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[RECESSION OFFER OPPORTUNITIES TO IMPROVE A BUSINESS STRATEGIC POSITION AND COMPETITIVENESS.]
Even when recession is prevalent there are still possible opportunities for competitiveness and strategic position improvement. This happens if the proper steps are taken and properly implemented.
Recession is a period of general economic decline over a period of time which is part of usual cycle. The current storm of recession has left many in despair but the open fact is simply. A lot can be done during this period and the misfortune can turn around to be a fortune. This report comprehensively discusses and supports how recession can offer opportunities to improve business strategic position and competitiveness.
Many individuals and businesses have had their heads in the sand for too long, but even the most firmly in denial have had to come up for air, and what they're seeing isn't pretty. Some are in a state of moderate to advanced panic, believing that their businesses, plans, and way of life are finished forever. Others believe that the media's grasp of reality has taken the concept of exaggeration to previously unimaginable heights. The truth, as is often the case, lies somewhere between the two.
Those hoping that a recession isn't a serious threat or problem are likely to be disappointed. There are an apparently endless number of analogies being used, but my favourite compares a recession with a violent storm. Those caught up in one will undoubtedly sustain damage, but the extent of their suffering may range from inconvenience to life-changing disaster. It depends on where you are located, how long the storm takes to pass, how vulnerable you are to its effects and how much you have to lose. The analogy is a good one, as aside from planning and basic prevention, it often feels as though there are raging elements that lie beyond your control.
However, it's not all doom and gloom, and there is much that can be done to not only ride-out the recession, but possibly even gain from it.
In spite of all the obvious negative consequences of a recession, it can also be a good time to expand and develop your business, as many of your competition will probably be doing the complete opposite. In spite of the apparent panicking, consumers and businesses do not completely stop looking for solutions to their problems, but they might begin looking for better value. If your product or service offers that, then this particular recession-fuelled demand could turn into your opportunity.
The same idea might also apply to existing customers and users. A smaller version of what you usually sell could be of interest, as could a cheaper and/or more basic version.
put why limit your outlook only to existing markets? You may have to go looking for them, but other markets are out there. Older people, for example, tend to be less affected by recessions, as their mortgages and debts have usually been paid, and they are not typically dependant on salary for their income. If there's a way to tap into these users, now would be a good time to do so.
A recession can also offer opportunities for businesses to expand their market share, and those with the courage and foresight to increase their marketing budgets can gain in the long term. When a company's income shows signs of falling, the knee-jerk reaction is to cut back on spending. And all too often, the marketing budget is one of the first to go. This is undoubtedly a mistake.
When the number of people coming into your shop starts to fall, boarding up the windows and turning out the lights is a really bad idea.
And while we're thinking positively, let's not forget that a recession can also give all businesses a shake-up. While this might be painful, it can also produce greater flexibility, better spending habits and improved creativity in the long run.
But let's be realistic here. If you go to the Doctor for an inoculation and spend three days shivering in bed while your body builds up resistance, you're going to feel bad for those three days. But remembering that there's light at the end of the tunnel can help ride out the short-term discomfort.
And don't overlook the obvious - your business not only generates revenue but spends as well. Many businesses are slashing their prices in a desperate attempt to increase their income, resulting in some very good deals for software, products, hardware, services and more. Don't make the mistake of stopping all spending as the economic situation worsens. Spend cautiously, choose more wisely and enjoy the savings that are out there.
It's also a good time to invest in your existing supporters. The importance of retaining their loyalty during these times is paramount, and a little goodwill right now could pay off in the future. You already know that acquiring new customers is more costly than keeping existing users happy, but are you making sufficient efforts to reassure and impress them now, while the going's still good?
And do not, under any circumstances, abandon plans for new products and services at this time. You might want to put a little recession/savings orientated spin on them, but for many goods and services, new offerings are just as likely to be popular now as a year or two ago. Sales might be slower to come in, but getting the word out and establishing a reputation doesn't happen overnight.
So enough theory and reassurance. What should you be doing to ensure that you not only survive the recession but possibly even gain from it?
Start from your base - your customers. Now is the time to really understand who they are, where they come from and how they may be affected by the recession. Now is the time to start communicating with them on a regular basis. And now is the time to identify their needs, and start tapping into them. Many small businesses often adopt a fairly lax approach to invoicing their clients. Aside from the fact that this is a bad business practice, this is precisely the sort of problem you want to avoid during these times. If you allow your customer's inefficiency or inability to pay on time to run rife, your own business could well run into cash flow problems. It's a problem that can be very difficult to repair, but is easily avoided.
Encouraging customers to pay on time doesn't need to involve threats or harassment. But invoices should include clear payment terms, and customers should understand that failure to pay on time will result in additional charges. They expect this from most of their other suppliers, so why should you be any different? Bear in mind, however, that there's no need to be heavy handed. The last thing you want is to drive away a long-term customer. Get the balance right.
The next step should be to consider all and any possible expansion. New products or services, new licensing, different pricing models - but while we're on the subject of pricing, don't simply lower prices to try and increase sales volume. It's far too basic a strategy, and as well as risking a drop in revenue can also cheapen your company's image and make you look desperate. During a recession, customers need more reassurance, so don't force prospects to question whether you'll be around in a few months time.
