During periods of economic pressure, two types of managers emerge: those affected by the negative climate and those who appreciate the reality of the marketplace and strive onwards regardless. Companies that have a plan to fight their way through the downturn and prepare for the upturn will head the list of winners. And in every fight there are always winners.
In an economic downturn, management usually focuses on cutting costs. While this is important, reducing costs by 15% is not going to save you if your sales volume dips by 30%. We are not in a cost crisis, we are in a revenue crisis.
A look at P&L shows that only a plan covering all profit drivers, cost and revenue has the stability required to guide your company over the next couple of years. Realistically, the objective cannot always be on improvement and instead should focus on avoiding further decline.
Management needs a plan mixing tactical and strategic elements. Tactical actions must be low cost and offer immediate results. The influence of labour laws, union deals and redundancy packages on P&L can take several quarters. That is too long. The strategic dimension is important as companies must position themselves to benefit from the rebound of the economy, the beginning of which is probably less than a couple of years away.
As consultants with a global presence we meet several dozen CEOs every week. From these discussions we have developed a toolkit of key tactical and strategic actions that, if combined smartly into a comprehensive overall programme, will help an organisation to weather the financial storm and emerge a stronger player than before.
Actively reduce volume/output
Simple mathematics proves that, profit-wise, a volume cut is less damaging than a price cut. Smart companies try to actively reduce volume and aim to keep prices reasonably stable rather than the other way around. In November, ArcelorMittal announced it would drastically cut its monthly global production and expected to see the benefits in the spot market prices.
Give discounts in kind, not price reductions
Price cuts may be unavoidable in a downturn, yet they should be implemented as discounts in kind rather than as direct price discounts. A boat builder is giving his retail partners one free unit for every five boats they buy. While this still equates to an actual discount of over 16%, volume revenue and margin remain higher than if 16% had been knocked off the products directly.
Re-deploy office staff into the sales force
A common view is that office staff are not good sales people. In many cases this might be true, but not in every instance. One could argue that in the current downturn there is not an over-capacity in production, but an under-capacity in marketing and sales.
European automotive company Würth, for example, moved 10% of its office staff into the sales force during the 1993 crisis, with successful results. And we’ve heard similar stories recently, both in services and more industrial sectors. This approach can come in many shapes and forms from giving office staff short and intensive training and then letting them work off a ‘hunting list’ of potential new customers, to teaming them up with sales veterans in a particular territory to take administrative work off the sales reps’ shoulders.
Other roles include sending technical staff to discuss the development of customised technical solutions with customers and manning trade shows in new markets. More people will typically achieve more sales, especially if you have the resources to attack new segments/markets.
Use customised solutions to address your customers’ anxieties
With customer anxiety exacerbated, creative suppliers have the chance to shift priorities. Georg Kofler has just launched Kofler Energies AG in Austria. The company covers the complete cost of any energy-saving investments and guarantees customers a 10% energy cost saving. The company receives all savings above this level for ten-15 years. This is an exemplary business model that addresses specific customer needs and fears and should work well even in the current climate.
Strategise to meet the upturn: The strategy dimension must also be part of the overall management package and companies must address three exemplary questions:
How can I diversify my business further to reduce the dependency on particular segments or markets?
It is obvious that the re-deployment of sales resources from traditional markets with slowing demand into completely new segments (whether they be geographies or customers) can be significant. The strategic dimension, however, is to carefully select which segments to focus on from a mid-term perspective. For example, one of the leading manufacturers of kitchen equipment for restaurants is now expanding into the hotel segment and we see suppliers to the truck industry deploying sales teams to emerging markets in Eastern Europe and BRIC.
Can I take competition out of the market?
Many companies were smart and horded cash or secured access to debt during recent boom years. They are now in a perfect position to conduct the necessary due diligence and buy selected competitors in the market. BA and Ryanair are cases in point, with discussions with Qantas and Aer Lingus respectively, as is Microsoft and its renewed pursuit of part of Yahoo.
Can I use the current market price for a share buyback programme?
Tool hire firm Speedy Hire announced extensive share purchases of its top management a few months ago. Such actions signal the strong belief of management in the future of the company and puts investors in a position to benefit from the rebound. It also shows management’s confidence in the success of the crisis strategy it has put together.
The right combination of activities in a well coordinated package is the key to ensuring quick wins and better positioning in the mid-term. Successful managers have the vision to develop a clear plan.
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