15 Jun 10 Waiting for change

My proposition has always been that it is the period after a recession that is most relevant for business strategy. Typically, changes in, for example, consumer behaviour that we witness during the recession are merely short-term reactions.

The time to get out and find out how customers’ needs are more permanently changing is after the recession. In the past I have predicted at least two waves of permanent change in customers’ needs and behaviours during the months and years after the official end of the recession. The first change being the realisation that we are not returning to the pre-recession halcyon days of debt-fuelled growth, the second wave taking place when the macro economic structure of countries (such as the highly financial services dependent UK) changes, again to reflect the new reality.

Recent research[1] tells us that this first post-recession wave of change has not yet started. This survey reveals that under 1 in 4 (23%) feel that the UK’s government’s impending austerity measures will affect them. So a surprise is in store for many.

It is also the time for astute businesses to identify the emerging needs and behaviours that may shape business strategy for the next decade.

Reference
[1] Eaglesham, J Pain message yet to be heard, says poll. Financial Times. June 14, 2010

Tags: business strategy, consumer behaviour, customers needs

27 Mar 09 Navigating the Recession: The waves of change

A clear point emanating from my earlier posts and, importantly, discussions with business managers and leaders is that we cannot afford just to “sit this one out” and expect the business world (and in fact the world in general) to be in exactly the same shape as it was before when this recession comes to an end.  It is becoming clear now that we are at the threshold of a new world and things will be very different.  The recession scenarios provide us with a mechanism to see what the new worlds could look like, but in this post I would like to start to explore what the process of transition to the new world itself might look like.  When looking at the transition process, I will adopt the perspective of your businesses customers and clients, in other words the phases of change that your clients and customers will go through.

In this post I am going to put forward a proposition for debate that as we go through this journey from recession to recovery there will be multiple behavioural and structural shifts to look out for.  Each will provide challenges but also, and more importantly, will provide new opportunities for your business.  I will describe 5 of these waves of change in this post.  Remember that some will run sequentially and that some will run concurrently.

Phase 1:  Shock and Horror.

Whilst there was some talk about 24 months ago of an impending economic “blipage”, nobody thought it would ever be this bad.  The accepted thinking appeared to be at worst that we would have say a slowdown period of 12 months and then we would get back to growing in a predictable world.  Nobody thought that capitalism might be brought to its knees.  Therefore, when the news broke last year – particularly when Lehman Brothers went down on 15 September – we were all thrown into a state of shock.  It was as if the bottom of our worlds had been pulled away.  A good way of looking at this is to think about that old, but classic, motivation model Maslow’s Hierarchy of Needs.  It was as if the bottom layers, the foundations, had been stolen.  For this reason, people and organisations act a little irrationally during this first phase.  As security is threatened, we need to do something to protect ourselves and this usually means making immediate cost-cutting decisions many of which might not be in the long-term interest of either the individual or the business.  In shock there is the over-riding desire to do just something.  An example is that 74% of Americans intend to cut back on eating out and entertainment [1].

So this is where we are now. In an irrational period.  From a business perspective, it is a period to make temporary adjustments to match these new behavioural patterns.  But it certainly is not the time to make long-term irreversible decisions.  As I try to show in the first illustration below, this is a temporary phase.

And my guess is that we will come to the end of this phase in late 2009.

Phase 2:  Acceptance

Phase 2 is important for three reasons.

1. It represents almost certainly a longer period than the first phase.
2. It is the period when customers adjust to accept the fact that we are (probably) in for the long haul.  Expect therefore more reasoned decision making that will hold for the medium term.
3. During this period the behaviours of Generation Y (the children of the “baby boomers”, Generation X) will be shaped permanently.  Remember that in the last real downturn, Generation Y would have been in nappies (diapers).  What they see and feel during this period will have a permanent impact.  It is the first time that their world will have been shaken and their beliefs and assumptions challenged.  Long-term behavioural changes will appear, such as a move away from external, tangible displays of wealth.

At the time of writing this entry I would say that we are just about to enter this phase – a phase that may last for 3 or more years, but as I show in this second illustration, the impact is far more permanent.