And despite my constant urges not to slash marketing budgets and not to stop spending, it's a prudent time to cut back where it makes sense. A little time spent on research can find savings in cheaper phone calls and utilities, for example, and for some companies, cutting down on unnecessary travel could also be a good opportunity to save. All of which should have been done before the financial crisis, but better late than never as the saying goes.
But as the other saying goes, don't throw the baby out with the bathwater! Saving a few dollars each month by switching to a cheaper internet service provider may prove to be a false economy if your new connection is slow and unreliable. Cut down on unnecessary expenditure, but don't cut corners.
Cash flow is also of importance. Despite the fact that many small companies think that such ideas only apply to the bigger businesses, cash flow could well prove to be the difference between a business surviving or dying. Tapping into the skills of your accountant or even using software such as QuickBooks make this information instantly available. Keeping an eye on cash flow is quick, easy to plan around and potentially lifesaving.
If you do foresee short-term cash flow problems, don't be afraid of taking whatever measures are required. Even if your business has been self-supporting from the start, borrowing money to fund necessary expansion makes a lot more sense than not allowing a worthwhile project to get off the ground.
Finally, a note of caution. No-one knows how long the current recession is going to last, nor how our businesses are going to be affected over the coming months. Yet even if your business is doing well or even thriving right now, a lot of change lies ahead. Most new initiatives take time to put together and implement, so now is the time to look around, consider what options are available and start putting ideas into place.
Be seen, be strong, and be sold.
A Recession Is an Opportunity
A recession is a scary event. It can last for six months, and the aftermath usually lasts for years.
Before it happens, most people don't think about it. They forget that recessions happen regularly, and that they create fear.
This is why you should prepare now. This means the usual strategies: reduce debt, get into cash, be ready to tighten your belt at work and at home.
But a better approach is to think of a recession as an opportunity. Here are good things that happen in recessions.
1. It gets easier to hire competent people.
2. Your advertising money lets you leapfrog your competitors, who pull back.
3. You can buy a nice home from a frightened seller.
4. You can get better deals from negotiating.
5. You can buy stocks at low P/E ratios.
These are all really good things you can do, which you can't do at a comparable price during boom times.
So, if you prepare for a recession, it can provide unique opportunities for long-term profits.
When it hits, instead of being blindsided and paralyzed, you will overtake your competition.
The good news is the bad news will give you an edge.
But will you be ready to take advantage of these opportunities? I hope so.
While the current recession poses many challenges to pet specialty retailers, it also presents some clear opportunities.
Clearly, the current state of the economy is a source of angst for retailers of every ilk, and for good reason. Navigating through what billionaire Warren Buffett describes as an “economic Pearl Harbor” is an undertaking fraught with peril–even for the pet specialty trade, which has built a reputation for being somewhat recession resistant.
While it can be all too easy for business owners to see gloom and doom behind every door in this type of selling environment, it’s important to keep a positive outlook. The recession is having a profound effect on every industry–many of which have been hit much harder than the market for pet products–and this pervasiveness is creating some real opportunities for retailers who are brave enough (and healthy enough) to take advantage.
There are five areas, in particular, where pet store owners and operators may find that the recession has opened new doors: real estate, advertising, construction/remodeling, staffing and local competition. While each of these areas brings its own set of opportunities and challenges, a common thread runs through most. The current state of the economy has made this a buyer’s market, and retailers who are willing and able to leverage the value they bring to the table as a prospective client, tenant or employer can position themselves for success once the economy recovers.
Opportunity #1: Commercial Real Estate Bargains
As we have all seen, the U.S. is facing a big crisis when it comes to real estate. Some experts estimate that home prices have plummeted as much as 27 percent over the past several months, and the market for commercial real estate is not fairing much better.
Commercial real estate prices–particularly when talking about retail space–are being driven down by simple case of supply and demand. On one side of the equation, there is a softening of demand for these spaces, as the recession has slowed the entry of startups and the expansion plans of established retailers. Add to this the unfortunate fact that economic pressures are driving a startling number of retailers out of business, thus increasing the amount of retail space available, and the result is a real estate market that puts buyers and renters firmly in the driver’s seat.
“If a retailer needs new space, now is the time to make a deal, because landlords are a lot more receptive to discounts, such as free rent up front,” says Richard J. Amstater, partner, RJL Real Estate Consultants, in El Paso, Texas (www.rjlrealestate.com). “Developers are being a lot more aggressive because they don’t want empty space. This benefits local and regional retailers who are doing well but couldn’t afford to compete with national retailers for prime locations and brand-new buildings before.”
Of course, a retailer will not find the same deals in every shopping center. “It really depends on how successful that mall has been,” says Amstater. “If it’s pretty much full, you know the landlord has greater options and doesn’t have to make as many concessions. But if you’re looking at a strip shopping center with a lot of vacancies, the retailer has a lot more leverage.”
A retailer doesn’t necessarily need to relocate or open up a new store to benefit from the current commercial real estate market, though. There may be savings available in a pet store’s current or expiring lease.
“We’re seeing retailers taking advantage of the climate by going back and asking for rent reductions,” says Amstater. “Maybe it’s asking for additional extensions, or renegotiating their option rent, or taking out percentage rent, there are a lot of things that retailers can do to improve their situation.”
