A theme is emerging from the flood of recent corporate earnings reports: Cost cuts are boosting profits.
Investors are cheering, but they shouldn't. Even in these tough times, more CEOs should be talking about how they are seeking out investments, developing new technologies and making acquisitions.
That's what will set their companies up for a stronger future.
Intel Corp.'s former CEO Gordon Moore had it right when he said years ago that "you can't save your way out of a recession." He meant that even in the toughest times, companies have to spend money on new ideas.
Recessions always end, Moore often said, and when they do, companies that embraced innovation during the downturn won't be stuck with obsolete products and services. Instead, they'll have new things to offer once demand picks up again.
"Customers don't come out of recessions spending the way they did before," said Chunka Mui, who has studied how companies can capitalize on opportunities during crises at his Chicago-based consulting firm, The Devil's Advocate Group. "They demand something different."
Surprisingly few companies are following Moore's advice of innovating during recessions.
Companies in the Standard & Poor's 500 index cut 25 percent on average from their capital expenditures expenses and 5 percent from research and development costs between the end of the third quarter last year and the second quarter this year, according to S&P.
Many have been crippled by the pullback in consumer and business spending as well as tight credit conditions, which is making it harder for companies to get loans to fund their operations. That's driven some to hoard cash and make drastic cost cuts. They're slashing jobs and wages and closing stores and factories.
The aggressive cuts have allowed companies to exceed Wall Street's expectations for their earnings. In fact, the "good" news has sent the Dow Jones industrial average above 10,000 for the first time in a year.
The problem is that too many companies are making widespread, not focused cuts. They're telling every division to cut 10 percent of their work force or slashing marketing dollars by the same amount companywide.
That is a quick way to rid a company of costs. But it doesn't help it get in a better position going forward, says Cesare Mainardi, managing director at the consulting firm Booz & Co. and co-author of the new book "Cut Costs, Grow Stronger."
"A downturn like this should force people's hand," he said.
At Intel, Moore's philosophy has been used consistently since he led the chipmaker starting in the late 1970s. Over the years, the Santa Clara, Calif., company's top executives continue to openly discuss the company's strategy of investing heavily in downturns. (continued...)
© 2009 Associated Press/AP Online under contract with YellowBrix. All rights reserved.
|
Rackspace: It makes a difference when you focus on support.
House Lawmakers Push Ban on Peer-to-Peer Software
GAO: Los Alamos Computer Security Has Weaknesses
Computer Security Firm Fortinet Plans IPO This Week
Flat Shipments Hurt Dell Despite Increased Earnings
New Pogoplug 'Personal Cloud' Does Social Networking
Apple Tablet Rumored Delayed as Publisher Gears Up
Smartphones: A Bigger Target for Security Threats
FBI Says Hackers Targeting Law Firms, PR Companies