Dodging the virus, surviving the recession, and thriving in the future

Managers are facing a tremendous challenge in setting business strategies for present and post COVID-19 business recovery given the current economic and market environment. The change from level five to level four has in no way quelled the uncertainty and turbulence that is at the order of the day and it is unclear how the government will manage the rest of the incremental untangling of lockdown. Sales are down or in some cases still prohibited and consumers are paranoid, hanging onto their cash if they have any to hang onto. Sales projections for the foreseeable future have become obsolete. Businesses must find a way to sell to usually loyal customers who are continuously altering their buying behaviour, constrained by regulations and financial means. Suppliers want to re-negotiate their contracts as they experience severe liquidity pressure themselves. All this, while colleagues are trying to figure out how to work from home, learning to cope with new software to keep up with their work. Not only facing the uncertain world of virtual meetings and stressed out bosses but trying to keep up morale and productivity with the looming anxiety over possibly losing their jobs. 

The drastic economic decline may have been because of an unprecedented situation, but it is not a new element in the country’s financial cycle. A recession is a period of economic contraction (Chappelow, 2020), meaning that, “What goes up must come down.” A recession should therefore be treated like the short-term problem it is. The most important part of the financial recovery strategy will be to exploit the opportunity to prepare for the impending economic upswing.

Key steps in the recovery strategy process:

1.      Do a thorough and realistic assessment of the business’ action framework.

2.      Evaluate the economic environment within which the company operates based on the expected depth and duration of the economic down swing.

3.      Identify the appropriate recovery strategy with focus areas.

4.      Prepare for the upswing while surviving the dip.

 1. Do a thorough and realistic assessment of the business’ action framework

 A recession provides a unique opportunity to take a very realistic view on the competitive strength of the enterprise. This will essentially determine the firm’s strategic options in surviving the downturn and preparing for the upswing, with strong cash flows from well-defined and understood market niches, increasingly efficient cost structures, continuous quality improvement and increasing sales offering the ultimate competitive advantage. The action framework for an enterprise is defined by the strength of the:

• Balance sheet.
• Cash flow/liquidity.
• Industry leading margins based on:

Cost structure efficiency and leadership

Superior technology

Processes defined by continuous improvement

• Diversification in:

Products and markets; and

Distribution channels

 The financial department should pro-actively build predictive models to stress test the impact of different scenarios on financial projections, capital needs, liquidity, and cash flow. Management can use these models in conjunction with “what- if” analysis to evaluate the impact of their decisions on the health of the enterprise.

 Use this opportunity to investigate the product portfolio and distribution portfolio intensively. Investigate the market share growth and profitability of each product and channel combination. The BCG framework is a great tool to consider the cows, dogs, stars, and question marks in your portfolio.

This review will be used to create focus and redirect resources to build the best channel product combination for future business. Consider how consumers are responding to the changing economic conditions in terms of their spending habits, channels of choice and buying up or down? There may even be an opportunity to introduce a new product that will thrive in the current market. The most important part of this analysis is to understand changes in consumer behaviour to guide informed strategic responses.

 2. Take a view on the economic environment within which the company operates based on the expected depth and duration of economic down swing

 The short and medium-term economic environment within which businesses will operate is expressed in two dimensions namely; the duration and the depth of the COVID-19 pandemic. The duration of the impact on economic activity is determined by two interlinked elements; the characteristics of the virus which includes transmission, mortality and a possible vaccine and public health responses such as social distancing, lockdowns and restrictions on physical interaction, movement and public mobility.

The depth of the impact on economic activity is driven by the magnitude of the liquidity removal from the economy versus the speed and effectiveness of governmental fiscal and monetary policy to counter the impact of the liquidity crisis. The most pervasive factor in the new economic environment will be the changes in consumer behaviour towards products and channels because of changing perceptions and their own liquidity constraints

 These two dimensions can potentially result in the following scenarios applicable to businesses and, within businesses, products and distribution channels.

Considering the education sector where online training is booming and face to face contact is restricted, it is evident that products and channels in a business will experience different scenarios and even new initiatives that can be capitalised on. It is important to not remain stagnant but to pro-actively adapt to the new economic environment.

  3. Identify the appropriate recovery strategy with focus areas

 The strategic response to the economic downturn will primarily be affected in two dimensions namely, cost restructuring and business transformation. In a short-lived economic recession, the business will respond by cutting down on discretionary costs and holding back on planned capital expenditure. As soon as economic activity resumes, the businesses will continue with this expenditure. In contrast, when the economic downturn is long-lived, businesses will have to respond by changing their cost structures. A deep economic impact or recession will change the way the economy works as consumers adjust their spending habits and behaviours and create a new business environment. Businesses will have to innovate and incubate new business models to respond to these emerging consumer trends.

