13 Jan 09 Recession Survival: Look again at the outside world

Every once in a while a piece of academic research lands on my desk just at the right time.

Just last week I read a research article from two academics in the US focusing upon strategy and the way that managers see the business environment (please see References [1] at the end of this article).  In short, the way that managers and business leaders see and interpret the outside world shapes their decisions and of course the strategies of their organisations.  All very commonsense stuff.  But we are facing a period of environmental turbulence and one of those infrequent tipping points where the business world could change dramatically and forever.  So what can this piece of research contribute?

In summary, we have four pointers:

Pointer #1: Question your mental model. Now is the time to question some of the assumptions that we have taken for granted when we think about and formulate strategy.  An example would be what our customers want.

Pointer #2: Don’t just look at the usual indicators. There is a temptation to look at the world outside our organisations from an industry perspective.  But now the forces for change won’t emanate from inside our industries but outside.

Pointer #3: Change the way you plan. The danger of “battening down the hatches”.

I will now take a closer look at each of these three pointers.

Pointer #1: Question your mental model.

Arguably, there is just too much information coming in on changes both in the markets that your organisation operates in and the broader global environment for one person to digest.  During the last six months of 2008 I attempted to track the strategic implications of the financial sector ‘meltdown’ on a daily basis.  Apart from taking up time, it left me with a permanent headache!

But in all seriousness, we develop mental models to simplify this complexity to make sense of it all.  That is human nature – and we all do it.  The problem is that we tend to assume when using these mental models that the business world operates in a certain way and that certain strategies and approaches will always work.  In other words, we take predefined ’cause and effect’ relationships for granted. The temptation, as we enter recession, is to do exactly the same as we did during the last recession.  But this time the world may be starting to work in a different way.

So the message is to take a broad minded view of how changes in the outside world could hit your industry.  Don’t just assume that your sector will survive a recession relatively unscathed because it survived the 1990s downturn.  The general insurance sector is probably a good example.  This has its own strong industry cycle so some may think that in relative terms organisations in this sector will do quite well.  Perhaps they will if we extrapolate from the past. But perhaps they won’t – especially if we look at regulatory perspective emerging from the G20’s first meeting.

And here are some other established assumptions that must be revisited.

• Globalisation will continue. Well, it just might not.  Some point to a divided Europe emerging as we progress through a recession [2], others question if globalisation has and will deliver prosperity [3].  This brings the whole issue of BRICs based strategies back onto the drawing board.
• We know what our customers want and who they are. Well we might have done but we don’t now.  As food retailers at the luxury end of the UK food market are discovering, customers are rapidly changing their buying criteria.  And as I have argued before, this recession will deliver major change in the structure of the so-called advanced economies – and therefore major changes in who your target customers really are.

Pointer #2:  Don’t just look at the usual indicators.

Organisations, particularly those in fast moving environments, tend to focus on tracking changes and developments that happen within their industry.  New entrants, changes in distribution channels, changes in supply chains would be examples.  In times of major upheaval look further afield.  My argument is that the shape of your market place over the coming years won’t be shaped primarily by industry forces but by global forces (such as regulation) emanating from outside the industry.

Pointer #3: Change the way you plan

I hear the phrase ‘we’re going to batten down the hatches’ quite a lot at the moment. Now, this gives me the picture in my mind of an old sailing ship about to enter a storm.  The hatches are nailed down and the crew goes below decks and waits for the calm after the storm.  The only problems with this approach are that:

1. You can’t see where you’re going during the storm and
2. The world, I propose, will have changed quite fundamentally when the hatches are opened.

Research [1] tells us that those organisations that sense changes first and move the quickest change the way they plan.  They don’t rely totally on conventional business plans where we construct a plan in concrete for say a year ahead. They rely more on experimentation, deliberately going outside to test what’s changing and what new approaches might work and then bringing this learning back into the organisation to further develop strategy.

Paradoxically therefore recession isn’t a time to batten down the hatches, but to go out and experiment to sense emerging changes especially amongst your organisation’s customers.  If you stay under the hatches you might just lose your customers.

