About the Author: Dr. Khyati Shetty is the Head of the School of Business and Humanities, Curtin University Dubai. With an experience of 11+ years in the industry, Consultancy and Academia, she specializes in the subjects of Strategy, Entrepreneurial Marketing, and Strategic Marketing. She is also an Executive Coach, Innovation Facilitator, and Leadership Consultant to several governments.
When a person faces physical threats, the human body adapts superbly well by going into a fight or flight mode. The body increases its heartbeat to provide energy, dilates the pupil to allow more light and increases the respiratory rate to provide for more oxygen. After the threat is gone, it takes between 20 to 60 minutes for the body to return to normal.
If only a company could respond so brilliantly to the dangers of a downturn!
The uncertainty of doing business during the turbulence caused by the COVID-19 is like entering into a heavyweight boxing ring to compete. The unsettling twist and turns for business leaders are a one-off- the right hook they never saw coming. As former world heavyweight champion Mike Tyson famously said, “Everyone has a plan until they get punched in the face.” Confronted with turbulent times, some leaders swing to a complete defense stance and enter into crisis mode, to prevent the company from getting hurt. They enter a cost-cutting reflex, shrinking operating costs, clamping down on expenses, cutting down on compensation, reducing frills, lowering headcount, and conserving cash. However, this could be a short-term fix with potentially devastating long-term consequences.
This strategy implemented recklessly can create a siege mentality in the organization, which can choke creativity, innovation, and morale. Efficiency is replaced with a constant struggle of doing the job with minimum resources, which could lead to a drop in customer satisfaction, delivery, and customer loyalty, all of which are the nuclei of post-crisis growth. Pessimism engulfs organizations, and survival becomes key- personal and organizational.
On the other end of the spectrum, are leaders who are tempted to implement aggressive, offensive strategies, and seem to defy the gravity of the crisis. Their idea of riding out the storm is to make investments that have long-term pay-offs, employ aggressive pricing strategies, and spend exorbitant amounts on corporate branding. These are the mangers who ignore the early red flags of the shrinking pie of market share, budget-cuts by customers, poor financial results reaching a tip-off point where decision making becomes chaotic.
To ultimately prevail victoriously, a Janus-faced strategy in these turbulent times sounds prudent. A little bit of agility, a little bit of absorption-and, voila, you have a winning strategy. Agility in the boxing ring as in business (operational, portfolio, and strategic) is the ability to duck and weave at the right moment and change positions and directions with ease and speed. Absorption, on the other hand, is the toughness and strength to withstand punches and, in the case of business, is business size, customer lock-ins, high switching costs, network effects, and a war chest of cash. Working this Janus faced strategy may seem like a challenge. But here are a few strategies for consideration to navigate through these poorly chartered waters:
The financial strength and earning statements of your business serve as a fuel gauge during these times. If your fuel tank is low, your trip will be a short one. The key is to focus on cash-to-cash conversion cycles and shifting focus from the income statement to the cash flow statement. Cash flow and liquidity analysis can give better visibility to identify choke points and opportunities to improve processes. Cracking down on receivables collection, negotiating better payment terms with suppliers, and just-in-time delivery could be some of the most basic measures, to begin with. Cash flow and liquidity analysis not only guide a company’s strategy but also increases its thrust.
In the language of managerial accounting, employing activity-based costing and swapping fixed costs for variable costs is a proven technique during times of crisis. While fixed costs are incurred regardless of business levels, variable costs are only incurred when revenue-producing business is generated. As business volume declines, variable costs are automatically reduced or eliminated, helping to buoy profitability. However, in all this, it is vital to preserving your core business while increasing your flexibility on the fringes. Companies could consider tools like transportation fleet leasing, third party warehousing, and outsourcing. Low fixed costs are an outstanding source of absorption- a store of energy for hard times, much like the fat in the human body.
It is true that customers have started buying less during this crisis, but the truth is they still buy. Unfortunately, to make up for lost revenues, organizations increase prices, add new charges, and gouge customers. So how is it possible to gain share without giving away the store? Every company has its set of loyal customers. The ones who love your product, offering, and service; love you for who you are. They are the ones who produce the “good revenue,” the kind that is predictable and profitable vs. “bad revenue” from customers who look for excessive discounts, customization and don’t value your core business proposition.
Draw a heat map to identify these high-potential customers and carefully calibrate strategic promotions aimed at maintaining these key market segments, which could be the hot-spots to your business in an otherwise cooling economy.
Turbulence creates room for disruption. For example, after the 2008 financial crisis receded, companies like Uber, Pinterest, and Airbnb became the poster-children for the disruption economy. Inaction does not spell safety in volatile times. This is the time to take to your strategy canvas and reflect on your current position. Chances are if your strategic profile begins to resemble most of your other competitors in the market, it is time to start redrawing your profile and explore new frontiers where there is little or no competition. It is also about creating value innovation, which is the cornerstone of a Blue Ocean strategy and reconstructing value, profit, and people propositions to create new value while reducing costs. And to create this, it is the ideas that matter, not your resources.