ChiefExecutive.net

CEO Outlook 2009

December 12 2008 by Steve Viuker

With the financial meltdown of 2008 bringing Wall Street and much of the U.S. economy to its knees, CEOs continue to reel from the credit shock blowback. Many say we are in a recession but are not certain how long and hard it will prove to be. Chief Executive asked business leaders from a wide range of industries: What issues or challenges, either for your company and industry or for the economy, will be uppermost on your minds, as you face 2009 and beyond?

Industrious Agenda

“Everyone is concerned about the energy crisis and the economic crisis, but the challenge America is really facing is an industrial crisis. The solution? A new industrial policy-one developed by manufacturers for manufacturers, a policy that rejuvenates our economic base and makes American industry competitive again. In order to bring U.S. manufacturing costs in line with our global competitors, we need to lower the corporate tax rate, reinvent regulation, reform our civil justice system and find solutions to the health care crisis. Energy consumption will continue to soar, and we have got to develop a comprehensive policy so that we can keep energy investments inside our borders. And we have to improve our energy security by improving efficiency and conservation, diversifying domestic supplies and finding new alternatives and renewables. Everyone- not just the $1.6 trillion manufacturing sector but every industry, all public and private sectors, and environmentalists- must collaborate to realize these goals. 

The Dow Chemical Company is a $54 billion global chemical, plastics and agro sciences company based in Midland, Mich. www.dow.com

Cautious Flyer

“Times are, indeed, challenging. The entire economy is obviously mired in uncertainty, which never bodes well for our industry. This has been such a tough decade, and many are calling our current industry situation worse than the aftermath of 9/11. It’s not just soaring oil prices. Airlines are experiencing cutbacks in business travel spending, declining leisure travel, bankruptcies and layoffs, and the list goes on.

Of course, no one knows the future, and I will be the first to tell you I had no idea this financial crisis was coming the way it erupted this fall. But I can tell you emphatically that Southwest Airlines was prepared for it. Just like we were prepared for 9/11, and just like we were prepared for the first Gulf War in 1991. We’ve got cash in the bank, we have a line of credit, we have modest levels of debt and we have manageable commitments.

So, it remains to be seen what will happen with the economy and on Wall Street in 2009, but I feel very, very good about the Southwest Airlines brand and where it is headed. As we’re thinking about making choices for our future, we’re putting it through a filter and asking ourselves: what’s a good way to take care of our employees in the long run so that they, in turn, can take great care of our customers.

In terms of thinking about next year, however, we still need to be very cautious. There’s a lot of risk built into our industry, and we’re obviously not immune to those risks or their effects in today’s volatile economic environment. We’ve said for some time that our plan is to keep our fleet growth relatively flat in 2009, and even as of today, we haven’t firmly decided how many aircraft we’ll deploy beyond our current schedule (open through March 8, 2009). We do know we’ll be adding Minneapolis- St. Paul to our schedule in March 2009, and we’ll be ready to grow our capacity when it makes sense.

Regardless, 2009 will be a critical year for us. We’ve started a lot of work to continue positioning ourselves for the future, and the coming year is the time when we’ll be executing a lot of these initiatives.

Southwest Airlines is a $9.9 billion Dallas-based passenger airline. www.southwest.com

Uncle Sam, Lend a Hand

“The general weakness in the U.S. housing market caused by oversupply and a lack of buyer confidence in home price stability has been compounded by the recent liquidity crisis among financial institutions. Clearly we need to solve the liquidity mess and then focus on stabilizing home prices and stimulating demand for new homes. We believe the government needs to proactively move buyers off the fence by offering a substantial tax credit-say $15,000 to $20,000- to encourage Americans to take advantage of the current buyers’ market. Once buyers return, home prices will firm and so will the mortgage securities.

