• Strategy
  • The Economist

Managing in the Fog

The struggle to make meaningful forecasts in a downturn.

In Praise of Short-termism

Yet with economies in free fall, managers also need up-to-date information about what is happening to their businesses, so that they can change course rapidly if necessary. Cisco, an American network-equipment giant, has invested over many years in the technology needed to generate such data. Frank Calderoni, the firm’s CFO, says that every day its senior executives can track exactly what orders are coming in from sales teams around the world, and identify emerging trends in each region and market segment. And at the end of each month, the firm can get reliable financial results within four hours of closing its books. Most firms have to wait days or even weeks for such certainty.

Admittedly, Cisco’s financial results have not made happy reading recently because, in common with many other large technology companies, it has seen demand for its products falter in the downturn. In early February it announced that its fiscal second-quarter revenues of $9.1 billion were 7.5 percent lower than the same period in 2008 and that its profit had fallen by 27 percent, to $1.5 billion.

In response to hard times, Cisco plans to cut $1 billion of costs this year by, among other things, harnessing its own video-conferencing and other communications technologies to reduce the amount its executives travel. It is also using these facilities to relay information from employees on the ground to its senior managers, and to get instructions from Cisco’s leaders back out to its 67,000 staff. A rapid exchange of information and instructions is especially valuable if the company wants to alter course in stormy times.

If everybody in a company can rapidly grasp what they have to do and how it is changing, they are more likely to get the job done. But some firms are reluctant to share their goals with the wider world. Unilever, a big Anglo-Dutch consumer-goods group, has decided against issuing a 2009 financial forecast to investors, arguing that it is difficult to predict what is going to happen, given the parlous state of the world economy. “We’re not just going to provide numbers for the sake of it,” explains James Allison, the company’s head of investor relations. Other companies that have decided not to provide annual earnings estimates for 2009 include Costco, a big American retailer, and Union Pacific, an American railway company.

Some firms, such as Intel, seem to have chosen to take things quarter by quarter. The giant chipmaker said in January that it would not issue an official forecast for the first quarter of 2009 after its fourth-quarter 2008 profit plunged by 90 percent. Several retail chains have also stopped providing monthly sales estimates because they cannot see what the future holds. Retailers, chipmakers and firms in many other industries may have a long wait before the economic fog finally lifts.

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