BLEND DEFENCE AND OFFENCE TO GROW IN A RECESSION.
All business owners, senior managers and boards will be understandably concerned with the developments in British politics and economic decline.
Any political party holding power which is so inept that it results in three prime ministers in a six-week period and four chancellors in four months will only serve to damage the country they were entrusted to care for and protect. It’s a clear signal to the word of a country in decline.
With this sorry episode happening at the same time as the world heads into a recession is an act of economic vandalism that only serves to fuel recessionary pressures.
How companies act as they move into a recession is fascinating. The most common business response is to cut costs/overheads.
However, a Harvard Business Review study into 4700 publicly listed companies and how they acted in the last three sizeable recessions, found that firms who acted to solely cut costs faster and deeper than their rivals did not flourish. Indeed, they had the lowest probability (21%) of finding growth when opportunity presents itself.
The business world is a competitive environment. Companies who develop and implement strategies that focuses on competitors’ strengths, weaknesses and activity as well as customers’ changing needs are the best performing companies at any stage of the economic cycle. But this becomes more crucial as negative economic pressures influence consumer patters and buying moods change.
Knowing what your competitors are doing and how they are performing, and combining this with recent customer feedback, allows you to ensure your products and services maintain their attractiveness and relevance in the eyes of your customers – and at your competitors expense.
Furthermore, when a company becomes defensive and begins to cut overheads it’s a clear signal to your competitors that you are vulnerable and can be outmanoeuvred.
On the other side however, Harvard Business Review found that businesses who boldly invested more than their rivals didn’t necessarily fair better either.
The answer is a blended approach of defensive and offensive steps.
There are two mistakes companies make which could be significant in damaging your company.
1. Being too defensive
Crisis mode is the dominant emotion and action employed at board level. It’s reactionary and focuses too heavily on just surviving the storm. Decisions are made to reduce costs, eliminate frills, stop all discretionary expenditure privileges, and reduce staff numbers. These companies also immediately stop spending money to develop new business or refining/adapting existing products or services.
This strategy is the approach Sony took during the 2000 downturn, when it cut its workforce by 11%, its R&D expenditures by 12%, and its capital expenditures by 23%. Whilst this, in the short term, increased profit margin from 8% to 12%, growth in its sales collapsed from 11% in the three years before the recession to 1% thereafter. Sony has struggled since then to regain momentum.
When companies start thinking like this it becomes the culture. Everything is done to minimise loss, which stops innovation in its tracks.
2. Being too aggressive
When a crisis hits, some business leaders use it as a good time to pursue opportunities aggressively while other competitors might be neglecting customers to deal with internal issues. They invest in long-term projects and pursue the acquisition of people and assets.
The idea is to gain a maximum benefit once the crisis blows over.
Hewlett-Packard in 2000 drew up an ambitious change agenda even though sales and profits were falling. HP embarked on a massive restructuring program, made the largest acquisition in its history by buying Compaq for $25 billion, and increased R&D expenditures by 9%. It also spent $200 million on a corporate branding campaign and $1 billion on expanding the availability of information technology in developing countries.
These initiatives strained the organisation and management couldn’t cope. When the recession ended, the company found it tough to match the profitability levels of their competitors, IBM and Dell.
These companies struggle to grasp the severity of the crisis over time and ignore early warning signs. The result is that they are blind-sided when the financial results continue to decline. They also struggle to make the required cost cuts when the negative results persist and end doing too little too late.
Offensive companies adopt two tactics – develop their products or services and invest in researching their customers’ needs.
In the Harvard study, only a small number of companies (about 9%) flourished after the crisis. These companies were able to perform better on key financial parameters and managed to outperform rivals in their industry by at least 10% in terms of sales and profit growth.
So what did the companies who thrived in the study do differently?
The best of both
You need to find a balance between the two extremes. Cost cutting is necessary to survive the crisis but only in the early initial phases. Investment in product development and customer needs is equally essential to spur growth.
The companies that performed the best after crisis situations universally applied a dual approach
With only 6% of SMEs and corporates having and implementing a growth strategy, the competitive advantage for those who do is considerable.
Contact Alan to arrange a meeting to discuss how we can help.