Whether a retailer is considering a move to a new location, the addition of a store or the renegotiation of a lease, it would be a mistake to assume that the bargains will be around forever. “It’s a cycle,” adds Amstater. “What you’re going to see is a slowdown on new construction, which will give developers an opportunity to fill their space without competition. In a year or two, when a lot of new construction projects are put on hold and not built, then the market will firm up and the vacancy rate will decrease.”
Opportunity #2: Affordable Construction/Remodeling
Another area that has been hit hard by the recession is the construction industry; and that spells savings for retailers who are interested in remodeling their stores. In addition to lagging demand, declining materials costs are making it more affordable than ever for a small independent retailer to make significant changes to their sales floor, says Jerry Birnbach, F.I.S.P., principle, RDD Associates Inc., a New York-based retail design firm (www.rddassociatesinc.com).
“Freight companies are dropping the surcharges that were in existence because of [rising oil prices in 2008] and steel prices have also dropped,” he says. “I’ve seen several downward price changes because of that.”
But Birnbach is quick to note that every area is going to have different dynamics when it comes to the impact that the recession is having on the building industry. “Go out and really shop,” he suggests. “Talk to two or three [different contractors] and really work them over. Say to them, ‘I’ve got this quote, can you beat it?’”
The key here is in making sure that you’re comparing apples to apples, which tends to be a big problem when it comes to pricing out construction. “The only way you can level the playing field is by getting a real set of drawings that will define all of the work that needs to get done,” notes Birnbach. “This way, the retailer knows that all of the contractors being considered are bidding on the same thing.
“It’s an area where novices can really get clobbered. You may only get one shot at this thing. Get a professional [consultant]; the fee will pay itself back three times over in their ability to buy it better, come up with a cheaper solution, and have the real desired effect on the bottom line.”
Birnbach also notes that pet specialty retailers can find great deals on store fixtures today. “There are tons of stores going out of business, which means there are a lot of store fixtures available,” he says. “There are vacated stores full of lighting and other fixtures that are going to end up getting sold for ten cents on the dollar.”
While the help of a good consultant will go a long way in helping to root out bargains on store fixtures, retailers can easily find attractive deals via the Internet. In fact, a simple Google search for “used retail store fixtures” brings nearly a half-million results.
An investment in a major store remodel will be all for naught, however, if a retailer does not couple it with a sound merchandising plan. “If their [merchandising strategy] is broken, they can do all the remodeling they want, but it’s not going to affect the bottom line,” Birnbach says. “The bottom line is going to be affected by creating a store environment that’s appealing and is maximizing its space to get more products sold.”
Opportunity #3: Declining Advertising Costs
Advertising is another area in which pet specialty retailers can find some recession-driven bargains. As big corporate advertising budgets shrink or are put on hold, new opportunities are opening up for smaller companies, which could not have competed with the big spenders of the past.
“There’s a ton of opportunities out there for companies that have elected to continue being proactive,” says Tim Lord, a sales associate with Capitol Media Solutions, an Alexandria, Va.-based full-service advertising agency. “It’s a buyer’s market for everything right now. If you have money and you’re comfortable in your economic situation, I’m sure you can secure a sweetheart deal.”
To illustrate his point, Lord mentions the new breed of mini-infomercials that have been popping up across the television dial. “On television you’re seeing a preponderance of small, quirky infomercials during prime time,” he says. “Normally, you would have only seen those in the wee hours on some obscure little channel, not during primetime on a major network.
“The reason that they are able to be featured on a major network during prime time, is because some of the larger, more routine advertisers are on the sidelines. They have been placed in slots that ordinarily they either wouldn’t be able to afford or simply wouldn’t have the opportunity to purchase.”
Of course, the attractiveness of television advertising will depend on how big of an audience a prospective advertiser is looking to reach, as well as the programmer’s ability to reach that audience without a lot of overkill–after all, there’s no reason to spend money on advertising to consumers who will never visit your store.
However, other media platforms, which specialize in reaching local and regional audiences, are also feeling the pinch of declining ad revenues and offering up some attractive incentives to clients. For example, says Lord, newspapers have been hit particularly hard during this recession.
It’s not just in purchasing media space that retailers can potentially find some great deals; there are also bargains to be had on the creative side. “Most of us in the advertising industry are probably considering doing things that we ordinarily wouldn’t,” says Lord. “We are always considering ways to make deals, whether it’s cutting a cost here or cutting a cost there, or reducing this or improving that.”
While all of the deals going around in the advertising industry may seem too attractive for a retailer to pass up, it is essential that any prospective ad campaign be approached with careful consideration to ensure that it makes the most efficient use of the store’s marketing budget.
“In today’s environment, you have to be much more thoughtful and do your due diligence,” says Lord. “Take your time and really evaluate each opportunity, and then work the one or two opportunities that you’ve selected as fully as you can.”
Opportunity #4: A Deeper Staffing Pool
While rising unemployment rates have most retailers worried about the health of their customers’ pocketbooks, they also represent another opportunity during this fiscal crisis. The fact is that professionals from all walks of life are finding themselves out of a job, and many are willing to be flexible in looking for their next source of steady income. This means that the pool of potential store employees has deepened to the point where retailers may be able to attract applicants with considerable work experience and even management skills.
“There’s an abundance of people looking for employment right now,” says Kathy Marie, vice president of Hutch Retail Staffing in College Park, Md. “Many more-qualified people are taking lower level positions just to have an income. People will declassify themselves all the way down to $10 per hour, from the 20s, because they’ve got to make that mortgage payment.”
