Riding over Recession: Managing growth during economic slowdown
There are two ways companies can respond to recession or economic slowdown.
One, they press the panic button and go on a layoff and cost cutting spree. This is essentially defensive or survival mode. Over 90 percent of companies resort to this tactic primarily to minimize losses and survive the lean period. However, it may end up crippling their ability to compete effectively even after the recession is long gone.
Two, they plan for the slowdown and take it as an opportunity to reinvent themselves. As is the case with life, one doesn’t care about fundamental flaws, imperfections, or improvement areas when things are going good. Its only when everything comes crashing down, one takes notice of where and how things started going wrong or what areas could have been worked upon to make life better. It’s same with business. However, less than 10 percent of companies follow this approach and those who succeed, not only manage to continue growing even during recession, but come out even stronger when economic conditions stabilize. Here are some ways to beat the slowdown and emerge stronger when the economy recovers:
Give customers reasons to buy from you
Cement industry is not just one of the most competitive but it also has very little room for product differentiation. Operating in an industry where all major players were making losses, Firm A had developed a new technology which when implemented, would lower their cost of production. Majority of board had taken a call to pass on the benefit to consumers and lower the retail price, taking rivals out of the game. However, one of the senior executives had other ideas. They hired a consultant to conduct a wargame.
Executives from across departments including their sales and marketing team assembled in a hall, were divided into different teams and asked to role play their competitors. As the game began, Firm A lowered the price which had immediate impact on the sales figures. Other firms started losing market share. To surprise of board members, other firms responded by lowering their price as well which resulted in an all-out price war. The board was of the view that their loss making competitors would have little room to lower prices. As it turned out, closing a cement plant would have caused more losses to their competitors than they would have suffered by lowering the prices further. This took away the price advantage from Firm A and their technology breakthrough couldn’t benefit them. The Board sat again after analysing the war game results and decided to still pass on the price benefit to customers but through services. They started offering transportation to big clients. Other similar measures were employed to give customers more convenience or more reasons to buy from Firm A.
Lowering price during economic slowdown is a common tactic but a tit for tat action is soon followed by rival firms unleashing a price war. Often, our clients ask us how they can differentiate their products in a market where all competitors offer almost identical offerings. In today’s hyper competitive world, companies lose no time in replicating new product offerings or technology changes introduced by their rivals. On the other hand, services are hidden. If you focus on improving the customer experience through services, you will already have gained some market share and loyal customers by the time rival firms even know about it.
Go all in on creating an effective online Presence
60% of people hired last year were not looking for a change. They caught some recruiter’s attention online and they came and got them. An effective online presence does just that for your company. Your sales team cannot reach everywhere and neither they can remain available 24 by 7. Your website and other social media presence can. They act as your brand ambassadors. They help you build deep ties with your customers and bring in new customers which your sales team did not know existed. They even help you gain market share through traditional sales pitch. Long after your sales team has made a presentation or even before a client decides to give them time for making one, they might want to visit your website to take a first-hand look. The experience you give them there can have a direct bearing on your sales figures.
With advancement in digital technology, smart companies are taking it a step further. While earlier they waited for customers to come to them online, they are now going to the customers and fulfilling their needs as they arise. They are continuously making effort to understand and track the need and preferences of their customers and offer tailored solutions to fulfil those needs. They remain connected to customers through online presence, apps and even chips in wearable gadgets and clothes to enhance their experience.
However, even today, a majority of companies have a website which was updated years ago to show for their online presence. It doesn’t help them increase their brand awareness or gain an iota of market share beyond their locality or reach of sales team. An online presence which can effectively communicate a brand’s value proposition to potential customers is a must in today's digital world. A good digital strategy is a mix of quality content, SEO optimization and paid campaigns. This helps drive more customers towards your business in times of slowdown and even after that - at a lower cost than what is incurred on your sales team.
An online presence which can effectively communicate a brand’s value proposition to potential customers is a must in today's digital world.
Step up research and development
Apple has decided to invest significantly more in R&D in 2019. They want to emerge more stronger than their competitors when the world economy recovers. Not every company has the luxury to sit on a cash pile that Apple have at their disposal but investing in R&D during slowdown is an effective and proven strategy. Many studies have inferred that a small number of companies which invested in research and development for new products or product variants during the great depression of 1930s and the financial meltdown of 2007-08 not only managed to grow even during slowdown, but positioned themselves for sustained growth thereafter. Doing so will ensure your company has many aces up its sleeves which you can reveal to win the market share game as the economy starts to recover.