Phase 3:  Emergence

At some point the stimulus packages and measures that are now being put in place will bear fruit.  Confidence will be restored.  Demand will increase.  New demands and needs will appear, but these will have been materially shaped by experiences (that are now largely unknown) that will have occurred during phase 2 – Acceptance.  New customer segments will appear. But the effect may not be so dramatic in the long-term in terms of customer needs.

Phase 4:  Restructuring

I opened this post by saying that we can’t just sit this one out.  One of my propositions is that certain developed economies need to undergo second order macro economic changes.  The UK is a good case in point as I have observed earlier with its near 22% of employment in financial services.  These macro economic changes should produce new opportunities and needs to meet as new employment champions appear – just as financial services did in the early 1980s when manufacturing went into decline, at least here in the UK.  This phase, as new employment sectors appear, will be more permanent in its impact.

The first 4 waves of change are all shown with a subjective view of their period of influence in the illustration below:

Phase 5:  New Influencers

Here we go out into the medium to long-term, beyond the illustration above.  And I have in mind 3 to 10 years out from now.  During this period the winning BRICs (the emerging economies of Brazil, Russia, India and China – if any of them do make it) will really have the position to reshape both the business world and capitalism itself.  The mechanism to do this (G20) is already being put in place and remember that by 2019 China could control 13% of the world’s banking system and 16% of the global stock markets[2].

Conclusion

So now is not a time to sit back and wait – it is a time to sense, inter-act with customers and learn.  I propose that our customers will go through 4 – 5 waves or phases of change.  Of these 2 will probably have a permanent impact.  The first of these is the “Generation Y” effect within  Phase 2:  Acceptance. Here, attitudes and behaviours could be shaped for a lifetime.  Finally, the second phase to have a permanent impact is Phase 4: Restructuring when new (as yet unidentified) employment sectors emerge.

So now is the time to sense and explore these proposed waves of change.  Before your competitors do.

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[1] The Daily Stat. Harvard Business Publishing. April 1, 2009

[2] DB Research (2009) China’s financial markets: A future global force? March 16

Tags: business strategy, capitalism, customer strategy, economic recession, lehman brothers, marketing strategy, recession, scenarios

25 Feb 09 Recession: Looking for stress points

In my last posting Davos 2009, Recession and Business Strategy: Quo Vadis? I included some straightforward questions to start the process of “stress testing” your business strategy.  In this posting I would like to explore the issue of “Stress” from a different perspective, which has a distinctly human element.

Unfortunately all the dials (or most of them) are pointing to a period of prolonged economic recession.  And we cannot be sure, with any degree certainty, what the post recession world will look like. As I explain in my recession scenarios,we could face four completely different worlds.

This means, probably for the first time in our lives, that we will have to live through a period of extended business and strategic ambiguity.  Some observers tell us that we are entering a depression that could last for up to 10 years.

We know too little, from both strategy and human perspectives, of what the challenges are for living and managing in a such a period of extended ambiguity.  Together with my colleagues, I am interested in exploring further the strategic and psychological implications both of this economic downturn and the prospect of a long period of “strategic ambiguity”.

I would therefore be grateful if you could spare a few minutes to complete the following survey.  It can be completed anonymously and only the aggregated findings will be published.  The results will help us to gain a deeper understanding of the challenges that we face. To participate, please click on the button below.

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Tags: business strategy, economic downturn, economic recession, human perspectives, survey

11 Feb 09 Davos 2009, Recession and Business Strategy: Quo Vadis?

Davos: Are the muddied waters clearer? [Updated 25 February 2009]

I thought that I would save my next blog entry on the strategy implications of economic recession until the conclusions of the World Economic Forum meeting in Davos emerged.

I wanted to use the output from Davos to review my trajectory of change, introduced in the 23rd January blog entry.  Regular readers will know that I have produced four scenarios that, I feel, encompass the broad range of futures that lie ahead of us in the current financial crisis. These scenarios were introduced in my Executive Briefing 2009: Signposts to where? and you can download the full working paper here, after registering, which is incidentally regularly updated as we progress along the bumpy road that is the future.  I have released the latest version on 25th February which includes more implications in respect of recession and business strategy that should, I feel, be debated at senior management and board levels.