Of course, the more attractive a retailer can make the terms of employment, the higher the level of talent they will be able to attract. For example, offering a full-time position that comes with benefits can be great point of differentiation for a prospective employer, says Marie.
“A lot of people are doing multiple part-time jobs right now because it’s so difficult to find full-time jobs,” she explains. “This is a losing situation for the employees, because they have no benefits. Right now, people are looking for the benefits more than a certain per-hour salary.”
Whenever a retailer considers hiring someone who’s overqualified for a position, it’s only natural to be concerned about how long they’ll be able to retain that person on the store’s staff once the economy recovers. This, says Marie, shouldn’t necessarily be a concern.
“Depending on the structure of company and the specific location, you can get somebody that’s overqualified and you can work with them so that they know the ground-level work; and hopefully by the time the economy recovers, they’ll be ready to move forward to a management position, which will potentially bring a salary that’s more in line with what they think they should be making.”
What about the potential difficulty of managing someone who is used to being the manager? Again, Marie says it may not be as difficult as one might imagine.
“Having too many chiefs and not enough Indians can cause a problem,” she admits. “But overall, I would say [an employee’s management skills are] going to be an asset. Most ex-managers, when in a layman’s position, will have enough respect for their manager to listen, watch and do. And hopefully there will be opportunity to grow in their position.”
As with most endeavors, success or failure in assimilating high-level talent into a store’s staff will depend on the unique circumstances of the situation. But with pet retailers always on the lookout for dependable employees and many hard-working people looking for a paycheck today, Marie sees it as a clear “win-win” for all parties involved.
Opportunity #5: Thinning Competition
It may be a morbid thought, but the fact of the matter is that the current recession is thinning the herd of pet product retailers. While some pet store owners will likely see this as a foreboding reminder of the precariousness of their business’ long-term success, more optimistic retailers will see the dwindling competitive field as an opportunity to step in and grow their market share.
According to Anne Obarski, director of Merchandise Concepts, a St. Charles, Mo.-based retail consulting firm, while a pet retailer can learn a lot from a shuddered competitor’s mistakes, a close look should also be given to what those failed stores did right. “If you know of competitors who have fallen by the wayside, look at what their drawing card was and set yourself up to fill that new void,” she notes.
Whether it’s fresh-baked treats at the front counter, eye-catching window displays or some type of in-store event, there is bound to be something that a closed store’s former customers are going to miss; and incorporating these popular elements into the store is sure to help attract shoppers who are looking for a new destination for their pet-related purchases.
However, Obarski does offer a word of warning about going overboard in trying to be all things to all customers–particularly when it comes to product selection. “Letting inventory become too wide and too deep can kill a retailer,” she says. “Turnover slows and prices get too high.”
There is also a more direct way to pursue a failed competitor’s former customers. Now, many retailers compile as much information as possible about their customers, as well as their pets; and it is quite possible that a storeowner who is going out of business will be willing to sell that information for the right price. The key, says Obarski, is in what the buyer does with that information once it’s been purchased. It is essential to have some type of plan on how to reach out to these customers to introduce them to the store, whether it’s through direct mail, email or even a phone call.
Ultimately, says Obarski, a retailer’s success in drawing and, more importantly, keeping new customers will rest in the shopping experience provided. This makes it important for specialty retailers to play to their unique strengths–sound advice and a friendly staff. “This is the time to work with the staff to upgrade their knowledge and customer service skills,” says Obarski. “Developing a strong, knowledgeable staff that is efficient,
with economic storm clouds overhead and finance hard to come by, it is no surprise that companies need to focus on survival, but the danger is that too many companies will implement hasty and badly thought through plans to slash costs, cut jobs and freeze capital investment. Only those with a clear approach aligned to their broader, long-term strategy will survive the downturn and be in a strong position once the recovery starts.
The key to what CIMA is calling ‘strategy under stress’ is discipline. This means looking clearly at strategic positioning, planning and execution and then analysing how this long-term strategy can be managed in a challenging economy. A clear and structured framework can help companies avoid impulsive reactions to problems that may achieve a short-term fix but could compromise future success.
One such framework is the CIMA Strategic Scorecard*. It is based on very simple principles and just following these through in a systematic way can help companies to get some clarity around their strategic thinking.
The scorecard has four dimensions: strategic position, strategic options, strategic implementation and strategic risks. These can prompt a useful checklist of questions to help determine key points at which you need to take decisions and formulate a coherent plan of action.
First, it is essential to understand your strategic position. What is the general state of the economy and how does it actually affect your industry? What about your customers, suppliers and competitors? By staying focused on the actual situation that presents itself and by having a well structured approach to identifying and exploiting trends, companies can feel more confident that they have a clear context for decisions, whether they relate to intense short-term pressures or more general longer-term trends. Individual managers should take responsibility for monitoring different aspects of the strategic position such as market share and competitor activity. It may also be helpful to use formal techniques such as scenario planning or SWOT (strengths, weaknesses, opportunities and threats) analysis.
