Recession on the horizon? Based on our own research and research by Bain & Company, Harvard Business Review, Deloitte, Gartner and McKinsey, we formulate 7 actions to accelerate your profitability during and straight after a recession. Figure 1 shows how big the difference is between winners and losers. This does not only apply to EBIT, after a recession, winning companies are also able to make significant strides in market share.
THE 7 MOST IMPORTANT ACTIONS TO BE AMONGST THE WINNERS
The key to success is preparation. Although, preparation is actually a wrong choice of words. Winners are winners, because they structurally sail close to the wind and have a clear vision. They are proactive, fast and decisive. They are financially prudent to absorb setbacks and seize opportunities as they arise. The seven actions below clearly indicate what that means in concrete terms.
1. CLEAR VISION AND ORGANISATIONAL ALIGNMENT
What will your business look like in three to five years? And in one year? What are the ‘vital few’ strategic initiatives and what is the path from strategy to concrete actions? Not only your leadership team needs to be committed and aligned, this applies to your entire organisation. Strategy Deployment is a powerful tool to maintain alignment and focus, monitor progress against plan and make rapid and appropriate adjustments in case of changing conditions.
2. UNDERSTAND YOUR STRATEGIC AND FINANCIAL POSITION
Mapping out your plans depends on your strategic and financial position (see figure 2).
3. FREE UP FINANCIAL RESOURCES
The focus is on aligning your spending with your vision and strategic initiatives; not blunt cost cutting. Zero-based Alignment is a good way to select and make lean those activities that are fully aligned. Non-aligned activities are stopped. The financial resources you free up can strengthen your balance sheet and/or support your investment agenda.
Currently we face high inflation. Supply chain problems and capacity bottlenecks are responsible for some of it, but their effect will dampen. Another cause is the sharp rise in energy costs as a result of the conflict in Ukraine and the resulting economic sanctions. In time, part of the costs will bounce back, but no longer to the old level. Costs will remain structurally higher due to urgency of the climate-change-driven energy transition. Furthermore, too much money is in circulation and its effect on inflation will also last longer.
The current high inflation can turn margins negative very quickly. Speed and flexibility are called for and selling prices have to go up. Raising prices in one go is difficult. It is better to do this in regular small steps. Possibilities depend on the strength of your brand and the market your company operates in. Make sure you retain the right customers in the process
4. RETAIN YOUR CUSTOMERS
Retaining customers is much cheaper than acquiring new ones. The margin impact is significant. Explore ways to help your customers through the economic downturn and particularly in the early upturn when the opportunities start to arise. Winners have already created the “currency” to invest. Just make sure you target the right customers.
5. PLAN FOR VARIOUS SCENARIOS
No one knows when and how a downturn will fully unfold and when the economy will start growing again. The winners have developed different scenarios, and they know how they should act in each scenario. This allows them to act quickly and decisively.
6. ACT QUICKLY AND DECISIVELY
Winning companies act quickly and decisively, in the downturn and particularly in the early upswing when the opportunities begin to emerge. They have already unlocked the financial resources to invest.
7. EMBRACE TECHNOLOGY
Not all companies have been equally aggressive in adopting new technologies. There are many opportunities here for improving efficiency or generating more value and thereby gaining a competitive advantage.
To emphasise the importance of technology even more.
Figure 3 shows the development of the total shareholder return before and after the recession of 2009/2010. It is clear to see how winners break away from the rest.
Harvard Business Review found that 70% of companies failed to regain their pre-recession growth rate in the 3 years following the recession. Only 5% of companies manage to develop a growth rate that is consistently above that of their competitors (quarter-over-quarter simultaneous growth of sales and profit margin).
Digital leaders are 3x more likely to achieve revenue and margin growth that exceeds industry!