The scenarios are reproduced again below:

The scenarios are driven by two forces that act along a continuum. Running from north to south we have the degree of global co-operation that actually appears to solve the current crisis, and running west to east we have industry contagion, broadly how far the crisis creeps out from the banking sector to infect other industries.  The fate of GM and particularly Chrysler is a good example of “industry contagion”.

My last trajectory of change proposition (published on 23rd  January) is shown below:

Looking at Davos and associated events (including the latest losses in the UK banking sector), it is clear that we are now standing at the edge of, or starting to wade into, the River Rubicon. The Rubicon is the divide between the two left hand scenarios (Focused Change and Globalization Ahead) which imply a relatively quick economic recovery and the two on the right Capitalism II and The Jigsaw – that imply a deeper, longer economic recession. We currently have two views on how wide the Rubicon really is. The IMF has scaled down its 2009 forecast for world economic growth from 2.2% to 0.5%. However the IMF is in the (relatively) optimistic camp, forecasting a significant turnaround in 2010 with even the UK moving into positive growth[1]. In the other camp, we have the view that we are in for a longer slump[2], [3] supported by the prospect of more bad news from the banking sector[4]. There is growing evidence that this may be the case, with some arguing that the UK is positioned to experience the great depression[5]. The view, that we are in for a long-term recession, has received some support with the Bank of England’s 11th February announcement that the UK’s economy will probably shrink by 4% year on year in quarter 2 2009.

Possibly the bad news is being fed to us in reasonably digestible doses?

We can also see the first troublesome shoots of protectionism from workers’ protests in the UK to the Buy American content of the American Recovery and Reinvestment Act[6], [7], [8].

These observations, coupled with continued ambiguity of the level of global co-operation emerging from Davos[9],[10], has led me to the rather unfortunate conclusion that we may be heading broadly towards The Jigsaw as an outcome scenario. I have updated my trajectory of change as shown below and you can see that I have added a broad landing zone:

So what does this mean for strategy?
It is still too soon to judge with any certainty what the outcome will be. As described in my working paper, we need to experience the world’s reaction to one or more shaping events to know where our ultimate destination will be. This means that we have to consider seriously what life will be like in both Capitalism II and The Jigsaw.

However, at least one action is on the immediate agenda and that is to consider the impact of a prolonged economic downturn and I’m talking about a period of negative or very low levels of economic growth over a 3 to 5 year period within the developed economies. Just going back 12 to 18 months, many organisations had formed their strategies on the assumption that the developed economies would suffer a brief, 12 month period of shallow growth or stagnation. Pinning one’s hopes on such an outlook now looks surprisingly shaky.

We now have to look at how watertight our boat is to cross the Rubicon, a journey that could take 3 to 5 years.

This means that you should consider stress testing your business strategy.

To start, consider these questions:

Issue #1: Core Customer Resilience: In a prolonged recession how resilient will your core, most profitable customers be? Will geographic differences emerge? What leading indicators of resilience can you put in place? Will you have to consider a new, more resilient customer group to focus on?

Issue #2: Customer Needs: Do you anticipate that your customers’ needs will change as we progress through an extended downturn? What are the implications for your products and services? Remember that currently most consumers and organisations too are just entering the initial shock phase. Their medium to longer-term buying behaviours will not yet have emerged. So you will have to be particularly adept at tracking changes. It could be that your customers’ needs will move through four cycles of change:

(a) Shock as customers face the reality of a protracted period of contraction, an experience that many will not have experienced before. Expect short-term, knee jerk decisions.

(b) Adjustment as customers change, after a period of reflection, both their businesses and lives to the new reality.

(c) Recovery as national stimulus programmes start to bite and

(d) Emergence as customers adjust to the new employment and economic landscape (to use my scenarios – life in The Jigsaw or Capitalism II). This observation, especially for the UK,  is based on the view that ultimately a new employment white knight will appear to fill that gap left by a reduced financial services sector.