The next step is to consider your strategic options. Unless you are actively creating and thinking through possible options on a continuous basis, both for long-term development and to provide responses to changing circumstances, you may unwittingly be limiting your possible courses of action or making important choices too slowly. Having a range of options that you have already thought through in advance of need can give you a powerful competitive advantage. The list of options does not need to be long; those that seem less feasible during a downturn could be placed ‘below the line’ to show that they have potential but are less viable in the immediate future. While the options for some companies will include headcount reduction and closures in recessionary times, it is also worth considering whether there are opportunities for growth such as acquiring distressed competitors.
The third step is to focus on implementation. Even if a strategic option has been well thought through and is based on a strong and clear understanding of the organization’s strategic position, it can fail if it is not well executed. That’s why options should include targets, milestones and timelines – as well as longer term measures of success. Each person involved in implementing the strategy should understand their role, how it relates to others and what they need to achieve, why and in what time frame. There also needs to be strong leadership and accountability for each strategic initiative.
The fourth and final step of the scorecard framework is to ensure a structured approach to strategic risk. Many organizations are adept at planning for operational risks such as flooding or products recalls but find it hard to identify strategic risks that might undermine their business model and strategy. The first step is for companies to ensure that they maintain a consistent approach to risk throughout the business cycle, avoiding excessive optimism and risk-taking during a boom, but also avoiding the temptation to become over cautious during a recession. Once a company has a clearly articulated approach to risk, it can then ensure that it identifies and evaluates all the key strategic risks and opportunities so as to formulate appropriate responses.
Cost cutting measures
It is tempting to believe that the best way to survive a recession is to cut budgets and hope for the best, but managers who make snap judgments about such decisions could be making a critical error. Even if a cost reduction programme is considered essential to survival, simply looking for percentage cuts across the business might be a blunt instrument that hinders competitiveness. It makes sense to apply CIMA’s more structured strategic planning approach to such cost-cutting programmes.
For example, in terms of strategic position, look at competitors’ cost structures and how they deploy their resources, as well as how markets are shifting, to highlight possible approaches and areas suitable for cuts. The board can then have strategic options on cost savings available for debate – with any resource, regulatory and operational considerations fully assessed.
Implementation is crucial in respect of cost-cutting strategies. One common pitfall is that boards often fail to consider the practicalities for middle management. Operational risks, such as the legal pitfalls of a botched redundancy program me, are one danger, but it is also essential to consider long-term strategic risks such as losing skilled or experienced staff.
A shrinking economy, poor trading conditions, disrupted markets and uncertain supply chains are all major threats to an organization’s survival. Taking a structured approach to managing these challenges and keeping an eye on the long-term strategy of the organization is the only way a business can make it through the recession.
Recession and Cost-Saving
Earnings of major companies at home and abroad have declined dramatically since the second half of 2008, aggravated by a deepening global recession. Many have declared bankruptcy, while others are struggling for their survival. Due to the worsening business environment - declining revenue, rising unit costs, fierce price competition and a credit squeeze - protecting profitability and maintaining cash reserves have become paramount management concerns.
Under such circumstances, companies have mounted an array of familiar cost-cutting steps: selling off businesses, downsizing their workforce and reducing operations, postponing investments and cutting salaries and benefits. However, traditional cost-saving methods, while having their intended short-term cost-reducing effects, tend to bring other longer-term problems into play. This is because some measures are not implemented in the context of a longer-term corporate strategy, but rather tend to focus on the short term or on specific parts of the company. Sometimes, measures are taken just to demonstrate to shareholders that cost-saving efforts are being made. Ultimately, a short-term approach cannot lead to improvements in the fundamentals underlying a company’s competitiveness and may in fact damage its long-term growth potential.
A prime example would be the case of the three major US automakers. They were able to get through the 2001-2003 recession through payroll reductions, but they failed to bring about a fundamental improvement in their competitiveness, so that they again face closure in today’s recessionary environment. There are many other examples where short-term-oriented cost-saving efforts have been inconsistent with a company’s overall strategy or underlying causes of loss in competitiveness have not been properly addressed.
There is therefore a clear need to put together cost-cutting measures with a firm strategic perspective. Indeed, it will be important to resist the strong temptation, in times of recession, to adopt quick-fix types of cost-cutting measures. Rather, a more strategic and systematic approach will be needed.
“Strategic cost-saving” refers to the reduction or control of costs while at the same time strengthening the longer-term competitiveness of the company. An example of this is the “4-4-2” approach (closing down four, maintaining four and increasing two investment projects) introduced by Harvard professors Ranjay Gulati and Nitin Nohria as a “strategic” way to lower R&D costs during a recession. The point is that it is not good enough to just reduce inputs/costs; inputs and outputs must be considered together so that productivity and competitiveness can be enhanced at the same time. Prior to implementation, companies must analyze how proposed cost-saving measures affect the products and services they provide and ultimately how they affect their longer-run competitiveness. The choice must depend on whether the measures (1) are consistent with the company’s overall strategy, (2) can be sustained over the longer-term and (3) help costs for the company as a whole.
II. Strategic Cost-Saving
Strategic cost-saving covers a much broader area than what is normally considered in cost-cutting. Importantly, it covers the business model itself, manpower and departmental organization, and business processes. In some circumstances, reconfiguring the business model may be necessary to adopt cost-cutting measures that are consistent with the overall company strategy. Of course, it is very difficult to implement changes to something as fundamental as a company’s “cost-profit structure,” but such changes will also bring the biggest benefits and be sustainable over the longer term. With regard to manpower and departmental organization, recessions can provide an opportunity for the company to carry out radical reorganizations to bring things more in line with the overall strategy - a very difficult task during normal times. Once established, a low-cost, high-efficiency business model/process will prove to be profitable on a sustained basis, irrespective of one’s place in the business cycle.