Create a new customer base
Many medium enterprises we interact with tell us they have a stable customer base and they don’t do much to further increase it. While on face of it, they cite their inability to handle larger customer base or say they are content with the current volumes, it also portrays lack of vision. In a growing market, if a company is not adding new customers, which are being lapped up by their competitors, it is as good as a loss for them. Such companies are at greater risk in case of any major changes in customer preferences, taste or business environment and in a slowing economy, not adding new customers automatically reduces their volumes. Slowdown in economic activity can be a good time to start looking at ways to add new customers all over again. You can start by targeting clients of some of your competitors or even develop an altogether new market by providing tailored solutions to a client base after understanding their needs.
Understand your customers better
Barrett Distribution Centers, an American warehousing and distribution services managed to beat the slowdown of 2007-08 and were continuing to grow at 15 percent at a time when their competitors struggled to survive. However, they were less sure of the future and felt disconnected from their customers. For years, they had relied on an online survey to get customer feedback and the customer participation in those surveys was in a downward spiral. With same repetitive questions being asked year after year, it provided little insight to Barrett Distribution Centers about their customers.
This is when, despite growing at 15 percent that fiscal, they decided to hire a company to survey their customers. They had many surprises for them in store. Some customers who needed warehousing facilities in Northern and Southern California and Memphis were not aware that Barrett Distribution Centers had operations there. One customer complained about lack of details in e-mail communication. Another one, Vibram FiveFingers, who made athletic shoes, needed help with product returns and electronic ordering system.
Barrett went back to them with detailed plans for both their needs and it resulted in four times growth in volume of business from Vibram FiveFingers. The whole process cost them roughly INR 21 lakhs at today’s exchange rate. A year later, they had revenue of INR 199 crores as against 113 crores in the previous year. All of that was not a direct result of the survey but it played a big part in achieving that growth.
Become lean and efficient
Decline in cash flows can adversely affect health of a business during slowdown and limit their execution ability. While cash flows in a booming economy hide these problems, it becomes apparent when they dry up. In such situations, companies have limited funds to invest in measures discussed above. Trimming down fat (inefficiencies and waste) is the best way to get back in shape under such circumstances. It also contributes by improving margins in the longer term which starts getting reflected in the bottom line.
To effectively plan for a slowdown, it’s important to understand what caused it.
What has caused the current slowdown and why India is feeling more heat this time than it did in 2007 - 2008?
The world never fully recovered from the last financial crisis and a next slowdown was imminent. It was only a matter of when and the signs have started becoming visible now. As for India, thanks to Reserve Bank, it had negligible exposure to complex financial instruments which were at the root of last crisis.
This time however, failure of IL&FS threatened to become India’s Lehman moment and unleash a credit crisis never seen before. The Banking institutions were already extra cautious after the NPA mess they got themselves into. As Vice Chairman NITI Aayog, Rajiv Kumar put it, “No one is willing to give loans within the private sector. They are sitting on cash”.
India’s entire financial system has been misused for decades. The likes of Mallya and Nirav Modi are only tip of iceberg. There was a structured, government sponsored loot of public money with thousands of crores of loans being sanctioned to people who had no intention to repay it, with tacit understanding of people in power. When that money came into circulation in economy, it did promote economic activity, but the quality of growth was not desirable. It also promoted further inequality and lot of funds were siphoned off overseas.
While the banks, both private and public were hiding these bad loans on their books, the last government which began its term in 2014, forced them to come clean and take corrective measures. Insolvency code was another measure in this direction. It’s natural that Banks suddenly have become over cautious in giving out loans which is hurting the economic activity. Under such tight liquidity scenario, the IL&FS default has worsened the situation further and the Government did what it thought was right by taking over the management of the NBFC giant. Considering NBFCs accounted for over 70 percent of two wheeler and 60 per cent of commercial vehicles loans, the spiral effect IL&FS had on this sector is being felt more severely in the Auto sector which is under severe stress.
Many people are trying to create panic and politically exploit the current situation by saying Indian economy is headed towards doom blaming current policies, demonetization and GST among other factors for this mess.
What does the future hold
Are government policies to blame for the current situation? Have we dug ourselves into a pit? A quick review of Indian economy does point towards strong fundamentals. As Narayan Murthy put it categorically “Economic climate is most conducive for growth in last 300 years”.
A slowdown can be cyclical and structural. The factors discussed above indicate it’s a mix of both. While the cyclical slowdown is a natural economic cycle, fundamentals remain strong and the structural slowdown is because of a pause which financial institutions find themselves into before doing a course correction and once it is done, Indian economy will emerge more stronger and resilient than it was ever before. This may also turn out to be an opportunity for the government to push through big reforms. Remember 1991? Organizations will do good to plan for the immediate slowdown instead of pressing the panic button.
But how to plan for the slowdown? Often we get to know about recession having already entered it. Most important thing will be to spot the signs and secure future cash flows. Running out of cash in a slowing economy, already facing a credit crunch can worsen the situation for any business and we have seen some recent examples.
Next thing will be to wisely utilize the cash and reinvent the organization by focussing on areas discussed above.