Issue #3: Distributors: If there are others in the supply chain between you and the customer the final user of your product or service how well positioned are they to survive the onslaught? Do they need additional help from you? Should you consider other channels? Will, for example, Internet based distribution enjoy a further boost if customers look for a cheaper alternative?

Issue #4: Suppliers: Again, how resilient are your suppliers? Can they help you to keep up with changing demands from your current customers? Can they support you if you focus upon a new sector?

These are just four introductory questions to start the process of recession testing your strategy or seeing how watertight the boat is for a long distance river crossing.

But this only covers how we get across waters of the Rubicon. I will explore what the land looks like on the other side in later postings.

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References:
[1] IMF World Economic Outlook (WEO) Update — Global Economic Slump Challenges Policies, January 2009, International Monetary Fund, Jan. 2009.
[2] M. Wolf, Why Obama’s new Tarp will fail to rescue the banks, FT.com, Feb. 2009.
[3] P. Boone and S. Johnson, “Speeches, Testimony, Papers: Baseline Scenario, February 2009, Peterson Institute, Feb. 2009.
[4] Roubini: Anglo-Saxon model has failed, FT.com, Feb. 2009.
[5] N. Walayat, UK Recession Watch- Britain’s Great Depression?, Global Research.ca, Feb. 2009.
[6] G. Rachman, When globalisation goes into reverse., Financial Times, Feb. 2009, p. 13.
[7] G.C. Hufbauer and J. Schott, POLICY BRIEF 09-2: Buy American: Bad for Jobs, Worse for Reputation, Peterson Institute, Feb. 2009.
[8] E. Prasad, Buy American?: Global Considerations for the Proposed Stimulus Plan Clause, Brookings, Feb. 2009.
[9] C. Giles, P. Larsen, and G. Tett, Lack of inspiration unites Davos delegates, FT.com, Feb. 2009.
[10] A. Edgecliffe-Johnson, No consensus on restoring trust in business, FT.com, Feb. 2009.

Tags: business strategy, economic recession, economic recovery, marketing strategy, recession, scenarios, slump, world economic forum

23 Jan 09 Recession and Strategy: Tracking the path to a new world.

In my January 2009 Executive Briefing I argue that we are dealing with far more than a recession.  We are on the edge of a tipping point where the business world will probably undergo the biggest shift that we will witness in our lifetimes.

If we thought that in the mid 1990s the emergence of the Internet was a tipping point for business strategy, then what we will witness is a wholesale earthquake.

My position is that the current recession (in the developed economies) and slowdown (in the emerging economies) is not the end game.  The recession is a catalyst to a new world.  The twist is that nobody knows for sure what the new world looks like.  If you read the above briefing you will see that I put forward four different scenarios or snapshots of what the new world could look like:

Broadly, the two scenarios on the left assume a relatively short recessionary period and we then return to life very much as it was back in 2007. In “Focused Change” we see some new regulatory activity to reduce the systemic risk in the banking sector. In “Globalisation Ahead” we see the BRICs (the emergent economies of Brazil, Russia, India, China) emerging to take a dominant role on the world stage – China and India in particular win through.  However, even these two optimistic scenarios have their downsides for developed economies.  For example, this recession has brought under the spotlight the fragility of financial services led economies (like the UK’s).  Even in the optimistic scenarios these sectors shrink – so what will fill the employment gap?

The two scenarios on the right are even more challenging and assume a further banking crisis and failure in a major employment sector – e.g. automobile manufacturing.  The outcomes could go two ways – globalisation does continue but the emerging economies assume a position of global influence faster than has been previously envisaged.  The result could be the decline of the primarily US led definitions of “Capitalism”.  New views appear as to which is the “best way”.  In “The Jigsaw”, the final scenario, we see the emergence of protectionism and effectively the death of globalisation.

I use two shaping events to track the possible trajectory of change – where we are going – industry contagion and global co-operation.  Using views on where these shaping events are going, we can form an indicative view of where the world is going.  My personal view is shown below and it can be seen that we may be rapidly approaching the Rubicon, or the point of no return:

I will be continuing to track and comment upon the trajectory of change in this blog.  If you would like to received the underlying working paper describing these propositions in more detail please click here.

