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3/28/2006
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Q&A: Riding The Business Cycle More Wisely

University of California professor Peter Navarro says enterprises can be more competitive by better managing the ups and downs of the business cycle, notably via sharper control of inventory and capital outlays such as technology spending.

Business expert Peter Navarro says IT solution providers and their clients can be more competitive by better managing the ups and downs of the business cycle, notably via sharper control of inventory and capital outlays such as technology spending. A University of California business professor, Navarro has had his work published in The Wall Street Journal, The New York Times, BusinessWeek and the Harvard Business Review. He outlined his approach, explained in his book The Well Timed Strategy, in an interview with CRN Director Of Editorial Research John Roberts. Here is an excerpt.

CRN: Why do companies need to do a better job of managing the business cycle, and why is it so important for them to know when to act?

NAVARRO: A lot of what people know about strategy focuses on the how and the why. But timing, very often, is as [important] or more important. In terms of inventory-type management, the kind of micro approach to managing inventory is to increase your inventory turnovers as much as possible all of the time. In fact, what you want to do going into or out of a recession is to cut inventory more subtly. When you are coming out of a recession, you want to be building up because you want to be the first on the stock shelves and have the opportunity to sell. Just about any decision across the organizational structure--whether it is marketing, HR, production, M&A, finance, whatever--is sensitive to where you are in the business cycle and the related interest-rate and stock-market cycle.

CRN: You said a key part of managing the business cycle is cutting expenditures ahead of a recession to conserve cash and increasing expenditures at the bottom of a recession to exploit a coming recovery. How does this differ from current business thinking?

NAVARRO: I think the culprit there is a bigger problem of the lack of business cycle literacy among a lot of executives. Those that manage the business cycle well are in the minority. The problem is that understanding basic economics, understanding what economic indicators to look for, is not something that a lot of executives do. That is very costly to companies, particularly in the tech area, because tech has been subject to exuberant views and exaggerations in the business cycle. That is because a lot of tech executives--[Cisco Systems CEO] John Chambers is a classic example--thought their companies were outside the business cycle.

Because of this lack of understanding about basic economics, many [executives] are not prepared to do trim inventory in anticipation of a recession, boost capital expenditures in the middle of a recession and restock inventory in anticipation of a recovery. A lot of companies are very risk-averse, and they just will not do that. But it really is the best way to get the most innovative products on the shelves ahead of your rivals. You can't wait until good times are back. Moreover, recessions tend to be shorter than expansions, so there is a window of opportunity there. If you move three, six or nine months faster than your rivals, then you've got them.

CRN: How can CRN’s readers, as IT solution providers, help their customers better manage the business cycle?

NAVARRO: The average person from your audience actually faces two challenges. The first challenge is the fact that they are in a highly cyclical industry. They have to be as ready as anyone for a recession because their own company will get pulled down whatever happens in the technology industry if a recession occurs. So they need to manage their own companies with an eye toward the economy. At the same time, they can also bring the following message to their customers: 'We can help you manage your company, including your expenditures on technology, using more sophisticated systems that will help you anticipate economic movements and help to exploit them.'

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