 Business leaders should consider these strategic categories as a continuum of strategic options that could prompt revolutionary transformation of the business model, redesigning the operational model, capitalising on strategic advantage to selectively grow market share at the cost of less prepared competitors or simply seeing through a short-lived dip. The action framework created in the first step will delineate and guide the potential manoeuvring space for the business. Keep in mind that individual business units will find themselves in different market and economic realities and different strategies will therefore apply.

 4. Prepare for the upswing while surviving the dip

 The core of the recovery strategy is to ensure that there is cash available to do the important job. Managers must redirect focus by cutting money from the less important and reallocating savings to what is crucial in building the future of the business. The yin and yang of this step, relocating resources, is one of the most challenging things to do in a big business. This is the time to rally around the term, “Do not let a good crisis go to waste.” The wise business leader will use this opportunity to refocus resources that will, in normal circumstances, result in long, unresolved meetings and internal politicking as colleagues defend pet projects and investments in managerial egos. 

 Thoughts on cost cutting:

Cost cutting is an inevitable responsibility in any turnaround situation. Management will have to find the money for optimising, redesigning, and transforming the business and it is unlikely to come from any external source during an economic downturn.

Cut from the top to the bottom. Cost cutting exercises are usually conceptualised by management, head office and support units and it is therefore not surprising that most cost cutting initiatives do not affect these groups to the same extent. Conventional wisdom dictates that one can slash costs by 15-20% without negatively affecting product quality and service levels, but these cost cutting opportunities do not present themselves in the operational departments. These costs are hidden in discretionary spending (the forklift called 'entertainment fees'), narrow spans of control - one on one reporting structures, etc. Specialists in support departments can typically continue or even improve their work output without their work being reviewed by a supervisor. There is no logic in appointing an expert and then appointing another expert to check the expert. Look at how far units of the organisation are removed from the customer. 

 Help managers shift the perceived definition of fixed vs variable and discretionary vs non-discretionary spending. We are human and we use pre-conceived ideas or bias to speed up our decision-making processes. These biases turn into assumptions that discretionary costs are non-discretionary. Help managers to outsmart their biases by giving them an outside perspective as it is incredibly difficult to see your own bias.

 Other ways to save costs and increase liquidity are to tighten credit and collections, reduce inventory, renegotiate terms with suppliers, renegotiate leases, defer capital expenditure and projects and workforce management.

 The following key points will probably require careful consideration:

Trade credit - One of the first suggestions during an economic downturn is to extend more favourable trading terms to cash constrained customers. This leads to a reduction in liquidity and cash availability, increased pressure on collections and exposing your business to increased credit risk especially given that you are aware that customers will be less likely to have the financial means to settle their accounts. 

Marketing budget - The saying goes that 50% of marketing spent is wasted, the challenge is to figure out what this 50% is comprised of. A strong business can extend its consumer share of mind in a time where other competitors cannot afford the same marketing expenditure. The business will have to be in a strong position to do this though. The key is to focus spending on the most profitable product and channel combinations, anticipating and encouraging consumers as they change their spending habits to optimise the marketing budget.

Discounts and the race to the bottom - The first thing the sales team will suggest is to reduce prices or increase discounts to keep up with aggressive competitors. The key is to maintain margins by reducing costs along with price reductions or discounts. The worst-case scenario is to end up in a death spiral race to the bottom with competitors. The best strategy in such a situation is to selectively yield your unprofitable customers, products, or channels to allow aggressive competitors to drink more from the poisoned chalice of selling lower than cost. You will have to know your costing and customers very well to be able to execute this strategy.

 Opportunistic strategies

Liquidity is the greatest source of power in a downturn. A business with cash at its disposal can grow their market share by launching new products, pro-actively investing in R&D while competitors cannot afford to do the same, and by reducing prices to squeeze out competitors with higher cost margins. Well prepared business leaders will be in a good position to capitalise on a once in a career opportunity to acquire new businesses, technology, patents, property, and other significant assets which are near impossible to acquire in more favourable conditions. 

 Foundation for the future

 Diversification, cost efficiencies, margins, superior technology, continuous improvement in costing and quality processes and sales growth are the basis for long-term competitiveness. Only a well-prepared business and a well-prepared leader will be able to execute opportunistic strategies during economic downturns and come out stronger on the other side. Exceptional leaders manage with the next recession in mind by ensuring that the company builds a portfolio of well-focused niche markets and distribution channels that deliver healthy cash flows based on customer loyalty engendered by continuously improving product quality or service excellence.