Opinion

Proactive thinking is the key to surviving an economic downturn

Sanjay Kirloskar | Updated on October 25, 2019 Published on October 22, 2019

Leadership matters more than strategy in surviving a downturn   -  iStockphoto

The pressures felt due to a bad economy must be channelled in streamlining of business processes and getting ready for future growth

Managing business has got only tougher as the domestic economic slowdown has added to the challenge of technological and trade disruptions. India’s economy has been slipping for a few quarters, and expectations for the immediate future are tinged with worry. Quite a few sectors are feeling the pinch and it has become a challenge to achieve growth or even sustain performance.

However, bad times are good for house-cleaning and reorganisation. The pressure to survive can be used to become fit for growth.

It is instinctive to retreat into a shell for safety, but it is not a safe option when the business environment is changing fast. A scramble to save money only fulfils the prophecy of doom. Worse, it damages the vitals of an organisation. As Warren Buffet said: “When others are fearful, be greedy”.

Bringing in efficiency

A downturn is the time to streamline the organisation and invest in the future. When sales are growing, the focus is to produce more, but when the market stumbles, one can focus on improving the products. A crisis brings a sense of discipline and urgency in an organisation, because the market no longer pays for sloppiness.

Organisations grow fat on growth, but need to get fit to compete for a shrinking pie. They have to get most out of their spending and create innovative products and deals to excite a moribund market. They must reinvent their business models to offer better value and convenience to the customer.

During a downturn, organisations must become clearer about their positioning and vision, and must shorten their plan horizons, intensify performance enhancement and set targets dynamically. Vanity projects should be set aside and margins should become sacrosanct.

Liquidity is critical when everyone is in panic mode, and the risk of receivables delay and default increases. Reducing sales on credit and diligent recovery of outstanding payments can be critical when cash becomes scarce. At the same time, organisations must reduce own debt to minimise compulsory outgo and strengthen solvency for fresh investment.

Many organisations tend to operate on the fat with a machete instead of a surgical knife. The rule of thumb is then to cut 10 per cent costs across the board at any sign of trouble, which tends to cut into the organisation’s bones as well as fat. The zeal to cut expenses extends to headcount, marketing and product development too.

Rash cost-cutting destabilises the supply chain, damages customer confidence and motivates talented employees to leave. Showing and communicating confidence when everybody is panicking is central to doing well in a downturn. It helps to sign long-term contracts with key customers, suppliers and employees when they are worried.

Focus on products

Increasing spending on product development and marketing are essential to recession-proof an organisation. New design and functionality of products can get people to spend even in a bad economy. Apple launched the iPhone at the peak of the financial crisis in the US, and most of the other digital giants of today began disrupting the market around the time too. People will pay if they are offered unprecedented utility or a means to save money and effort. One also needs to market more during crises, not less. Instead of cutting marketing budgets, organisations need to improve their propositions and push them with persistence.

A downturn puts pressure on prices, and dropping prices to push sales is a reflex. However, conceding pricing power is a self-harming strategy, because raising a price once lowered is extremely difficult. One can offer a bargain to the saving-conscious customer by offering add-ons without giving up the price point. One can also offer expensive products on a pay-as-you-use basis, to save immediate expenses of customers.

Fishing in the troubled waters can be useful. It is easier and cheaper to buy competing and complementary businesses in a downturn. However, one must resist the temptation to buy an asset, organisation or customer base just because they are cheap and available. It is critical that focus be on acquiring new capabilities to grow the market in the present and in the future. In a structural downturn, it is better to shed conventional assets than to add to them.

Leadership matters more than strategy in surviving a downturn. A troubled organisation first needs inspiring leadership, followed by an exacting management. A leader must fire up the organisation for the fight. The organisation must be encouraged to pursue new revenue sources, new markets, new business models and adopt a new structure and culture. Looking beyond the present is central to rescuing an organisation from self-flagellation and make it focus on the next steps.

Every downturn produces new winners and losers. Those who try to wait out the storm are usually disappointed. The future belongs to those who create it.

The writer is President, All India Management Association

Published on October 22, 2019
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