has lost much of its historical furniture manufacturing base. Rather than being in a deep slump, however, the state is one of the most dynamic economies in the country. The reasons are simple to state, even if somewhat complex to implement in practice.

1. Allow low margin business to go abroad. Rather than remaining stuck in what had become low margin businesses, the state allowed businesses that had become globally uncompetitive to move operations to Asia and Mexico or simply to fail. This unquestionably has disrupted some communities and been painful for many individuals. But, because of the next four points, most people and communities have been able to adapt and thrive

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Duke Strategy Professor Will Mitchell’s insights on business failure.

Times are tough and businesses are going bankrupt. I do not need to remind anyone that we are in a tough economic period – in the U.S. and throughout the world – and that many firms have either failed or on the point of failing. In the U.S., the American Bankruptcy Association reports that business bankruptcy filings were up more than 40% in the first half of 2008 versus the same period in 2007, to more than 18,000 filings. The third and fourth quarter statistics will almost certainly be even worse. Several high-profile cases involving the possible failure of U.S. auto manufacturers are front and center in the media, as well as here in discussions on this Duke Research Advantage blog.

Failure hurts more than shareholders. In addition to shareholders, bankruptcy clearly causes losses for employees, suppliers, and the communities in which a firm operates – whether the bankruptcy involves full dissolution (Chapter 7) or is part of business reorganization (Chapter 11). Each of us can look at our local communities and at friends and families to see the losses and hurt that business failure can cause.

Should we keep failing businesses from failing? So, the big question is how hard we should seek to avoid business failure? Like most questions of this sort, the answer depends on who the “we” is.

Avoid failure by creating profitable value. People throughout a firm have every incentive to bust most parts of their bodies – and especially their minds – to find the resources they need to stay in business. Of course, the best way to stay in business is to create value that customers want to pay for, even in tough economic times (see the four-part series that Rich Burton and I posted last week). Profitable value is by far the best drug for business survival. It is my job as a teacher in a business school classroom to help students gain the skills that they need to keep their companies alive by creating profitable value.

Is the economy better off if we use public subsidies to keep failing firms from failing? But what if a firm’s best efforts to create profitable value fail – should the firm lobby for and receive public support to stay afloat until times get better? After all, isn’t the public welfare better served by keeping a firm going – to provide jobs, keep firms in the supply chain alive, and support local communities? Moreover, even a struggling firm often has components that are highly valuable, whether desirable products, long term R&D activities, organized supply chains, and complex distribution systems. Business failure might appear to threaten to throw out the valuable components along with the struggling parts of the business. Should we conclude, then, that the economy is better off if we provide public subsidies that keep struggling firms alive, especially firms that historically were strong, in hopes that they will return to strength when the economy recovers?

Perhaps surprisingly, that answer is usually “no.”

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Duke Strategy Professor Scott Rockart explains why some companies should pursue conservative expansion during the downturn.

Should firms respond to the current economic times with a protective logic of contraction? Many analysts are recommending that firms cancel plans that were already marginal and find ways to reduce operating expenditures. While self protection through contraction may be a virtue for many firms, leading firms may find that a broader and longer perspective calls for increasing, rather than reducing, expenditures.

Why might increasing expenditures be beneficial for leading firms? Read the rest of this entry »

This is the final installment in a four-part series of postings by Strategy Professors Will Mitchell and Richard Burton. Mitchell and Burton outline four principles for leading your business as an opportunity driven strategist in tough times, rather than falling into purely defensive positions that are destined to be overwhelmed by economic pressures.

PRINCIPLE 4. MOTIVATE YOUR PEOPLE

We have already told you that part of principle 2 is to “invest in your people”. So, why are we coming back to people? Well, we were reminded about the importance of motivation by a recent talk to the graduating Global Executive MBA class at Duke University by Ferdinando Beccalli-Falco, the CEO of GE International. Mr. Becalli-Falco’s core point was that you will not survive tough times without the commitment of your people.

In our experience, when times are good, the second thing that comes out of our mouths, after “we are customer focused,” is usually “our people are our most valuable resource.” But most of us do not really practice the people mantra. We take advantage of the rising tide to succeed as businesses despite under-performing in how we motivate and build on our employees’ insights. We do not have that luxury when times are tough.

