Blend Corporate Defence & Offence to Grow

The business community and the markets are rightly anxious about geopolitical and micro political ruminations.

In the UK mortgage rates are being pushed up despite stable inflation and lowering of BOE base rates across 2024. This is anxiety reflecting itself in perception of economic risk directly linked to American Politics and the impending Oct 24 Budget.

A recent article in multiple outlets including CNN linked the UK’s fiscal black hole of £22bn to the economic vandalism that is Brexit. The 4% hit to UK GDP Brexit has caused Brexit is £88 bn annually. Labour could take the UK back into the EU and this would remove the aggressive tax measures that are planned to be introduced in the Oct 24 budget. Yet Labour will not do this and this is being reflected in the markets.

On the upside in 2024 we managed to avoid a recession in the UK but Goldman Sachs is saying there is still a 25% chance of a global recession such is the state of the world.

US markets are vexed equally by Trump and Kamala Harris as both would hurt the UK and by proxy the global economy in differing ways.

How companies act as they move into tightening economic conditions is fascinating. The most common business response is to reduce overheads and hunker down wating for the worse to pass.

The 2020 Harvard Business Review studied 4700 companies and how they acted across the last 3 sizable recessions and found that firms who acted to solely cut costs faster and deeper than their rivals had the lowest probability (21%) of finding growth when opportunity began to present itself. Worse they had not kept pace with markets and customer needs and wants, and thus were left with products that were behind competitors.

We get that the business world is a competitive environment.  Companies who develop and implement strategies that focus centres on competitors’ strengths, weaknesses and activity as well as customers changing needs are the best performing companies at any stage of the economic cycle. Companies who have products that are starved of development or customer testing are vulnerable even if they don’t realise it.

Customer awareness becomes more crucial as negative economic pressures directly influence consumer patters and your clients’ buying moods change.

Knowing what your competitors are doing and how they are performing and combining this with ongoing customer feedback allows you to ensure your products and services maintain their attractiveness and relevance in the eyes of your customers and most importantly this is done at your competitors expense.

The case for investment in key areas when the markets contract is never been more crucial.

Further, when a company becomes defensive and begins to cut overheads it’s a clear signal to your competitors that you are vulnerable. This is when they will outmanoeuvre you without you even knowing it.   

On the other side however, HBR found that businesses who boldly invested more than their rivals didn’t necessarily fare better either.

The answer is a blended approach of defensive, and offensive steps.

There are two mistakes companies make which could be significant in damaging your company. 

1.     Being Too Defensive

Crisis mode is the dominant emotion and action employed at board level. Its reactionary and focuses too heavily on just surviving the storm. Decisions are made to reduce costs, eliminate frills, stop all discretionary expenditure privileges and reduce staff numbers. These companies also immediately stop spending money to develop new business or refining/adapting existing products or services.

This strategy is the approach Sony took during the 2000 downturn, when they cut its workforce by 11%, its R&D expenditures by 12%, and its capital expenditures by 23%. Whilst this in the short-term increased profit margin from 8% to 12%, growth, its sales collapsed from 11% in the three years before the recession to 1% thereafter. Sony has struggled since then to regain momentum. 

When companies start thinking like this it becomes the culture.  Everything is done to minimise loss, which stops innovation in its tracks.

2. Being too Aggressive

Some business leaders when a crisis hits use this as an opportunity to pursue opportunities aggressively while other competitors might be neglecting customers to deal with internal issues. They invest in long-term projects and pursue the acquisition of people and assets.

The idea is to gain a maximum benefit once the crisis blows over. 

Hewlett-Packard in 2000 drew up an ambitious change agenda even though sales and profits were falling. HP embarked on a massive restructuring program, made the largest acquisition in its history by buying Compaq for $25 billion, and increased R&D expenditures by 9%. It also spent $200 million on a corporate branding campaign and $1 billion on expanding the availability of information technology in developing countries.

These initiatives strained the organisation and management could not cope. When the recession ended, the company found it tough to match the profitability levels of their rivals like IBM and Dell.

These companies struggle to grasp the severity of the crisis over time and ignore early warning signs. The result is that these companies are blind-sided when the financial results continue to decline. They also struggle to make the required cost cuts when the negatve results persist and end up doing too little too late.

Offensive companies adopt two tactics – develop their products/services and invest in researching their customer’s needs.

In the Harvard study, only a small number of companies (about 9%) flourished after the crisis. These companies were able to perform better on key financial parameters and managed to outperform rivals in their industry by at least 10% in terms of sales and profits growth.

So, what did the companies who thrived in the study do differently? 

The Best of Both

You need to find a balance between the two extremes. Cost cutting is necessary to survive the crisis but only in the early initial phases. Investment in product development and customer needs is equally essential to spur growth.

The companies that performed the best after crisis situations universally applied a dual approach

With only 6% of SME’s and corporates having and implementing a growth strategy, the competitive advantage for those who do is considerable.

We develop research driven strategies for crisis scenarios. We have multiple audit services that will uncover weaknesses and opportunities within businesses to allow these to be addressed. These audits cover customer sentiment, market dynamics, competitor positioning and operational effectiveness to inform the strategies for survival and growth.

Contact alan@genoablack.com to arrange a meeting to discuss how we can help.