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Several broad objectives could be achieved in order to survive and maximize company's performance during downturn. Moreover, the rapid pace of economic events is challenging companies in their efforts to focus on the long term, and to keep the organization and its processes well aligned with shifting strategic priorities.
Typical cost management and product innovation is not enough to generate and maintain a competitive advantage, especially not in an economic downturn. Successful companies look for opportunities to reduce costs to their customers, and increase delivered value. Many successful innovations and rebirths have been the outcome of prior downturns. Identification of opportunities to restructure, to reduce, and preserve capital and streamline operations becomes paramount for a company's sustainability.
Innovation in financial stability
1.1. Manage and maximize cash position
The aim is to ensure that the company has adequate cash flow and access to capital. Not only does lack of liquidity create immediate problems but it also is critically important in order to make smart investment decision for future growth.
A company can start by probing fundamental questions like: How much cash is tied up in the inventory? Or what options exist to reduce this investment?
One of the possible solution could be to put greater focus on having instant availability of the core stock (following the 80:20 rule) and special orders can be made, with longer lead times, on the less popular lines. Furthermore, a checklist can also help in monitoring and assessing the vulnerability of the company.
Managing customer credit risk (assign credit rating)
Optimizing company's financial structure and options
Tightening up account payables and receivables
Driving down inventory
Centralize or pool cash across units
1.2. Share unproductive assets
More attention should be paid to reducing existing capital investments, mainly because it is harder to achieve and has a longer time frame. Where it is not possible or sensible to exit unproductive assets, an alternative could be to share assets. For example; sharing warehousing space, office space or retail space with other organizations may create win-win solutions.
IT organizations can share their existing IT capacities, like servers and storage and put a cap on maintenance spending resulting in considerable saving.
Many large organizations have millions of dollars locked up in IT assets. These assets can be leveraged upon to generate cash. They may consider selling or leasing data centers or spinning off overseas service centre. Though these moves may be unfavorable in long term, the short term value of cash might make them necessary.
1.3. Outsource to reduce cost
Investing in new capital is a luxury that few can afford. Building on the opportunity for sharing assets, company can also seek to outsource any new capital requirements.
One might argue that it is spending more over the life of the asset, but, in the current conditions, having adequate short-term cash flow is likely to be more important.
1.4. Abolish weak projects
Slow-moving projects exhaust funding and technical talent at a time when companies must focus their resources on the most probable successes. One can conduct a quick, quantitative portfolio scan to uncover projects that can be classified in three categories:
Supporting unprofitable product lines
Undesirable with current or future customer preferences.
Further, to ensure that R&D does not lose its way, it requires that every project remain clearly within the bounds of overall company strategy, stick to the innovation model, and leverage core capabilities.
Innovation in structural stability
1.5. Inclusiveness in organization
a. Integrate suppliers into the operations.
Toyota has been the exemplar of supplier integration for several decades, but their real advantage is in creating supplier integration that is culturally involving two-way partnerships rather than just transactional.
b. Include customers into the operations.
Many opportunities exist for the business to remove activities, reduce cost and deliver greater customer value by allowing customers to become more involved in the process.
The furniture market was transformed by IKEA as it established self-assembly as the norm at the value end of the market.
A new cost effective way was developed by AMAZON (website) when it started using its customers to do the heavy legwork of its product marketing by encouraging them to write reviews and recommendations.
2. Innovative Strategies to capitalize on
This challenging economy requires a start-up mentality in many areas.
"Procter & Gamble (PG) recently announced plans to roll out a national, franchised carwash chain under its Mr. Clean brand name. Even though many chain operations have been struggling lately, P&G feels that the downturn offers a unique shot to move into the space."
"Hulu.com, a joint venture between General Electric's NBC (GE) and News Corp. (NWS) is moving to take advantage of the shift to in-home entertainment. The online video streaming Web site delivers a compelling mix of prime time TV through an easy-to navigate user interface supported by advertising.
In only its second year of existence, it is already fourth among streaming video Web sites like YouTube.com and might generate $200 million in revenue this year."
What these business concepts showcase is that even in a downturn, well-timed innovations can still create growth businesses. In these times there are few specificÂ downturn needs.
Ones created by the substitution effects.
Needs that emerge by way of necessities
(i.e. availability of excessive time or
unavailability of productive employment)
Products that deliver value for the money spent on them.
In order to succeed, however, companies will need to challenge some of their basic assumptions.
2.1. Identify new customer segments
One can think of it in a way that customer groups which were previously out of reach, are now becoming available
In marketing terms, companies have to think more about value creation for consumers rather than only focusing on price. Companies need to alter the proposition so that the consumer sees more value in it. The organization must thoroughly understand their brand, and its ability to charge a price premium, and the competition it confronts.
The following 2x2 matrix showcase that:
Value Brand Offering
Premium Brand Offering
Non -Competitive environment
Widen or Build category
Offer great deals/discounts
Build the brand
Also, though downturn is quickly highlighting problem areas, but there may also be new opportunities for the business which were earlier not available or viable.
Sainsbury's have gained from customers who have rejected the higher-priced Marks & Spencer food offer.
Virgin Atlantic is currently running an advertising campaign for its Premium Economy cabin, presumably to attract business travelers who can no longer afford to travel full business class.
2.2. Unbundle the products and services
In downturn many companies might be experiencing a fall in revenue as the customers become reluctant to pay full price. Unbundling allows to better match the value of product or services with customers' individual needs.
For instance Ryanair's business model is based on extremely low fares with add-ons for in-flight food, extra baggage and even for check-in. This gives it the flexibility to adapt to the changing spending ways of consumers.
