In Praise of Managing Decline

Management textbooks abound with advice about how to grow a business, and with case studies of success in doing so. We must all look to Porter’s five forces and to blue oceans to identify opportunities, then act as a disrupter before we are disrupted ourselves. There are many ways to innovate, and to acquire and motivate the most exciting talent.

This all has its place. But actually, most of the time companies are stuck in a less exciting place, that might be termed managing decline. If you think of the classical life cycle of a company, with its early adopter and rapid growth phases eventually being replaced by a more modest growth, then a plateau and finally a stately retreat, most of the time is usually in the latter phases. We should not forget, most of the money is there as well.

Further, in some ways managing the initiation and growth phases are easier. The vision is clear and appealing. The company is small and the hierarchical structure simple. Setting goals is simple, as is attracting talent and even money, if the vision is appealing enough. And growth conceals so many sins. Project overruns and cost laziness can be obscured by growth, since cost metrics in cents per unit usually improve while the unit denominator is increasing.

Most of my career at Shell I was managing decline, though of course we never described it as such. We had an established product in an established market with a loyal customer base and good margins. We had to keep challenging our cost base, and focus on keeping the existing customers happy. Disrupters came along and our market share often declined gently, and we usually reacted by slowly managing gross margins upwards and taking advantage of incumbent advantages by such means as loyalty programmes and squeezing suppliers.

It is not a surprise that little is written about managing decline since it is not all that sexy. Further, even those of us actively managing decline spend our days pretending that we are doing something else, making business plans to steal market share, acquire competitors and sometimes to expand markets and products.

Yet managing decline is not easy and it is critical. Most big non-tech companies you can think of are in this game, except perhaps in China. Think Ford, Nestlé, McDonalds, the Post Office, Time Warner Cable, Chase Bank. Whisper it softly, but large parts of Apple’s and Google’s businesses are pretty mature already. The archetypal companies for this phase are the cigarette manufacturers, whose product is essentially obsolete but still selling. These companies have some of the best long-term shareholder returns of all sectors.

Managing mature businesses require special skills. The clue comes from the original BCG matrix, where mature businesses are labelled cash cows. What cash cows need to produce is cash. A lot of the key is about being very disciplined with new investments and in eliminating parts of the balance sheet. In Shell I once termed a model for part of our European retail business OPM, standing for Other People’s Money. If you can retain a steady net income while reducing capital employed you can grow your return. So manage down capital, sell off non-core assets (and even core ones with care), and manage working capital carefully. All these moves restrict strategic freedom, but that is a fair sacrifice in many a mature business. Growth and investment and risk are allowed in mature businesses, and one trick is to hive these parts under separate management.

Important in a mature business is to really know what the purpose is, where it aspires to excel. Gradually activities can be trimmed back to the core, but the core needs protection and must not be milked too hard. That part is almost spiritual, and it also serves to retain an underlying motivation to staff.

Another key is to simplify and standardise the business as much as possible. Outsource parts of the supply chain, and use partnerships to share costs as well as to try to lock in additional customer loyalty. It makes more sense to join industry associations once a business is mature, since standardisation can reduce costs while creating some entry barriers. Scale can also be added via merging with rivals: in this case either be the one bought out or be very careful not to overpay, for goodwill on the balance sheet can kill a mature business.

Finally, be on the look out for long term liabilities that might become crippling to a smaller business. This can apply to fixed assets, but nowadays the main example is pensions. A mature business can find the number of pensioners exceeds the number of employees, and it is often the pension liability that condemns a mature business, so be smart enough to see it coming and take mitigating steps.

So there are many unwritten textbooks on the subject of managing decline in companies, and I recommend it as a career specialisation, there are many benefits to both you and your company to doing this well. Furthermore, there are numerous parallels for the skills in arenas outside business.

I was drawn to this blog subject by a neat Economist article about how cities are learning to manage decline. Even though urbanisation continues at pace globally, there are growing numbers of cities with declining populations. Detroit is the clearest example, and years of neglect demonstrate how not to manage such problems.

Usually, cities spend years in denial, and fail to cut the costs in time, and in the end build unsustainable deficits, especially over public sector pensions, and have to serve the remaining residents with inadequate operational budgets. If they only saw things coming in time, they could trim costs, work out pension deals, and reshape the city and its boundaries. Seemingly in Germany, many cities are physically contracting, buying up semi-derelict areas and returning them to nature. This is a novel concept to me, and an interesting one; I wish them luck and hope others can learn.

It is not just cities that can learn the good principles of managing decline, but countries too, whether economic, demographic or military decline. Sound planning can help, rather than policies based on denial or recklessness. The case of military decline or decline of political influence is particularly pertinent for the USA. Almost all the lessons from companies can be applied.

Keeping it simple means being less ambitious with foreign policy and focusing on home priorities. Cutting costs means rebalancing trade, encouraging immigration to keep up the base of productive workers, and challenging investment on vanity projects (while growing it on operational things like domestic infrastructure). Identifying a practical and spiritual core thatis defensible is important. Standardisation and partnership means ratifying UN conventions and using multilateral approaches wherever possible, in a more humble way than currently. The time of projecting exceptionalism should be over. It is hard to learn these lessons in time, as all previous hegemons would attest.

Finally, what is life itself if it is not one long decline, at least after we reach our forties? A keyword for mature businesses is harvesting, and this is what we can aspire to in the second halves of our lives as well. The same lessons apply. Notably, a spiritual core can act as a guide in later life. We should simplify where possible without sacrificing what really matters to us. We should reduce and simplify our balance sheets, and make sure especially that our property suits our needs before it becomes too difficult to move. We should become less fussy and less demanding of our friends as well.

Harvesting can be a glorious time, and with good luck can extend a long time. Viewed sensibly, it involves very little sacrifice. For an individual, a city, and country or a company, these can be the golden years.