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REFERENCES

[1] S. Nadkarni and P. Barr, Environmental Context, Managerial Cognition and Strategic Action: An Integrated View, Strategic Management Journal, vol. 29, 2008, pp. 1395-1427.

[2] J. Pisany-Ferry and Z. Darvas, Policy Brief 2008/10 Avoiding a new European divide, Bruegel, 2008.

[3] J. Bivens, “Everybody wins, except for most of us, Economic Policy Institute, Nov. 2008.

Tags: business, financial sector, meltdown, recession, strategy

10 Nov 08 Recession and Strategy: The old questions don’t work anymore

Overview

We are all deep into the annual planning process. But this time the challenges are different and therefore the questions that we should address must change. An era of uninterrupted economic growth has come to an abrupt halt. The hopes emanating from last year’s planning cycle, that the world would experience just a temporary economic slowdown, have been dashed at least for those of us in the developed economies.

The one uncomfortable fact that we must now face is that no one knows, with any degree of confidence, what the business environment will look like next year, let alone in five years time. We are entering a true period of uncertainty.

The future shape of the world and therefore the competitive strategies that we must craft to survive and flourish will be formed by a complex confluence of global, national and socio-demographic forces. I will explore these forces, their interaction and, most importantly, future global formative events that could have a material impact upon the structure of our business environment later in this briefing series.

But now onto some suggested questions that you should now be considering as part of your current business planning process.

The New Questions

Whilst the future is clouded, there is a range of questions that must be addressed during this year’s planning process. To help you, I am going to suggest that we divide or categorise our questions into three different time periods:

Period 1: Managing the Present: The next 6 months.

Period 2: Surviving the Middle Years: 12 to 48 months out and

Period 3: The Long View – New Strategies for New Markets: The 5 year view

Each of these periods will have different challenges and therefore different questions must be presented and answered.

Period 1: Managing the Present

The short-term focus is making sure that the business is in a fit state to survive, grow and potentially out-manoeuvre more inwards thinking competitors. The issues to consider have been dealt with in my briefing Recession: Key Questions for Business Survival and Growth, but the central message was do not take actions that would make contraction and decline a self-fulfilling prophesy for your business.

Three of the key questions that could help you in the immediate future are:

(i) How are our customers’ needs and decision making criteria changing in the short-term? In past briefings I have referred to this as the “Aldi Effect“. Customers’ needs, or more importantly, decision criteria will change more than once during the cycle of this downturn. Customers will make certain immediate changes to their decision criteria. One simple example is that “eating in is the new eating out” – as restaurants empty takeaway pizza operations flourish. The first task is to identify how customers are now changing what they buy and how they make up their minds. This is as much true for business to business markets as it is for consumer markets. In business markets the perceived risk agenda will be changing as will the decision making process and the composition of the key people involved in the decision making process. This is a question that must be answered now, as it will have significant implications for your offerings and management of target customers over the next 12 months.

(ii) How can we reduce and manage costs creatively? Rather than opting straight away for across the board headcount reductions or freezes, consider carefully your exposure to frictional costs. By frictional costs I mean the costs related to:

• Activities that are duplicated either in your organisation or elsewhere in your value chain for example similar processes, activities and decisions made both by your organisation and your distributors
• Activities that have historically been carried out but in today’s environment add little value.

Remember that the consultants McKinsey have calculated that most organisations can deliver substantial process cost savings by conducting a ground up review of processes – for example up to 30% gains in direct labour productivity, lower material costs and reductions in establishment expenditure.

(iii) How should we manage the survivors? It is an unfortunate fact that employment levels may have to be reduced. Few organisations will be totally insulated from a contracting economy. If you do have to make staff redundant, consider carefully how you manage and motivate the survivors. They too will still feel insecure and threatened and Human Resource policies must change accordingly.

Period 2: Surviving the Middle Years

Some interesting forecasts have started to appear focusing upon the immediate impact of the “melt down” in the banking and broader financial services sectors.

