Strategy in tough times

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I have just been asked to include a specific extra section on this in the LBS ADP executive course on which I teach, which reminds me it may be useful to many others, so here’s a very short summary

First, it’s unlikely that making big throws on changing your strategic positioning will help much – it may even be damaging. Sure, you might get a bit of revenue support from adding or moving to a slightly lower-priced proposition as many retailers are doing, but if you fundamentally alter your position you will likely confuse and annoy existing customers with no guarantee of picking up new ones. So – solutions need to focus more on strategic management of what you have.

The start-point as always is recognising that revenue and profits reflect the quantities of resources in place – demand-side [customers, dealers …] and supply-side [products, staff …]. But it’s not just the quantity of these that matters, it’s the quality too. Just about every business has customers who contribute little or nothing to sales and profits, and products too. 

During good times, management can easily be seduced into a land-grab for any half-promising growth opportunity that shows up, and fear looking wussy if they don’t match up with competitors’ bold efforts. The good times ensure that the diluting effect of poor quality customers or inadequate product-range extensions remain invisible, but a slow-down or reversal in demand realises the damage to performance they cause [e.g. those sub-prime fools again!]. So what to do to repair that damage?

Well, the usual simplistic call to just ‘cut costs’ can be ineffective or positively dangerous – cutting sales effort or service costs for example risks damaging all the business, good customers and poor ones alike. And cutting long-term investments such as training and R&D of course theaten longer-term development. [I heard the CEO of SAP explain how they were cutting R&D spend because of market conditions, and say this would not cause any significant long-term harm because they had plenty of R&D staff. If so, why were they spending this money in the first place!]

What is needed is to bring the business back to a good quality ‘core’. In mild cases, this may mean no more than ceasing to serve a small fraction of customers, dropping a few unpopular products and – regrettably – losing just a few of the staff who are no longer needed to support that now-unprofitable business. In more serious cases, it can be necessary to take a knife to the bad-quality periphery of the business. This may mean shutting down whole segments of customers, discontinuing whole classes of products or services, closing down associated capacity and shutting operations in marginal regions.

This can be scarey. When sales are down because of tough market conditions, it’s bold to cut business still further, which is why management is often reluctant and goes for the ‘cuts across the board’ approach. However, pulling back to a healthy core of customers, products, channels, and operating units can substantially improve profits, even while revenues are cut. Much more important, though, is that this change puts the system back to a state where it can develop strongly into the future once again – rather as a gardener prunes weaker branches back so a plant’s energy is focused on the stronger limbs, management is pruning the weak activities that are dragging back the whole business so that remaining resources can start working again.

Really smart strategic management, of course, anticipates the risk of creating this problem in the first place, and avoids it by more thoughtful expansion efforts in the good times.

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Comments

  1. John A Thich  November 23, 2008

    It seems that it is more the norm than the exception that in hard times, businesses simply use a machete to cut costs, investments etc…Why is this? The only answer I come up with is that top management in many companies today are no longer doing what they are supposed to do…take the long view. I see this financial crisis as an opportunity for businesses to re-engineer themselves internally and in their markets and position themselves for the post crisis period. Those that do will emerge much stronger…those that don’t…well more of the same if not worse.

    I have enjoyed reading your work.

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  2. Nikos K. Kokkalakis  November 23, 2008

    We see a lot of companies now reaching for ‘across the board’ cuts (i.e. retreats). This may provide more discerning competitors with opportunities for, yes, ‘land grab’. Customers and segments that are marginal for one may become profitable for another –if left undefended.

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