We expect there will be significantly fewer competitors in the next year in our industry, and we intend to be among those that will be able to gain market share. In addition, we are positioning ourselves to take advantage of what we expect will be large numbers of attractively priced land deals that will be disgorged by builders and banks as a result of our industry’s distress. As in the early 1990s, the last downturn, this will help set the table for our growth in the following five to 10 years.

The root of the problem has always been the depreciation taking place in homes since the latter part of 2005 until early 2006. Three years ago, nobody knew what the Case-Schiller index was; today a good many follow it religiously. The cause of the financial crisis is the lack of liquidity in mortgage-backed securities. We probably have $2 trillion to $3 trillion in the world’s economy of bad mortgage-backed securities (this is $3,000 billion, to put it in its proper perspective). If we can stop the slide in home prices, the bonds have a finite value and can be traded and held. If we don’t, this crisis will continue. The way to stop the slide in home prices is for the government to offer $20,000 to everybody who buys a new home in the next five months. This will cost the Treasury approximately $50 billion, which, as we now know, is nothing compared to treating the symptoms of the disease instead of the disease itself.

Toll Brothers is a $4.6 billion home builder based in Horsham, Pa. www.tollbrothers.com

Credit Crunch

“The No. 1 issue facing not just auto retailers, but consumers in general, is credit. The banks are looking for every reason to say no, and this is reflected in the decline of retail auto sales in the 3rd quarter. We used to get 90 percent of tier one customers financed �� it is now down to 60 percent and falling.

This is on top of the housing depression, which is being felt nationwide, but especially in high growth markets like California, Florida, Arizona and Nevada. That, in addition to high gas prices. You tell me when the credit crisis is going to pass, and I can tell you when you can start talking about improvement. The combination of market conditions is having an effect on auto retailers and the entire auto industry. We could see a few thousand dealers go out of business over the next 24 months, and a change in the dealer operating model. When we come out of this economic downturn, we will see the pent-up demand come into the marketplace and a stronger dealer network.

AutoNation is an $18 billion auto retailer selling more than 500,000 vehicles each year with locations in 16 states and is based in Ft. Lauderdale, Fla. www.autonation.com

Technically Speaking

“Looking ahead to 2009, there is no doubt that the impact of the recent financial collapse and the potential for a global recession are front of mind. Credit is tightening everywhere, consumers will be spending less, and businesses will have a harder time raising capital. This may well translate to cuts in capital spending and widescale efforts by our clients to cut spending. If this happens, our business will feel the impact. First and foremost, we have to monitor this potential downturn. Nonetheless, there are several mega-trends regarding how business and technology come together that will continue to define the foreseeable future for our company and affect the decisions of global businesses alike.

First, technology is becoming pervasive in how we live and work; increasingly, technology leaders are users of technology rather than sellers (Facebook, Google, Amazon). Second, globalization is widening and rebalancing as ever-evolving risk factors are forcing companies to spread production to new geographic regions and/or bring production near-shore, closer to the markets they serve. Finally, as 60 million baby boomers leave the workforce by 2025 with less than 40 million entering it, talent acquisition and retention is a critical requirement. Emerging economies will increasingly be a source of this talent, further changing the landscape of how we work and manage our organizations.

The issues materializing from these mega-trends will continue to affect our company-and other global organizations- in the coming year.

AMR Research is a privately held Boston-based industry analyst firm focused on supply chain and manufacturing. www.amrresearch.com

Risky Business

“The aggregate level of global risk is rising at an amazing pace, and the management of risk, capital and talent will probably be more important than in any time in the past 50 years. The implication of missteps will be huge as markets are very jittery. In 2009, organizations will be challenged to find ways to manage financial and non-financial risks to reduce volatility. Corporate leaders need to heighten their focus on emerging risks that affect business operations- particularly those related to liquidity, climate change, global politics, energy and supply chain management. Those firms that don’t embrace a commitment to aggressively managing down risk, protecting shareholder value and ensuring transparency can expect dramatic, negative impacts. Anticipating and reacting to unexpected challenges is going to mean the difference between average and great performance.

