We live in a world without borders (almost), with each nation intertwined with the fortunes of another, some more deeply than others. Similarly, there is no organization today that can claim to be insulated by the effects of the current slowdown. Anyone who claims to be unaffected or immune to what’s happening a few thousand kilometers away is living in ignorance or denial. At best, you can postpone the damage or absorb some of the impacts if you are fundamentally stronger and better prepared.
We are in the middle of a global demand slowdown driven by several factors, such as trade wars due to the protectionist mindset of some of the largest global economies (read US-China), geopolitical uncertainties such as Brexit and the most recent of all the novel Coronavirus that is threatening to lock out the world for next few months, reducing further access to markets. All of the above creates a continuous feedback loop of fear as the primary input in the economy (see below).
Mid-market enterprises, especially those with lesser free cash are particularly more susceptible to breaking down under such an environment. What should be your strategy when everyone is looking to withdraw from the market and reduce their exposure? Should you pull out all the reserves that you kept for a rainy day and become aggressive in the market? Should you panic and start reducing your workforce and other costs in order to limit your losses? Should you start selling your products by discounting them heavily in the hope that some of the cash will return back to you from the market? Most organizations will act in one or more of the above ways, further contributing to fear that feeds back into another negative cycle, leading to a never-ending abyss of darkness about their future survivability.
Fortunately, there is no need to be despondent and act like most others are likely to. As a leader, there are much better and far more effective strategies available for you to pursue as you weather the storm and wait for happier times to return. Recessionary environments create a wonderful opportunity in adversity that most organizations fail to recognize. Reduced action in the market means that you are lesser involved operationally and have more time to think and reflect. You have more time to look inwards and identify where you have been going wrong over the years. You have more time to address your weaknesses which you were ignoring because you had no bandwidth to work on them.
A slowdown whether it is limited to your organization or due to the larger macro factors in the economy and business environment is the perfect time for you to become focused. Being focused in such an environment implies becoming selective about pursuing opportunities that yield the highest returns with the least efforts. This starts with reviewing closely the performance of all your current lines of business or product categories. If you are into multiple related and unrelated businesses, this is the right time to take a hard look and assess if you would be better off selling or hiving a few that are non-core but they add to your burden. In aggressive and greedy times (read high growth environments), we tend to act somewhat recklessly and venture into new businesses, new lines of business, new product categories, new markets and new regions without much strategic foresight. This is not unusual and completely unfounded as entrepreneurship requires you to keep trying new possibilities in order to identify future blockbuster opportunities. But you do that when everything is going well and you have surplus cash to deploy. A slowdown, however, offers you the perfect time to clean up your portfolio or exposure to unprofitable markets and regions. If you do not use this time prudently for this purpose, you are going to make your organization very weak. Even if you survive the current slowdown, you will head into the next growth cycle with a highly inefficient organization that will struggle to capitalize when the market sentiment is positive.
The next important decision for you as a leader pertains to capacity expansion and capability building. Building capacity is about adding new resources, new assets or new machines so that you can produce and sell more. Building capability is about improving and enhancing your ability to deliver a certain quality of product or service consistently. During a high growth environment, one of the most commonly deployed strategies is capacity expansion to cater to growing demand. When you are bracing a slowdown, you don’t necessarily have to do the opposite and cut down capacity in panic. Other than getting rid of the flab you have accumulated due to inefficient capacity expansion in the past, your objective should be to improve the productivity and hence profitability of your existing capacity in preparation for a market turnaround. This can be achieved if you focus on capability building or strengthening your existing capabilities.
Capability building is similar to muscle building. Abraham Lincoln once quoted “Give me six hours to chop down a tree and I will spend the first four sharpening the axe.” Capability building is about multiplying your strengths. It’s about getting better at what you do across all your functions, particularly those that directly impact business operations. This is perhaps the best time to initiate important internal projects or transformation programs you have been postponing forever due to a lack of leadership bandwidth and focus. Let me illustrate this with a few examples.
If you are a product based company with a large salesforce (your capacity in this case) but lower throughput or productivity per sales executive, this is the best time for you to strengthen your training program and utilize their free time to enhance their product knowledge and selling skills. This is also the perfect time to transform your sales process to make it more effective.
If you are a software development company that always wanted to charge a premium to clients but were unable to because they perceived you as a low-cost service provider in spite of having highly talented engineers in your team, you may want to utilize this precious time to reimagine your brand identity, develop a business model that is focused on premiumization of your services and create a sales pitch that is focused on value selling versus selling time/billable hours of your engineers. While the overall transformation will take much longer, you will be able to successfully seed it with the necessary inputs with the right attention because you will have more time to do this now.
If you are a manufacturing company that has been adding capacity in the last few years much of which is going to be underutilized in the next few months due to slowdown, this is the right time to review and upgrade your manufacturing capabilities. You can now introduce/test new internet-based manufacturing technologies, modernize your production technology, implement lean principles in your manufacturing environment, optimize your procurement processes, or look out for savings by streamlining your supply chain. This is also the perfect time to double down on your R&D efforts and focus extensively on new product development.
To summarize, a slowdown offers you the perfect opportunity in adversity to strengthen your organization, refocus on what matters and start preparing for the next upswing in the market which is not so far as you may think. Be aware of what’s happening in the market, but avoid falling into the negative loop of fear as it will only lead you to make knee jerk decisions that will add more risk to your business sustainability than solve your problems.
Article originally posted on BOD website – https://bod.consulting/focus-and-build-capabilities-during-slowdown/