1. Business Model/Method
There are many ways in which a company can both save costs and enhance its longer-term viability by changing its business model or the way business is conducted. One way is for a company to reinforce its core competencies through cooperation or strategic alliances with other companies. Such cooperation may be with companies that are either in the same or different business areas. An example would be the recent strategic alliance between Chrysler and Fiat, where an exchange of technology and capital was made to allow greater cost saving and improve the longer-term competitiveness of both parties.
A second way would be for a company to recycle used equipment and products to reduce costs and even develop new businesses. Caterpillar, a major global manufacturer of heavy equipment and engines, has adopted “remanufacturing” to both reduce its own costs and at the same time sell its “remanufactured” products to generate additional annual revenue of over US$1 billion.
A third way would be to get a better handle on what is required by a company’s core clients and concentrate on meeting those requirements. In a recessionary environment, where resources are more limited than usual, such a narrowing of focus may be the way to cut costs while maximizing not only near-term profitability but also maximizing longer-term viability. This point is illustrated by Curves, a fitness franchise that opened in 1992 amid a recession in the US. First, it identified the core needs of female clients, its key target group: namely safety, convenience, affordability and social networking. Then it offered an exercise program called “Quick Fit,” dedicated to women and designed to service each of these needs. For example, by arranging 10 running machines in a circle rather than the usual single row, Curves provided an opportunity for female clients to exercise, while carrying on conversations and socializing with other female clients. At the same time, bathrooms and other facilities were fu rnished without unnecessary trimmings to minimize cost, both for the company and its clients. Curves’ innovative way of doing business caught on fast and the franchise expanded rapidly.
A fourth way to improve a company’s cost structure and enhance longer-term competitiveness is through rationalizing and streamlining the value chain. For example, SPA (Specialty retailer Private label Apparel) companies such as H&M and Zara were able to achieve both objectives by shortening the distribution chain and operating directly-operated retail stores. At the same time, they improved communications between stores and planning/production departments to enable a quicker response to changing demands.
2. Manpower and Departments
Even during a recession, it is important to maintain worker loyalty to the company. Accordingly, personnel downsizing should be avoided as much as possible to maintain the loyalty and trust of workers. For example, IQ Consulting, a personnel consulting firm in the US, recently conducted a survey of 4,172 people who had survived corporate restructurings. The survey found that productivity levels, quality of customer service and employee loyalty all fell substantially in these instances. The implication is that, even in times of recession, lay-offs must be carried out with the greatest of care with a firm eye on a company’s longer-term competitiveness. This is especially true given that it costs more to hire and train personnel than to retain valued, competent employees. For example, Eastman Kodak carried out a large lay-off of long-serving skilled workers in 1995, reflecting its need to cut costs at that time. However, changing circumstances dictated that it replace such workers only a year later - at much higher cost.
In a similar vein, it is risky to adopt a “me too” approach to cutting costs. When Circuit City, a US retailer of consumer electronics, decided to cut 7% of its skilled workers in 2007 and replace them with low-cost labor in a move to copy its rival Best Buy, it found that the service it provided to customers fell significantly and ended up filing for bankruptcy in 2008.
Clearly, it is risky to take a non-discriminatory approach to company downsizing, such as all departments reducing the headcount by a given percentage. A more selective approach that takes into account the company’s overall competitiveness and longer-term viability is needed to avoid unnecessary loss of worker morale, an exodus of core talent and a fall in productivity. The aim of this selective approach should be to cut where value added is low, or where there is a surplus or duplication of labor. For example, integrating units that perform simple but similar functions in their respective departments/businesses into a central, “shared service” department can help to cut costs and also to release employees to focus on core tasks, thereby enhancing efficiency and competitiveness.
It is possible to achieve sustainable cost savings via redesigning business processes that do not add much value or are duplicative. In normal times, such redesigning activity is often carried out separately by various departments. However, a recessionary environment provides an opportunity to take a fresh look and redesign them from a company-wide perspective, under the umbrella of the company’s longer-term strategy. It may be the case that process redesigns, when conducted independently by different departments, end up harming overall process efficiency. Renowned management guru Peter Drucker highlighted the need to approach cost-cutting from a company-wide perspective. Unless done in this way, the cost reduced may just turn up elsewhere in another form. The company’s core activities may be damaged and in any case the cost-reduction measures may lose their effectiveness in just a few months.
Improving the supply chain can contribute to cost-saving and enhancing longer-term competitiveness. Rather than myopically aiming for the lowest-cost input component, “strategic sourcing” requires more carefully managing the supply chain so as to achieve the lowest-cost supply on a sustainable basis. In this regard, Samsung Electronics succeeded in standardizing components for common use (from 594,000 in 2000 to 223,000 in 2005) across its vast product lineup. As a result, material costs vis-a-vis revenues were cut by 6%, totaling savings of 4.7 trillion won from 2000 to 2005.
4. Management and Operation
There is a need to take a broader approach to cost cutting in the area of management and operation as well. This point is illustrated by the recent aggressive adoption of more efficient energy-use technologies. Companies can install systems that enable the reuse of energy waste from factories or install facilities that run on low-priced fuel. Everland, designated an Energy Service Company (ESCO), saved 35.5 billion won in 2005 by setting up a system that distributes surplus steam from a factory to two adjacent factories at a low price.
