Succeeding in a Cyclical Industry

Achieving sustained performance in the oil and gas industry can, quite frankly, be a challenge. A primary reason is cyclicality. For suppliers, the task of continually scaling one’s organization to match market temperament can prove especially tricky.

Numerous factors lead to the swings in demand that define the oilfield. Mercurial commodity prices top the list. Fluctuating exchange rates, capital availability, seasonality and weather, government policy, and geopolitical events also play their part.

The uncertainty carries serious implications. In fact, how a company navigates the sector’s crosscurrents can mean the difference between success and failure. It can also shape how it’s perceived by customers.

One way suppliers can tame the effects of volatility is to stay focused on the horizon. Longer-term perspective allows companies to sidestep certain risks in a flighty market place. It reduces the inclination to grow too quickly during upswings—or cut recklessly during downturns. In other words, it introduces balance where there is none.

Integral to executing a longer-term strategy is the financial strength to survive troughs. Sound financial footing also enables greater investment — including research and development—across the cycle. This leads to more consistent and differentiated performance.

The best performing suppliers also have visibility in their business. While many can’t always hedge using financial instruments, they can enter long-term, take-or-pay, or minimum-payment contracts with customers (many of whom can and do hedge). The resulting cash flow stability is invaluable during in big swings.

Suppliers that outperform across industry cycles also tend to display an outsize commitment to process. This is the case at all levels of the organization. Proven playbooks are followed during both contractions and expansions. And procedures are continually honed.

Commitment to process is almost always evident in a company’s approach to talent management. Because they typically enjoy lower turnover, top performing companies are more willing to invest in training, cross-training and retraining their personnel. This enhances employee utilization, loyalty and morale. The upshot is better performance—even when activity fluctuates.

In downturns the best workforce-reductions ensure fair treatment of employees, clear communication and smooth transfer of responsibilities. During expansions, prior employees—who are familiar with the organization and culture—are among the first persons contacted to return. For top companies, many will return.

As in most industries, there is too much short-sightedness in the oilfield to expect all to heed the advice given here. However, those that do will find the deck stacks in their favor. And in a business where opportunity can turn to peril (and vice-versa) overnight, no advantage is too small.

3 Replies to “Succeeding in a Cyclical Industry”

  1. With every cyclical industry, the long game is the key. Socking away funds for the trough after the peak is necessary, and making sure processes are in place to weather the ups and downs are invaluable.

    When times are slow, it gives a company time to throw out what’s not working and make new process that will be online when the upturn comes. When times are moving like lightening, having a plan to ramp up and having the right processes in place will keep a company from feeling growing pains.

    For suppliers, a downturn is a good time to speak with customers to learn what pain points they have. In doing so, the supplier can put its research and development team to work making sure that they are addressing those pain points.

    With the right plan and people in place, suppliers can be ready for all of the ups and downs that a cyclical industry can throw at them.

  2. Kathy, you quite succinctly capture some of the most important aspects to effectively managing in a cyclical industry. While companies recognize that the oil and gas does swing, it take an long-term perspective to really prosper across cycles.

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