Tags: banking crisis, business strategy, emerging economies, globalisation, recession, recession strategy, scenarios

22 Dec 08 Recession Survival: Industry Contagion, Structural Change and Business Strategy

Structural Change

My last two entries introduced the challenge of structural change. I have drawn attention to the fact that recessions don’t just mean a period of economic contraction, they also bring the prospect of economic restructuring. And economic restructuring has fundamental implications for business strategy.

I used financial services in the UK as my example. To recap, in the late 1970s manufacturing employed over 25% of the workforce. This figure is now around 10% (and reports are that it will now take a further hammering). Fortunately, financial services came to the rescue in the 1980s and created jobs that swelled this sector to take eventually 21% of the workforce – up from 10% in the late 1970s.

That was good then.

But having an economy dominated by financial services could be bad now.

I have already pointed in earlier posts to at least two reasons why financial services won’t bounce back. One of these is regulation. It is clear from the action plan that emerged from November’s inaugural G20 summit that the blame for the current recession is being laid squarely at the feet of the financial services sectors of the world’s advanced economies. The G20 action plan focuses upon establishing a global regulatory framework that will prevent another financial services led implosion. And that regulation may restrict innovation and therefore future sector growth prospects.

But this leads us to another problem. And it’s particularly a UK problem.

I have been considering for about two years now the long-term viability of services led economies. My theory is that as manufacturing drifted towards the emerged and emerging economies so eventually would services. Indeed, there is the argument that entry barriers to services would fall as the educational capability of the newly emerged economies increased. Certainly, there is evidence that the newly emerged economies, and China in particular, will focus upon developing its own service sector capabilities to swell indigenous employment. In so doing it is reasonable for it to acquire, through acquisition, the intellectual knowledge held in the advanced economies. And as we have learnt through financial services offshoring, employees do not necessarily have to be located within the countries where the service is delivered.  These factors could dampen the resurgence, from an employment perspective, of financial services in the UK and other advanced economies.

Now, there is a related message from others calling for first order macroeconomic adjustment in the UK[1]. Broadly, the view is that financial services based economies are just too volatile. Essentially, to ensure stability the advanced economies should go back to the past and focus on re-establishing manufacturing, retail and healthcare sectors. Interestingly, some quarters[2] are calling upon President-elect Obama to move resources out of financial services into the “real” sectors of technology and manufacturing.

Industrial Contagion

Whether of not we see this type of economic restructuring depends upon a number of factors, one of the most important of which I will refer to as industrial contagion. By industrial contagion I mean the appearance of the corporate liquidity domino effect – the need for nationally funded corporate bail outs spreading from banking and financial services into other industry sectors.

And there is of course one sector already on the brink -automobile manufacturers and their component suppliers. If the support announced and mooted over the three days 19 21 December fails to stop the big US auto manufacturers collapsing (or only ensures a slow lingering death) then the whole question of the industrial structure of advanced economies will come under the main spotlight. For collapse of the big auto manufacturers in the US will bring almost unprecedented levels of human suffering in the US and beyond.

Over 3m unemployed and unemployment in some US states being pushed up by nearly 9%[3].

This is the type of event that can, and probably will, redefine both industry structures and the role of private enterprise in society.

So industry contagion is a leading indicator of structural change in advanced economies and, regrettably, the appearance of and “L” shaped, and not as hoped for a short-lived “V” shaped downturn.

Business Strategy

What has this to do with business strategy?

Everything probably.

It means that if we do enter an “L” shaped recession when we come out of it chances are that your target customers – whether consumer or business – will look and behave completely differently.

This could also herald an era where the balance of power starts to shift away from the boardroom towards governments, regulators and of course the new shareholder, the public.

It may also bring to end the view that businesses should be driven just to maximise shareholder value. It seems likely that contribution to a broader social agenda will sit alongside profit generation in organisations future balanced scorecards.

Therefore, we should now be using industry contagion not just to judge the shape of the downturn but more importantly how capitalism could change.

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Information Sources

[1] S. Johnson, P. Boone, and J. Kwak, “Get Ready for an L-Shaped Slump,”

Peterson Institute: Real Time Economic Issues Watch, Dec. 2008;

http://www.petersoninstitute.org/realtime/?p=330.