Also, companies can install systems that curtail the unnecessary use of power when operating electronics equipment. Cisco Systems introduced “Energywise” in January 2009, a system that automatically controls power usage of computers, telephones and access point devices.
It is also important to avoid inefficient use of office/factory space and avoid unnecessary real estate costs by taking a more company-wide approach. In turn, this will allow savings in other related costs, such as furnishings and equipment. IBM, for instance, saved US$1.4 billion by reflecting rental costs of each department in its performance appraisal and strengthening the monitoring of unnecessary space.
Companies also need to keep a close eye on, and take full advantage of, the business-friendly tax incentives that are being provided by governments worldwide in their effort to fight the global recession. For example, to support voluntary corporate restructuring, the Korean government is planning to offer incentives via investment tax credit, a postponement of taxation on capital gains from asset transfers and a reduction in double taxation on non-commercial land.
The business environment appears to be getting worse by the day - it certainly looks worse now than just a few months ago. Nevertheless, the temptation to focus on the near term, as strong as this may be, must be resisted so that a more strategic and systemic approach can be taken to cost-cutting. Recessionary times, like now, can provide a valuable opportunity to retool and reorganize the company to not simply cut costs, but also to put it in a stronger position for the longer run.
Pursuing cost saving in a strategic and company-wide manner allows one to avoid a “balloon effect,” where pushing down costs in one area of the company simply means that costs rise in another area. Such a systematic approach requires (1) keeping a firm eye on the company’s longer-term strategy, (2) a detailed review and analysis of the company’s entire cost structure, (3) setting targets for cost-saving, (4) selecting which cost savings are practical and prioritizing them, and (5) making sure they are implemented via strengthened monitoring.
It is important to make sure that the core values and competencies of the company are not damaged in the cost-cutting process. According to Donald Sull, author of “Revival of the Fittest,” ignoring the core values of a company is one of the main obstacles to its successful restructuring and innovation. It goes without saying that one of those core values needs to be the minimization of waste.
Finally, a successful cost-cutting effort requires a strong consensus among the company’s workers about what are the aims and how it will be achieved. Moreover, each must know what his/her role is in this effort. This, in turn, requires good internal communication from management to the staff. Indeed, active communication of cost-related information and cost-saving policies, employee training and improving access to cost-cutting information are likely to trigger a strong and favourable employee response.
P Chidambaram, former Finance Minister of India said, "The world economy in many countries are indeed already in recession or facing recession India is no where near recession we are affected by the slowdown in global growth."
Mother of all recessions has started from USA with the collapse of businesses like Leyman Brothers and Real Estate in Germany. The economy which hitherto overheated is showing signs of cooling down causing reverberations across the world. How long will it continue is a matter of debate. Pessimists say that it may take more than two years; optimists say that it may take only a year and the realists assert that it may take 2 years to come out this threat.
Second World War brought lot of destruction to mankind. It also ruined the world economy. But it resulted into several technological innovations that brought comforts to mankind. Similarly the current meltdown will bring fruits to mankind in several ways although there will be pain for some time. But the pain is worth bearing to enjoy the fruits.
More or less, all sectors have been hit by slowdown. Real estate and IT and IT sectors are badly hit. Fortunately few sectors in India have not been hit such as banking, food sector etc., The RBI has been stringent in its regulation and it has helped to overcome meltdown in the banking sector. Currently there is decline in exports in agriculture and food processing sectors which is matter of grave concern. However, good monsoon can check the slowdown.
Organizationally speaking recession is a threat for scroungers not a threat for workaholics. Rather workaholics are a threat to recession. Recession separates between men and boys. It differentiates between chaff and grain. It clearly focuses who are the real performers and non-performers. Non-performers wake up! It is time to mend their ways or else they will be fired. Recession is a wake up call for non-performers.
Companies are now looking for silly reasons to fire the people in the name of indiscipline. In fact, it is not due to indiscipline or lack of performance but because of recession. It is a retrograde step and brings down the image of the organizations.
Indian IT and ITeS sectors have been badly hit due to current meltdown. In the past, they were offering services at lower charges to American and European clients and generating revenues. The impact of American recession has played havoc in the India’s Knowledge sectors. The services sector has been hit hard. Below are few do’s during recession.
Dos during Recession:
• Always be productive.
• Show results to your boss.
• Develop new skills and abilities.
• Start networking.
• Open your communication channels.
• Think out of the box.
• Look for home based business.
• Stick to your deadlines.
• Keep cash ready.
• And last but not the least, stay committed and focused.
Merits of Recession:
Recession builds bridges among the families who until now have been separated by barriers due to work pressures. It connects people emotionally. It checks attrition. It provides breathing space to the tired people. It takes out the pressure and injects pleasure for the people.
Don’t Flight But Fight:
Recession is not new and we have faced several times in the past and survived. We would survive this time also. With the growing technology the media is highlighting recession too much thus worsening the situation further. Recession is existing but not as much as it is being overplayed.
Taming the Financial Tsunami:
Ajim Premji said global recession has offered a "huge opportunity" and would "spring-clean" those organizations which have become complacent through "excessive success" .