Aon Corporation (NYSE: AOC) is a $7.47 billion global provider of risk management services, insurance and reinsurance brokerage, human capital and management consulting based in Chicago, Ill. www.aon.com

Converging Content

“Any media today must understand that change is not an option. It’s also not a matter of adjustment. It’s a full rethinking and reorganizing around three key questions: How do we connect with consumers? How do we deliver the products of that connection? And when we have the answers, how do we organize and act to translate what we know into growth and profits?

Technologies are converging with changing consumers to create the greatest period of media transformation since the advent of moveable type. We all have to embrace change. The more platforms we have, the more touch points we have to communicate with our consumers. We must try every tool available to us to live the mantra of 21st century media: give the consumers what they want, when they want it, where they want it and how they want it.

Along with the rapid transformation of media, we are also faced with the decline of the U.S. economy. In tough economic times, the most important thing is to keep moving- keep launching new products, acquiring the right magazines, expanding internationally. At the same time, you need to know when it’s time to pull the plug on a project. If you shoot things down too soon, you could miss out on a big turnaround. If you shoot things down too late, you end up throwing away money.

At Hearst, we are building a branded content company with print at the center. Regardless of what media you pursue or what you do when you get there, the most important job is to be a brand builder. Any time we consider launching a new magazine or property at Hearst, we have to approach it in a completely agnostic way. The question should never be: Do we like it? It should always be: Is this a great idea? Can it succeed? And no less important: How soon can it succeed?

Now and in the future, it is important to remember what your core competency is, but you also have to be willing to adapt as change happens around you. A company cannot stand frozen in tough economic times; rather it has to think strategically and carefully about where growth can be made. We are in for a tough year ahead, but with change comes new ideas that keep businesses moving ahead and evolving toward new levels of success.

Hearst is a diversified $2.7 billion media company based in New York City. Black is the author of Basic Black: The Essential Guide for Getting Ahead at Work (and in Life). www.hearst.com

A Healthy Attitude

“In trying economic times, CEOs must manage what’s within their control and instruct their management team accordingly.

Act on the crucial issue of preventative health care with employees. CEOs must commit to providing appropriate health benefits as an investment in the longer-term health of their employees and company. Increasing coverage for preventative measures helps improve the employee’s health and achieves a substantial return on investment by lowering overall corporate expenditures. Offering a voluntary, no-cost “Blueprint for Wellness�VbCrLf program provides the employee an individual health assessment, and those with health risks are offered free coaching and education. At Olympus we’ve seen considerable tangible and intangible returns on this investment.

Be cognizant of the value and need to recruit recent college graduates while also respecting experienced workers. We are going to have a significant loss with the retirement of the baby boomer, and we need to think about how we utilize the opportunity to bridge these generations by providing positions for new workers. Specifically, 2009 solutions must include targeted job creation that will generate overall economic growth and tax revenues. This is good for all businesses and America overall, and companies that get this right will lead in the future.

Olympus Corporation of the Americas, headquartered in Center Valley, Pa., is a wholly owned subsidiary of $10.7 billion Olympus Corp., which creates imaging solutions in health care, life science and consumer electronic products. www.olympusamerica.com

Giving Credit

“The overwhelming concern in broad strokes is the economy and where it is heading. We’re nervous and so are our customers, and we have 900,000. There are a number of facets, not the least of which is what has been going on on Wall Street and in the credit markets and the ripple effect it will have on the economy. Another issue will be[the next President's] perspective in terms of getting the economy back on its feet. And how [the new administration] would approach the issue of free trade is another major issue.

The economic downturn started for us over a year ago, so we have been seeing gradual erosion in economic activity for the past 13 months or so. It has a dramatic impact on the volume that we’ve been seeing and the ensuing pricing pressure as a result of much weaker demand. The real question is whether the economy goes to a lower level or stabilizes. And the next question is when does it start to recover? As for the bailout, it’s a deplorable situation but the toothpaste is out of the tube. 