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This is the third installment in a four-part series of postings by Duke Strategy Professors Will Mitchell and Richard Burton. Mitchell and Burton outline four principles for leading your business as an opportunity driven strategist in tough times, rather than falling into purely defensive positions that are destined to be overwhelmed by economic pressures.

PRINCIPLE 3. STAY OUTWARDLY FOCUSED

When times are tough, the temptation is to hunker down and focus inwardly, trying to cut costs and protect our traditional core. But tough times create advantages – firms that find ways to reach out for those advantages while protecting cash and reinforcing current advantages will both flourish in the tough economic times and create platforms for growth when times get better.

Now, we can hear you saying that it is easy for us to say “stay outwardly focused”, but is this really realistic when you have to protect cash and reinforce our current advantages. Nonetheless, firms that keep one eye beyond their walls in tough economic times will find powerful opportunities.

We stress three points about staying outwardly focused: Sources of opportunities parallel your needs for investment, outward focus reinforces principle 2, and outward focus creates opportunities for selective expansion even in tough times.

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This is the second installment in a four-part series of postings by Duke Strategy Professors Will Mitchell and Richard Burton. Mitchell and Burton outline four principles for leading your business as an opportunity driven strategist in tough times, rather than falling into purely defensive positions that are destined to be overwhelmed by economic pressures.

PRINCIPLE 2. REINFORCE YOUR EXISTING ABILITY TO CREATE VALUE

You would not exist as a business if you were not offering some form of value to the market – whether manufactured goods, human services, or other valuable activities. Be absolutely clear about the sources of advantage that allow you to create value that your competitors do not match – know where you have cost advantages, where you have advantages based on differentiation, whether in fundamental quality or in delivery speed and reliability, and where you have advantages based on your ability to innovate. Then make sure that you protect and reinforce those advantages in value creation.

Principle 2 has three parts: Integrity, investment, and adaptability.

1. Integrity. Retain your integrity as a business – know your core principles and stay true to them. It is easy to fall into the temptation to cut corners when times are tough. We can all think of opportunities that will help us generate a bit more cash if we did something illegal, unethical, or simply out of keeping with our core principles. But bad practices that we use to survive typically turn around and bite us when the economy improves, either because the illegalities catch up or because the people we squeezed will remember. Moreover, cutting corners often contributes to failure in tough times rather than helping us survive, because those few who have money to buy our goods and services will look for alternatives if they recognize the lack of integrity.

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This week we will feature a four-part posting from Duke Strategy Professors Will Mitchell and Richard Burton. Mitchell and Burton outline four principles for leading your business as an opportunity driven strategist in tough times, rather than falling into purely defensive positions that are destined to be overwhelmed by economic pressures.

PRINCIPLE 1. PROTECT YOUR CASH FLOW

Tough times mean that credit is tight. The money you generate from your operations will be the money you can count on for the foreseeable future, no matter how profitable you may be. While investors might love your business in principle, they often will have little cash to give you in practice. Cash flow planning takes some of uncertainty out of tough times and puts you more in charge of your own destiny.

Seek both savings and revenue. Protecting your cash flow begins with cost reductions. Tight control on hiring is an obvious need. Travel is also an easy place to begin, whether this means cutting unnecessary travel or traveling coach (trust us, your legs will wake back up from their crowded coach seat positions once you walk around for a few minutes). Experiment with new “virtual” ways of staying in touch with suppliers, customers, and partners. But protecting revenue is equally important. Protect your best customers and look for new markets, in order to find new revenue rather than simply seek to control costs.

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Recent investigations by Congress and the media have focused on doctors’ financial ties to companies whose products they use or prescribe. Duke Professors Aaron Chatterji, Kira Fabrizio, Will Mitchell and Kevin Schulman set out to learn more about cases where doctors invent new products that are then developed and marketed by private companies with which the inventor doctors typically have some sort of financial relationship.

The group found that physicians are responsible for nearly 20% of all new medical device inventions patented in the U.S., leading them to caution that excessive regulation could potentially squash innovations that could help patients. Read more about the results, and the researchers’ take on the delicate balance between innovation and patient care, here.