If required accept pay cuts, don’t risk the existing job. A bird in hand is worth two in the bush. This is the time to lie low for a while not to rise when odds are stacked against you. Cut down unwanted expenses. Spend only what is bare necessity. Take a relook at your expenses. Write down and find out the areas that could be cut to sit on cash. It is time to differentiate between needs and wants. Wants are unlimited while needs are basic requirements. Focus on needs not wants for time being.
Innovative measures to cut down expenses and enhance productivity. Unconventional and out of the box thinking approach is essential. There should be insurance coverage for recession as well.
It is time the corporate reinvent their strategies to tackle recession. They need to develop leadership potential at the senior level to prevent such crises in future. Look at the products and projects that are not paying you off and prune the same effectively. Focus on R&D and find out the new ways and means to provide innovative products and services.
Recession is the result of top leadership taking the things for granted. It is time they correct their mistakes and take remedial measures to set the house in order. The US government is taking measures to check the recession through stimulus packages. The Indian government should tailor such stimulus packages to tackle the slow down.
Let us also know the fact that tough times either bring you to your knees or raise you to new heights. It all depends on your mindset and the resilience. When viewed from positive perspective it will take you to next higher orbit if you can spot and utilize the opportunities. Tough times don’t indicate an end but a bend in your life. Tough times may tumble you but ultimately humble you at the core.
1. Liquidity is king
The critical role of liquidity is something that the banks have re-discovered during the current financial meltdown - admittedly a special industry in extreme circumstances. Yet no matter what the industry, if revenues drop sharply and debtors stretch out their payables, all of a sudden creditors can lose confidence and insist on immediate payment.
After 9/11 collapsed airline revenues, lack of liquidity for fuel purchases grounded Swissair in October 2001 and soon drove it into receivership. Liquidity planning is critical, based on an analysis of the payments schedule, creditor terms and debtor collectability. The liquidity plan must be stress tested to see whether it can deal with worst case scenarios. The best insurance is real cash reserves in a safe bank.
2. Reduce fixed costs and increase flexibility
The ability to rapidly scale back activity when the recessionary storm hits without incurring major losses, and then scale back up on the rebound is key to coming out ahead after the storm passes. The budget airlines, with leased fleets, highly flexible pricing and rapid response to changing market conditions, came out of the 2001/2 downturn well ahead of the slower-moving larger airlines.
3. If necessary, restructure boldly, sooner rather than later
A downturn soon reveals what parts of the business are not profitable through a full economic cycle. Hanging on to non-economic business puts strain on the profitable business, thereby diminishing its rebound potential. If restructuring is needed, it’s important to move sooner before the markets for assets and divestments begin to freeze up. Bold decision-making is key with a preference for simplicity in the final business model. HSBC, for example, began aggressively scaling back its consumer finance and mortgage business in the US well before the full subprime crisis unfolded, which has allowed it to stagger its subprime write-downs over time without panicking its customers and shareholders.
4. Support critical long term partners
Smaller partners, like critical suppliers, distributors and customers, many not have the financial strength to withstand a major credit squeeze alone. If they go down, the ability of the full value chain to rebound may be severely compromised. To reduce this risk, some manufacturers have decided to offer special support to keep weak suppliers afloat until business rebounds.
Similarly, restructuring and wage cuts can undermine the morale of the organization, making it difficult for people to bounce back with full energy when demand picks up. Clarity about the critical talent needed for the long run and sharing the pain of flat or declining compensation throughout the organization, including top management, can bind people together and build valuable loyalty for the future. This is what many family businesses do to get through downturns.
5. Exploit opportunities to re-shape the competitive landscape
For those with strong balance sheets and liquidity, recessions throw up buying opportunities of a life-time at bargain prices. Acquiring talent, assets, access to markets, or whole businesses, at distressed prices, can completely change the balance of power in an industry. Bank of America’s acquisition of Merrill Lynch and JPMorgan’s takeover of Bear Stearns, together with the disappearance of Lehman Bros., has radically altered the power structure in the investment banking industry.
6. Leaders have to manage themselves responsibly
During difficult times the poet’s admonition is critical: make sure to “keep your head when those around you are losing theirs and blaming it on you.” A calm, steady hand must be visible at the top when implementing the measures needed in points 1 to 4. To retain credibility, execution must be accompanied by socio-political sensitivity.
Leaders lose credibility when they go on a big expense-paid fox hunt in England right after announcing a multibillion government bailout, or continue to promise eight figure bonuses in a firm that’s losing money. Instead, socio-political credibility requires they forego their bonuses, like the top executives at Goldman Sachs and UBS, as well as Josef Ackermann at Deutsche Bank, did in 2008.
7. Board members have to be strong sparring partners
Board members have to control the conduct of the business on behalf of the shareholders while, at the same time, supporting management in the value-creating process. In particular, during a recession, they have to ensure that management acts on points 1 through 3 to ensure the security of the business, while also encouraging management to be alert for windfall investment opportunities. This calls not so much for diversity on the board, but for board members with industry expertise, who are willing to support the CEO with difficult downsizing decisions and act as strong sparring partners to assess the desirability of potential investments.
The board can make the difference, as it did at Credit Suisse when the risk management committee called for a radical reduction in exposure to mortgage derivatives in mid-2006, exactly when the CEOs at rival banks were pushing for higher returns with more investment in the same instruments