In current downturn cycle company should also shift its focus on what kind of unbundle offer can be given to the potential customers as more options to attract as well as to retain them.
2.3. Reinvent business model
Perfect time to reinvent company's business model is during financial downturn, because it's harder for competitor's, to see, understand, copy or respond to changes. Some companies are making smart, innovative moves to reorient their business models according to the environment.
Wal-Mart Stores (WMT) is modifying its model to exploit an opportunity that stems from today's more cost conscious grocery shopper.
It is reinventing its private label brand, Great Value. The retailer reportedly has hired 75 people, improved the quality of 750 of its everyday food products, and overhauled the logo and packaging design.
Company has to be nimble, but at the same
time it has to make sure it's turning whole ship and not parts, one of the ways could be by doing a faster planning cycle-not annually, but quarterly.
2.4. Build cross-category partnerships
Downturn also presents an opportunity to capture key partnerships and customer networks to provide a better value proposition and increased customer base. If possible exclusive relationships can also be created to generate entry barriers for competition.
Consider a new partnership between the retailer Ann Taylor Loft and Procter & Gamble is turning stores into launching pads for two new products, Tide Total Care and Downy Total Care. Both products claim to cut down on dry cleaning bills by helping clothes look new for a longer time.
The store chain is handing out free samples and coupons to customers who buy machine washable clothes, while posters and decals throughout the stores alert customers to the products' benefits.
2.5. Acquire technology and intellectual
property at a cost
The downturn can produce many barÂgains for savvy acquirers with strong balance sheets, as cash-strapped firms are forced to monetize technology and intellectual assets they have not yet successfully exploited.
If the company has buying capacity, it can speed up the scouting process and develop a broader partner and supplier network to identify and vet acquisition opportunities. Otherwise companies that do not have the resources in place can consider using short-term, ad-hoc teams to scan opportunities across its business ecosystem.
2.6. Extract value from IT
As the growth is slowing, business should extract value from its IT functions. Company needs to balance between short-term financial improvement and possible impact on long term capabilities.
IT service can be judiciously used to increase revenue and reduce operation costs in short run. With few modest investments companies can use data more effectively, for example, IT can be vital for improving supply chains by enhancing logistic and inventory management. Similarly, better data can sharpen insights into customer segments, opportunities in changing price points or providing focused sales support. Over time these projects may return considerably over the bottom line impact of IT cost reduction.
IT can also have far reaching impacts for companies with sufficient resources. It can help in increasing efficiencies by changing management practices and models over a period of time.
2.7. Revitalize talent: Upgrade and Hire
Though cost cutting is required during downturn and deteriorating performance forces increasingly aggressive head-count reductions but that is a text book solution. Companies can use this downturn as an opportunity to redesign jobs , relook at job responsibilities, degree of autonomy, and span of control.
Consider Cisco Systems approach to downsizing (in 2001), Cisco redesigned its roles and responsibilities to improve various cross functional alignment and reduce duplication of jobs.
Moreover, in downturn cost to attract exceptional people gets lower and these people are always a scarce resource a stable company can easily leverage upon this advantage. This may create opportunities for the business to attract new leaders with new skills to help take the business forward.
Since turbulent times require innovative solutions hence company's search should not be restricted to its current industries.
2.8. Aggressively invest in innoÂvations
Now is the time to accelerÂate and optimize new products and technologies that are sure to deliver market advantage. If necessary, front-load resources and adjustment can be made in the development cycle to get to market in time for the upturn.
And one should always pay particular attention to the features that customers value most without compromising on quality.
2.9. Ask everyone for growth ideas
This is the opposite of the usual "threat-rigidity effects" rather than focusing and becoming more narrow and top-down, company can open up, organize bottom-up processes and try something new.
For instance in an automotive ancillary company, its leader initiated the idea-sharing process and one team noticed that there was always one business unit doing rather well among their automotive customers; the unit providing spare parts.
In a downturn, when people stop buying cars, more people need to have their cars repaired and this greatly helps the spare parts units. So, this team decided to propose an inventory control product specifically aimed at the spare parts units of automotive companies. The idea worked and has become one of the major revenue earners for the company.
2.10. Create value from Green Technology and community growth
Green technology is the next major growth sector. Renewable energy, self-sustainable agriculture, green building design, eco-friendly construction, clean-energy transportation technology is ready to explode and can be one of the upturn cycle for the company.
One can leverage by producing and packaging products with less material and more recycled content, which can have two fold advantage of cost saving and product differentiation. Moreover, a new revenue stream is possible through gaining carbon credits.
By investing in community growth organization can empower tomorrow's customer and also help in generating strong brand with larger base.
Consider Coca Cola's manual distribution program in Africa, it generates independent entrepreneurs and also helps Coca Cola secure hard-to-reach markets. So far Coca Cola is able to generate $500 million while giving employment to over 11000 people.
Green strategy can be effective in motivating employees as well which can have far reaching impact on productivity. Few companies have already made progress in this area.
Wal-Mart Personal Sustainability Project, starting from making employee's environment conscious to finally getting them excited about new, low-cost ways of operating or about creating products and services. These inspired workers can position the organization for a quicker recovery.
There are broadly two things that stand out about downturn.
Upturn always follows downturn and it lasts longer and is more robust than the downturn.
A severe downturn fundamentally changes the competitive landscape in most industries. There are new winners and new losers.
So in the current environment, the range of options of the players is very different. It's will not be clear what the competition is going to look like in a few years. But since the downturn has been so severe therefore the opportunities will be much more profound.
It's ultimately the question of vision. Companies that win with innovation will see downturn as an opportunity to re-create their industry on their own terms.