A Generation of Uncertainty Companies Prepare for Future that Can't Be Predicted
Part 2: Reliable Forecasts 'Virtually Impossible'
Reitzle takes a similar approach to managing the Linde Group. The CEO says that it's no longer possible to approve a five-year plan in the belief that the company will actually attain such goals. "That no longer works." He says today's companies need "an entirely different kind of flexibility".
This means that various divisions in a corporation have to be managed in highly diverse ways. In growth regions, he says it's important to play an offensive game and make major investments. By contrast, cutbacks are necessary in stagnating markets.
And everything has to be continuously better, faster and more efficient. The High Performance Organization (HPO) program has just been approved, and Reitzle is already introducing HPO II, which aims to save up to 900 million ($1.2 billion) over the next four years. Some executives are grumbling over this. Why now, they ask, when everything is going so well, should we become even better, and leaner?
Reitzle says he doesn't understand such an attitude. On the one hand, he says the corporation has to give itself sufficient leeway to take advantage of opportunities and buy out competitors -- such as the recent acquisition of the US company Lincare, which Linde purchased for some 3.6 billion. On the other hand, he says it's also necessary to work with early warning systems "to be prepared for the worst-case scenario." Ideally, he says, a company cannot be seriously threatened by any crisis, no matter how surprising it may be. Or, as Reitzle puts it: Linde will then be "indestructible."
And it's more than just a certain number of companies listed on Germany's DAX index of blue chip companies that are bracing themselves for the next crisis. Many small and medium-sized companies, Germany's so-called Mittelstand, are also preparing for an uncertain future. One such firm is Phoenix Contact.
The company is a "hidden champion," one of the many German global market leaders that very few people know. Working out of its headquarters in Blomberg in eastern Westphalia, it sets global standards for electrical connection technology. Phoenix Contact makes one-quarter of all the electrical connectors used in switch cabinets or other devices around the world.
Using a Lull to Gain an Edge
Over the past 12 years, the company has more than tripled its annual sales to over 1.5 billion. But now that growth is starting to falter. According to CEO Roland Bent, sales have declined in China and, not surprisingly, they are in a slump in Southern Europe. So what is the head of the company doing? He's investing.
In 2013, the company will open an experimental laboratory in Blomberg. It's also building a nearby center for trainees. There are 360 of them -- more than ever before. And, to top it all off, Phoenix Contact is investing tens of millions of euros in the development of a charging plug for electric cars.
Such perseverance -- one could also call it stubbornness -- is typical of this company. Even during the current crisis, it's sticking to the strategy that it thinks is right. Phoenix Contact is using the temporary lull to gain a technological edge on the competition.
During the recession in 2009, for instance, Phoenix engineers purchased a device that was revolutionary at the time: a 3-D printer to produce prototypes of pin and socket connectors. This allows the company to hand its clients a model made of plastic, instead of merely showing them an image on a monitor.
Phoenix Contact is consistently taking an anti-cyclical approach: While others are tightening their belts, the company is going on the offensive. This family-owned company can only afford to do this, though, because it is independent -- especially of shareholders and banks. Phoenix Contact doesn't require any outside capital.
In the current climate of uncertainty, many German global market leaders are adopting a mindset similar to that of executives at Phoenix Contact. They seek their own way through the maze of the financial and euro crises. A reliable forecast, says Phoenix Contact CEO Bent, is "virtually impossible" anyway.
The uncertainty over the future economic development has also rattled people who are looking to invest their money. These days, savings accounts produce virtually no interest. After deducting losses due to inflation, the account balance actually shrinks. Anyone who saves their money gets the short end of the stick. But what alternative remains?
Many people purchase an apartment, a house, precious metals or stocks. In some cases, prices have risen considerably. In urban centers such as Munich, Hamburg and Berlin, apartments and buildings are worth one-fifth more than they were two years ago. The price of gold has nearly doubled over the past five years. Last week, the DAX reached its highest level in five years.
But it can't go on like this forever. Responsible financial consultants admit to their clients that there are no safe tips for investments. They recommend diversifying and putting money into different types of investments. This at least makes it possible to spread the risk of suffering losses.
While investors, company CEOs, and small and medium-size companies increasingly accept that they no longer know how the economy will develop, the new sense of uncertainty has apparently made little impression on one group of professionals: economic analysts. They continue to make forecasts as if there were a mathematical formula to calculate the future. And they don't allow themselves to be bothered by the fact that their previous predictions were frequently off the mark.
Even the United Nations is warning of a worldwide recession. In its report "World Economic Situation and Prospects 2013," the UN writes: Economic growth could be close to zero. But the experts also predict that growth could be 2.4 percent, or even 3.8 percent, depending on the assumptions made. Everything is possible.
It's also interesting to note that the black swan has meanwhile extended its natural range of distribution. It's now endemic to New Zealand. A few specimens have even been sighted in the Netherlands.
Translated from the German by Paul Cohen
- Part 1: Companies Prepare for Future that Can't Be Predicted
- Part 2: Reliable Forecasts 'Virtually Impossible'