[2] P. Boone, S. Johnson, and J. Kwak, “Op-ed: An Economic Strategy for Mr.

Obama,” Peterson Institute, Nov. 2008;

http://www.petersoninstitute.org/publications/opeds/oped.cfm?ResearchID=1046.

[3] R. Scott, “Automaker bankruptcies would cost up to 3.3 million U.S. jobs,”

Economic Policy Institute, Dec. 2008;

http://www.epi.org/content.cfm/webfeatures_snapshots_20081217.

Tags: business strategy, economic contraction, economic restructuring, g20 summit, recession, strategy

18 Nov 08 Recession and Strategy: The first unfortunate signs of structural change.

The news on Monday 17th November that Citigroup was to shed 52,000 jobs, in addition to the 23,000 announced earlier this year is an upsetting indicator that the type of structural change described in my previous posting Recession and Strategy:  The old questions don’t work anymore is upon us.  Reports say the Citigroup will be left with some 300,000 employees indicating that as a result of a financial services led recession 1 in 5 employees will have lost their jobs – on the scale reported in the above posting.

This puts one very serious question onto the strategic agenda:

“Which industry sectors will expand to provide the employment shed by the financial services sector and how will this shift impact our products and targets markets?”

A question that is difficult to answer but that cannot be ignored.

Information Source:

Guerrera, F (2008) Citi cuts 52,000 more jobs Financial Times November 17.

Tags: business strategy, financial services sector, industry sectors, recession

17 May 08 Strategy and Innovation: Learning from experimentation and failure

One of the key changes in the world of strategy making is predictability or should I say the lack of it.

A quick scan of just one issue of the Financial Times will reveal trends and developments that you may not have been aware of just 12 months ago. Take the 25th April edition for example which included:

· The prospect of a long-term recession led by failings in the financial sector.
· Capital rationing.
· Global food shortages.
· Doubts over the wisdom of turning to biofuels as an alternative to fossil fuels.
· Diversity and fragmenting consumer values.
· Ever shortening product life cycles especially in the consumer electronics sector.
· The rise of national protectionism in the face of the new acquisitive kid on the block – “sovereign wealth fund”.
· The rise of anti-Western sentiments in China with Western brands taking the brunt.
· The prospect of a new wave of increased and possibly Draconian regulation.
· Question marks regarding the financial solidity of banks that we have long accepted as cornerstones of a profit focused economic system.

The fact is, the world is too unpredictable to risk your company’s future on the annual planning process. More companies are using experimentation to continuously learn more about developments in the outside world and use this knowledge to continuously craft and hone their strategies.

The news that Qualcomm (they make the computer chips that are inside your mobile phones) has bought a segment of the radio spectrum in the UK is a good example. The idea is to use this purchase to experiment and develop TV and movie streaming directly to the next generation of mobile devices. Virgin Mobile was the first to try to do this but their handsets weren’t apparently that convenient and channel coverage was limited. So the Virgin offering did not offer convenience – a key lesson from the Sony – Toshiba HD DVD wars (see my analysis here ). It looks as if Qualcomm has learnt from the experiences of the first mover and is setting up a framework for learning.

Bad news for those whose business depends on selling or renting out DVD disks. Remember those black vinyl spinning things that we used for music?

Tags: business strategy, first mover, innovation strategy

13 Feb 08 Thoughts of Recession: Before you cut the costs

Sunday’s business section of The Sunday Times fell open to the headline ‘Britain facing huge job losses’. Suddenly breakfast didn’t seem so palatable and indigestion loomed. Apparently, the latest research amongst employers reveals that 38% – very nearly 2 in 5 – plan redundancies over the next 3 months.

The point that I’ve made in earlier blogs is not to let the spectre of a recession become a self-fulfilling prophecy at least at the level of your firm or organisation. My argument is that recessionary times are periods when the primary question for management is not limited to cost cutting – but how can we be more innovative and more flexible. After all, a recession is a period of economic re-adjustment – the engine has overheated. But the engine will return to normal operating temperature (unless the entire capitalist system collapses) and your firm must remain in a fit state with a strong market position whilst others engines seize up and fail. The position that I take is rather than entering a period of management depression we should consider what opportunities a more challenging climate may provide.

