Strategy in a Downturn

Strategy in a DownturnCreating and sustaining a good long term strategy for growth isn’t easy even when times are good. But what do you do when things are looking worse than your worst case scenario? Conventional Wall Street wisdom says you should abandon your strategy, cut staff to the bone, and focus on the short term — getting through this quarter. What’s the problem with that approach?

First, studies show that layoffs tend to result in an exodus of valuable employees. Second, making cuts across the board compromises your organization’s competitiveness in the longer run. And third, abandoning your growth strategy will leave you unable to take advantage of the inevitable upturn when it comes.

So, what are we to do? Difficult times require extra effort and creativity devoted to strategy. Your strategy needs to be much more than a plan for growth. It needs to address all the issues that a downturn brings, be robust against a range of possible downturn scenarios, and prepare the organization for growth as the economy recovers. Here is a top 10 list of guidelines to consider:

1. Explicitly address economic scenarios. Look at a wide variety of economic scenarios (demand, growth rates, interest rates, competitors, etc.) and map them out. Determine the likelihood of each scenario occurring. Consider what would happen when multiple scenarios interact. Test out what will happen to your business in each scenario. Finally, devise strategies that will work best in each scenario.

2. Take measures to cut costs and improve efficiency. Take this opportunity to weed out less successful products from your product lines. Cut corporate “luxury” items, like entertainment, travel, and conferences. Be careful not to cut costs that are core to the business and might compromise its competitiveness. And be careful not to over-react to the downturn as well. Rather than cut costs across the board, perform “surgical” cost cutting that removes the expenses that are the least productive.

3. Generate and conserve as much cash as possible. Balance sheet flexibility is critical in an environment like we have today. Prioritize projects and investments for their ability to generate cash in the near term. Extend payment terms where possible. Get accounts receivable up to date. Think about ways to turn assets into cash, such as selling plants or equipment and lease them back.

4. Identify risks and develop mitigation plans. Create a catalog of all the risks your business faces. Identify what could happen and the likelihood of it happening. Pay special attention to risks that are more likely in a recession. Then develop actions that would help mitigate each risk. Also think about ways to track each risk so that you are not blind-sided by a downside case.

5. Monitor the financial health of partners and vendors. Businesses can be badly disrupted if a key supplier or partner goes under. Develop a system for monitoring these companies and have backup plans or multiple sources for business-critical parts, systems, and services.

6. Evaluate potential mergers and acquisitions. Some of your competitors and suppliers may be hurting worse than your company. This could be a good opportunity to grow through M&A at fire sale prices if you have the resources to pull it off.

7. Maintain long-term planning. Create a team or steering committee to plan for future growth when the economy turns around. It’s important to integrate the long term and short strategic needs, and be able to hit the ground running when the inevitable upturn happens. It’s also important to stay clear on what your competitive advantages and strategies for growth are, so you don’t compromise them in the interest of managing for the quarter.

8. Manage culture and motivate staff. In a downturn, it can be increasingly difficult to motivate employees, especially if there are layoffs. Work to improve communication as much as possible, create forums for employees to air their concerns, and sell them on the benefits of working for your company. A downturn may also represent an opportunity to recruit valuable staff from struggling competitors.

9. Build (or at least maintain) market share. Despite the temptation to do otherwise, keep spending on marketing. Develop a strategy for growing market share even as the market temporarily shrinks. If competitors are struggling, you can grab customers from them. Understand what you are good at relative to your competitors and how that can help you in a downturn. Make sure you don’t lose your competitive edge through cost cutting.

10. Pay attention to where the opportunities are. Some divisions and businesses may be impacted by the downturn differently than others. Be prepared to shift resources and focus. Have a clear strategy of how to manage your portfolio of businesses or products — some may need extra resources while others can be “milked” or grown.

There is much more that could be said about this topic, but I wanted to keep it concise and limited to a “top 10” list. If you’re interested in working on any of these in your organization, give us a call!

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One Response to Strategy in a Downturn

  1. Mohammed Yassar says:

    Nice article.Thanks.

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