Some forecasts point to, in London alone, 60,000 job losses in financial services[1]. To put this in perspective, there are some 230,000 people employed in this sector in London and the South East of England[2]. Broadly up to 1 in 4 employees could lose their jobs. This statistic, together with broader global developments, points towards a potential structural shift in the economies of the developed world.

The last time that we witnessed a structural shift in the developed economies was in the late 1970s when, as an example, the UK’s economy made the transition from manufacturing to services. This transition, in employment terms, is illustrated below and it can be clearly seen that the financial services sector came to the rescue as the manufacturing sector withered.

Source: Office for National Statistics. Workforce jobs by industry: United Kingdom, Thousands, Seasonally adjusted.

The issue that we must consider is “What the financial services sector gave, will it in turn take away?”

There is no guarantee that the employment structure in developed economies will be the same after the recession as it was before.

Critically, we need to consider if there will be a post services based economy in the developed economies and what form it could take.

There are a number of forces that could dampen a post-recession resurgence in employment within financial services including:

* Regulation. Regulation will prove to be a key shaping force in a post recessionary world and I will cover this issue in more depth in a subsequent briefing. It looks however currently that at least in the banking sector, innovation in new “products” will be more tightly monitored and controlled.  This brings with it the likelihood that past levels of employment may not return, at least in the developed economies.

* The Emerging Economies. Arguably, when referring to the BRICs (Brazil, Russia, India and China), we should now use the term “emerged economies”. One of the next challenges for the newly emerged economies, and China in particular, will be continue to boost employment growth. We have seen massive investment, within China, in heavy industry. The one problem is that heavy industry is not a significant generator of jobs. But the financial services sector has just that potential[3]. We can therefore expect further inwards and outwards investment in financial services that will, in turn, place financial services organisations in the developed economies under pressure.

As indigenous financial services organisations grow in the emerged economies they will become acquisitive looking, amongst things, for the ability to travel up the learning curve at maximum possible speed. In this scenario, one of the problems faced within the developed economies is that it is relatively easy to migrate financial services sector employment, as the recent trend towards outsourcing has demonstrated. So when organisations are acquired, the employees could be located anywhere globally.

However, the hallmark of the current crisis is that we are at a complex road junction. It is impossible to know which route the world will take.

An alternative argument to that articulated above is that the collapse of Sterling, for example, rewrites the economics of the outsourcing equation and that more jobs eventually could come home. Governments too could take a more protective stance in employment terms in respect of financial services organisations where they have acquired financial interests.

Another buoyant perspective is that increased demand from the new middle classes in the emerged economies could eventually lead to resurgence in the manufacturing sectors of developed economies creating new sources of employment.

What we can be reasonably sure of is that certain sectors of the economy, such as financial services, will probably shed jobs and contract as we progress into recession. Others will be more resilient. The immediate challenge is to look at the transition period, as shown in the illustration above, and address this question:

“Which of our customer sectors are most exposed to decline and which, in turn, may prove to be the most resilient?”

Considering three dimensions – industry sector, geographic area and firm size may be a good way to approach this question in your business. The answer may reveal that significant changes are required in respect of the definition of target customer segments, the products and services that are provided and the distribution channels that are used.

Period 3: The Long View – New Strategies for New Markets: The 5 year view

The argument presented in the last section, that the pre and post recession structures of economies in the developed world may be significantly different, forms the foundation for the most challenging question of all:

“What form will a post recession economy take?”

There is some emerging evidence that economies at least in the developed world may undergo a structural change, just as we witnessed in the 1970s and 1980s.

It may therefore be dangerous to assume that post recession things will be exactly as they were before.

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References:

[1] I. Dey, “Goodbye To The City … And Hello To The Life As A Teacher or Gardener.” The Sunday Times, Nov. 2008, p. 7.

[2] “NGRF – LMI Future Trends – Regional / national dimension (Sector: Financial Services),” NGRF; http://www.guidance-research.org/future-trends/banking/regional.

[3] G. Dyer, “Comment – How the financial crisis is changing China,” FT.com, Oct. 2008; http://www.ft.com/cms/s/0/e5d48044-a04c-11dd-80a0-000077b07658.html.

Tags: business, Business Planning, economic downturn, recession, strategy