“Due to the uncertain economic environment, management is not in the position to make any forecasts for the remainder of this fiscal year.”
This or similar statements have become all too common in the business press in recent months. Headline-making corporate scandals, a war against terrorism on many fronts, and an erratic stock market, combined with the first recession after a ten-year-long burgeoning economy, have created an economic environment that left many industry leaders looking for new direction.
There is, of course, no one formula applicable to all organizations. Economic downturns are often used to consolidate operations, increase efficiencies, and shed surplus capacity. But a weakening economy also provides opportunities to improve the talent pool and to strengthen the market position at relatively low costs, putting the company in a position to reap the maximum benefits from the eventual economic upswing.
How does this translate into concrete action steps for your individual organization? While there are certain measures any corporation should undertake when navigating uncertain economic times, Norelli & Company also distinguishes between "market leaders" and "market followers" or "niche players." First, we list action items that apply to all organizations:
- Continue to drive down Costs of Goods Sold (COGS). Price pressures are not going away. Strengthen yourself for when times do get better.
- Weed out all remaining non-value-adding costs, whether manufacturing or otherwise.
- Relentlessly strive to improve product and service quality.
- Prune unprofitable products and customers. To be able to do this assumes that you
- Have accurate information regarding the profitability of individual customers and products. This is an issue that can be neglected all-too-often in good times.
- Take the time to do the analysis - it might surprise you.
- Increase communication and build relationships with employees and leading customers (face-to-face is still the best way).
- Defend customer loyalty by providing them with additional information.
- Use the time for personnel development.
- Be opportunistic regarding selective addition of talent. Upgrade the organization; look for potential "impact" hires.
In addition, if your business is already a market leader, you should
- Maintain product development and targeted marketing efforts.
- Emphasize new product activity.
- Identify and pursue growth segments
- Position your capacity to be ready for the eventual upturn.
But, if your company is a market follower or niche player, the right answers are different:
- Place extra emphasis on process and quality improvement.
- Do not try to outspend larger competitors with deeper pockets on research & development and/ or marketing.
- Do not abandon new product activity, but be selective. Make sure new products target a niche and are differentiable.
- Think outside your own niche! Maybe you can reposition your products in a new segment largely ignored by larger players.
- Improve operating cash flow. Get inventories and receivables in line and keep them there.
- COGS reduction takes on an added importance. Try to emerge as a "better value" supplier for when things get better.
- Seek partnering opportunities.
If you have a well-conceived Strategic Plan which is embedded in your organization's values and built upon its strengths, continue to pursue it! Even though strategic goals usually do not change with the economic climate, you may have to adjust certain strategies. For instance, since uncertain economic times may not favor selling a business or division you would like to eventually divest, you may choose to adopt a harvesting strategy instead in the short-to-medium term (as long as the business is still generating cash!). On the opposite side, you could find that a targeted acquisition has become less expensive and present a more efficient alternative to increase your market share than internal growth.
You can do good things in bad times. Be proactive because standing still is never a good option. "The biggest risk in a changing environment is the risk of doing nothing at all," said Hourihan, Professor of Banking and Finance at Ireland's University College Dublin. "The boat is leaving. Get on the boat. Get off the beach. The natives are coming out of the jungle, they happen to be cannibals and they have a strategic plan: You for dinner tonight. Get off the beach."