23 Jul 08 Recession – A business survival guide (Part 2 – The “Aldi Effect”)

In earlier blogs I have argued that in a recession one must not “shoot the usual suspects”. By “shooting the usual suspects” I mean across the board cost cutting in areas such as sales, marketing and new product development.

My point is that during a recession a firm that wishes to survive and grow needs a greater capacity for innovation than in the times of economic buoyancy. The fact is that your customers’ needs and/or buying habits will change during an economic downturn.

One of the central challenges for business leaders during a recession is to at least retain customers. Getting new customers is usually an expensive process. One scenario to avoid is the loss of hard-won customers to competitors that can keep up with changing demand patterns better than you can – winning back those lost customers after a recession has ended may be a harder job than you imagine.

In the UK we already have several examples of this shift in customers’ needs and buying habits. The retailer Marks and Spencer has been hit with a fall in demand for food products.  One of its core offerings are luxury ready cooked chilled meals.  The problem is that customers are re-evaluating their spending patterns and substituting cheaper, more basic ready meals or even doing the cooking themselves form raw ingredients!  The problem for Marks and Spencer is that their competitors are probably better placed to meet this demand shift.  Customers are now spending 20% more at Aldi and Aldi aims to retain its newly found customers.  A similar story can be found in the takeaway meals sector where Domino’s – the pizza chain – has noticed that whilst sales to established customers are falling, sales to new customers have risen by around 20% as consumers opt for a takeaway instead of that expensive restaurant meal.

The central message is that the “Aldi Effect” – customers’ changing needs and buying behaviours – will take place during a recession – and not just in the consumer sector.  Innovation and astute marketing may be needed more than ever during a recession to avoid the loss of customers that may never be won back again when the economic clouds have lifted.

Tags: business survival, economic downturn, recession, Recession Survival & Growth

10 Jul 08 Recession – A Business Survival Guide (Part 1)

And so the worst is upon us. It appears that life in a zero or low growth economic environment is with us for a period of between about 6 months to 5 years depending on which market forecaster you care to listen too. There is no doubt that things will be tough over the next 1 – 2 years, so this an opportune time to focus on not just survival but growth in these challenging times. Therefore I’m starting a blog series on the subject of business survival and growth during a recession that I will continue to update. Summaries and more detailed thoughts will be published as part of my Executive briefing series found in my main website.

I introduced the concept of management challenges during a recession in an earlier blog Thoughts of Recession: Before you cut the costs which had 3 main messages:

Message #1: Costs: Rather than initial across the board cost cutting, focus on increasing the flexibility of your cost base and reducing minimum critical size. The once never changing insurance sector should provide us with an example. A large proportion of costs have historically been tied up in routine processes, such as issuing policies, that add little, if any, competitive advantage. New web-based technology should have allowed these costs to be excised from the organisation, reducing minimum critical size and increasing the flexibility of the cost base – that is the ability to absorb changing business volumes without material changes in the organisation’s underlying cost base. So a key question is how well your organisation has used web technologies to alter the characteristics of its cost base.

Message #2: Focus on broadening the customer base – taking your current products and offerings out to a wider audience. Challenge existing perceptions of what target customer segments should be.

Message #3: Protect your organisation’s memory. If you do have to cut headcount be careful not to loose key elements of your organisation’s experience and memory. This was a major problem with downsizing or as some called it ‘right-sizing’ in the late 1980s and 1990s. When the organisation want to grow margins through organic growth as opposed to cost cutting – the expertise and historic experience wasn’t there to be tapped.

In looking for lessons and experiences to help us manage our businesses during a recession I would like to look at a surprising sector for assistance – the UK’s now beleaguered manufacturing sector. Looking at recent news from this sector(1) we can draw the following guidance:

Thought #1: Don’t focus on mass commodity markets. Hone up your innovation and product development skills to enable you to take a narrower focus. The danger of having a commodity based offering is that when times get tough you will end up in a price shoot-out war. Having a more focused offering will give your sales people more to talk about than just pricing.

Thought #2: A direct follow-on from Thought #1 – how can can you make it easier for your products or offerings to be customisable to meet the needs of individual customers?

Thought #3: Look at global markets. Don’t feel restricted by traditionally drawn geographic boundaries. What is becoming clear is that not all geographic markets will bear equal amounts of economic pain. Some will do better than others.

More thoughts for recession survival will follow.

(1) Marsh, P (2008) Resilience through change of strategy. Financial Times. July 8

Tags: business survival, challenging times, recession