17Apr

You Can't Shrink Your Way To Greatness

Unfortunately troubled economic times seem to bring a narrow-minded response from many businesses. Common initiatives appear to be driven by short-termism and the need to be seen to be doing something rather than really adapting to the challenges of the new economic environment.

Initially the response is often denial, hoping that a recovery will come along and that things can get back to normal. When the realisation sets in that an early recovery is not forthcoming then it is agreed that something must be done and as it has now been left late, then that something must be radical.   Usually this means cost cutting and cost cutting means that heads must roll.

Whose heads? Certainly not executives, management nor any other vital support functions, well not at first anyway. Far better to start with “excess” production capacity; that is the people who deliver to customers. If a last in first out policy is in place then this is an excellent time to get rid of anyone who has been recently hired.   These were people who were generally hired because of their skills in areas of future growth. These are areas the business longer wishes to pursue, at least not during this downturn.

Having lost a few people (including high performers who often choose this time to leave as they are best equipped able to pursue better opportunities elsewhere) and engendered an appropriate climate of fear and insecurity, the important cost saving measures can begin in earnest. In the interests of fairness and sharing the pain it is important to introduce cost saving measures across the board and this means reductions in every department, even those that support revenue generation. Good areas are travel, training and any ongoing business improvement programs as these can be cancelled with the stroke of a pen. It is also standard practice to introduce as much new bureaucracy and administrative overhead as possible to measure your ongoing cost saving initiatives. This will ensure that everything, including the revenue generating activities, will be slowed down as a result of constant reporting on progress. A good way of doing this is to ensure that even minor expenditure has to be signed off by the CEO. Remember, that empowerment is only for the good times!

Contact with the outside world should be minimised, now is a good time to implement a “zero-travel” policy and stop participating in any external events and seminars. The organisation is now lean and mean (just ask any employees about the meanness). However the leanness is in the wrong place. They certainly have a lower cost base but they also have a declining revenue base, are making no investments in the future and probably most important are probably beginning to upset their customers.

Research shows that Market Leaders see downturns as an opportunity – they realise that you can’t shrink your way to greatness and most importantly they act on that knowledge. Their response in downturns is characterised by a strong external focus. They know that their competitors will be internally focussed doing all of the above mentioned and that now is the time to strike. The winners from the last two major downturns employed a number of different approaches, all of which capitalized on the market conditions as opposed to becoming besieged by them. This is not to say that cost reduction did not play a part in their strategies, it did, but it was extremely focussed on reducing waste and improving processes.

So what to do? Essentially do not do what the majority of your competitors will be doing; they are fooled by the illusion of progress that they get from the internal activities discussed above.

First, decide where the opportunity lies. It may be a weaker competitor or a larger competitor who has become distracted. It may be a new unexploited technology or process in which to invest.

Second focus your cost efficiencies (although you should really have been doing this as an ongoing business activity). Do not try to cut everything across the board, a one-size fits all policy actually fits very few people. Instead only impose targets after a rigorous analysis has shown you where to cut and where to maintain and even increase expenditure.

Finally and most importantly maintain your customer relationships as if your life depended on them, which in actual fact it does. Your customers are the people who are most probably being ignored by your competitors and they are also the people who will announce the beginning of the end of the downturn when they begin to buy again.

Have perseverance, do not expect your stock price to immediately reflect the fruits of your strategy, this may have to wait a little (the market is not renowned for it long term perspective). You will however have stolen a march on your competitors and be effectively positioned for the recovery.

Probably the most significant benefit of taking a focussed approach in a downturn is that you will have a more viable business at the end of it along with the increased respect and loyalty of customers, suppliers and your people.

Posted in Business Management

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