Looking back over some earlier Executive Briefings together with experiences from recessionary periods in the 1980s and early 1990s, there appear to be some clear dos and don’ts if a recession really does become a reality.

Some of these dos and don’ts might apply to your business:

(1) Don’t think that a recession means that you can’t grow your business. Research tells us that firms do grow their businesses and in fact new sector leaders can and do appear during a recession. So instead of a time for retrenchment and inwards thinking, it is a time for planning possibly to take sector leadership whilst others adopt a more negative and potentially inwards looking focal point. If you are a sector leader the clear challenge is how to defend that position as there may be others chasing your tail. In short, the new sector leaders may appear and excel at a balance of organic growth and M & A activity in times of a recession.

(2) Costs are important when times are tough and we cannot hide from that. The critical questions however can also include:

• What is our minimum critical size?
• How can we increase the flexibility of our cost base? For many, particularly the sector that I grew up in – insurance – Web technologies should have transformed the cost base of the organization – and provided the means to reach an increasingly flexible or recession resilient cost base.
• What is our exposure to ‘frictional costs‘? I raised the issue of ‘frictional costs‘ in an earlier Executive Briefing – Strategic Reinvention – Asking the right questions. To understand and excise frictional costs you have to understand the value chain – those activities that should, eventually, produce value for the final customer and stakeholders. It helps to have an idea of these activities, their costs and benefits across the entire value chain from first supplier to final customer – not just those activities within your firm – although that is a good place to start. Look for activities that are duplicated – either within your firm or elsewhere in the value chain. Then look for activities or cost structures that once were the bedrock of value creation but that now or in the future might not add real value. Technology has been a powerful force in redefining what are either strategic assets or strategic millstones. What was the bedrock of value creation may in a couple of years be no longer. As the online retailer Amazon has demonstrated, what was once a very necessary strategic bedrock or cost base – physical bookstores – can be turned into a strategic nightmare.

(3) Do consider how you can improve your firm’s ability to broaden the scope of its products and the customer base that it serves. Whilst in times of distress there may be some cut price acquisition bargains out there, and successful firms are good at picking up such bargains, recessionary periods are times to ‘get innovative or get dead’ to borrow one of Tom Peter’s expressions. In short, we need to protect and develop our innovative capability to broaden the customer segments that we serve and the scope of our products. And that means understanding the ‘innovation trail’ or how your firm innovates or should innovate from ideas through to finished products and offerings. In many cases, the best ideas are generated through customer contact and dialogue so consider how these processes can be improved. If you are thinking about outsourcing – which can be an effective route to minimizing critical size – be careful to protect your innovation trail – don’t outsource and lose control over it. Have a look at my briefings dealing with BPO and outsourcing problems. Recession is time to think about getting closer to your customers.

(4) When cutting costs or downsizing be careful to protect the firm’s memory or experience. This is a personal hobby horse of mine so apologies to those of you who have heard it all before. In an earlier decade when downsizing or ‘rightsizing’ first reared its head, delayering or getting rid of middle management was popular. What after all did all those people do? Well, many firms found out the hard way. Some of those people in ‘middle management’ held the firm’s memory, knowledge and experience of past years of organic growth. They had the ‘how to’ knowledge that others might not have had. Just the experience that you might need over the next couple of years. Remember getting good at just cutting costs won’t ensure your firm’s long-term survival – losing the competences to grow organically was one of the key unexpected side effects of the last decade’s downsizing efforts.

So to sum up the question isn’t just:

How can we cut costs the quickest?

But possibly a series of challenges:

(a) How can we reduce the minimum critical size of our operation?
(b) How can we increase the flexibility and therefore resilience of our expense profile?
(c) How can we maximise the efficiency of our innovation trail to take market leadership through organic growth?
(d) How can we protect and redeploy our firm’s memory in new markets and new product areas?

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Tags: business strategy, cost cutting, downsizing, organic growth, recession, redundancy, retrenchment