YRC Worldwide is a $10 billion transportation services company that ships industrial, commercial and retail goods in the U. S. and internationally, and is based in Overland Park, Kan. www.yrcw.com

Going Global

“We face the same issues impacting nearly all companies and economies-the continuing challenges and opportunities presented by the complexities of globalization. The recent financial crisis has demonstrated in a dramatic way how interconnected our financial markets are, prompting a vital reexamination of how global markets interact. I strongly believe that the public and private sectors must come together in a formal process to find the solution. We must bring together government leaders, regulators, investors and the corporate sector into what I call the Global Capital Markets Working Group to help us realize the full potential of the emerging markets, the developed markets and the frontier markets.

This proposal calls for an institutionalized, global, sustained multi-party dialogue around capital market activity and information, which can combine the day- to- day, cross-border, market experiences of the private sector with the expertise, perspective and power of the appropriate authorities. Working together, such a forum could benefit markets, investors and regulators by helping identify issues around transparency, risk management, standards, guidance and best practices. At a time when global market activity often outstrips the reach and constraints of national regulatory approaches, we need mechanisms to foster common understanding, approaches, principles and-where needed-improvements in regulation and information.

At Ernst & Young we have to match our broad range of professional services against this changing global complexity. As our client needs become increasingly global, we must act as a single, global organization. We recently combined practices from 87 countries across western and eastern Europe, the Middle East, India and Africa into a single practice area and similarly combined our country practices in the Far East.

These moves enhance our ability to provide consistent, high quality service across borders.

Ernst & Young is a global assurance, tax, transaction and advisory services firm based in New York. www.ey.com

Capital Idea

“The past 12 months have introduced significant challenges that will have broad implications for the health of business and the economy for at least the next 12 months. An unusual level of uncertainty is high on the list of issues, exacerbated by volatility on Wall Street, rising unemployment, declining home prices and a lack of consensus over the long-term implications of unprecedented government intervention. Most important, it will be difficult but crucial for business leaders to recognize the opportunities in a changing landscape and to maintain long-term discipline while addressing short-term challenges. Our economy’s resiliency will depend to a good extent on opportunistic firms that continue to acquire, expand and reinvest while the prevailing wisdom will be to sit on the sidelines.

Availability of capital is paramount. Successful services firms will focus narrowly on helping clients navigate a new financial and business landscape, providing actionable advice to help them adapt and to thrive through an economic rebound. Commercial real estate will become a more important area of focus for the largest, most diversified firms, which may recognize opportunities to strengthen their balance sheets by monetizing assets or consolidating operations.

Cushman & Wakefield, based in New York, is a $2.1 billion worldwide commercial real estate services firm. It advises occupiers, owners and investors on all aspects of property leasing, sales, valuation and management in 59 countries. www.cushwake.com

Food For Thought

“McDonald’s is well-positioned to sustain and even accelerate momentum in 2009. Yes, 2008 was a challenging year for all of us, both in the business sector and at home. Nevertheless, I’m proud to say that McDonald’s business around the world remains strong, with dedicated franchisees, committed suppliers and a sophisticated global system all working together to execute our Plan to Win. In times like these, like other consumers, I turn to what’s comfortable and familiar; you don’t take unnecessary risks in uncertain times. This is when a trusted and loyal brand like McDonald’s offers a hassle-free solution, connecting with customers to provide a little peace of mind. We serve 56 million people around the world every day.

In 2009, that commitment to our customers and that drive for operational excellence, even in a tough economy, will be top of mind for me and the people of McDonald’s. I’ve said that we’re recession-resistant, not recession-proof. By sticking to our proven Plan to Win, partnering with our franchisees and leveraging our solid relationships with our suppliers, I’m confident that we’ll keep our competitive edge while always putting the customer first and remaining poised for growth and continued global success.

McDonald’s is a $23 billion global food service retailer with more than 31,000 restaurants in more than 100 countries and is based in Oak Brook, Ill. www.mcdonalds.com