Use the downturn to set your business up well for the upswing
Let's face it, an economic downturn is the last thing any business leader wants or needs.
Market conditions are different to the last time we've seen something like this, most recently in 2008. A 13-year bull market has come to an end. We've seen the fastest stock drop in history, with a significant decline across all indices. Every asset class has been bubbled or affected by financial contagion. The potential of unexpected failings is profound.
The thing that makes this latest crash so unusual, despite the fact that it was expected, is the alarming potential for stagflation. The World Bank recently warned that "several years of above-average inflation and below-average growth now seem likely".
In response to a downturn, businesses may employ a number of strategies to defend margin and cash flow as they become the priority while revenue growth takes a backseat.
They may cut costs, usually switching suppliers or laying off employees. They may make adjustments to production to lower demand levels, reducing wage bills and improving working capital by having less tied up in inventory. They may use alternative sources of liquidity, extending their own payment delays and reducing or suppressing any dividends. And they may postpone investment and expansion plans when possible.
While it's understandable that businesses seek to restore profitability, in today's market, switching suppliers is risky, if not downright impossible. The labour market is so tight that minor changes risk employee flight. And as payment cycles stretch out, the relative buying power of a dollar today is more than a dollar in the future, bringing next-level complexity to cash flow management.
Even automation and productivity improvements offer minimal help as high inflation erodes margins, leaving businesses with the most delicate task of passing on cost inflation to customers without impacting sales volumes.
When McKinsey Consulting released research showing how the most resilient companies not only survived but thrived in the upswing from the Global Financial Crisis, they noted that pre-recession, the most resilient companies looked similar to others in terms of revenue, but that "they created a significant gap through the recovery, and then doubled that gap, or more, post recovery".
They found that the most successful companies proactively cut operating costs, invested in improving productivity per employee through technology, worked hard at leveraging, in particular through divestments, and invested in the future path ready for fast recovery and market share expansion.
But when it comes to cutting costs, there are a few key areas that businesses should invest the same or more in.
Compliance. Compliance obligations do not disappear in a recession. In fact, now is the time to optimise for it. With businesses failing, regulators have more time to go deeper and act quicker on marginally compliant organisations. This is an area ripe for improvement through technology.
Marketing. Businesses should spend their marketing budget more thoughtfully. Others will be cutting back, so continuing to invest in this space while there is less noise in the market and customers are open to doing more with less will pay off. Speak to the points of productivity gains, revenue growth and customer acquisition.
R&D. Continue to develop your product in a way that adds value to customers and further differentiates you in the market.
Customer Service. Further, use technology to identify your most valuable customers and level up the service you offer. Competitors will try to poach them, so make it difficult. This is also the time to let go of unprofitable or troublesome customers.
Things are going to get rough, but it's important for business leaders not to panic. Let's use this time to get back to basics. Take a hard look at your current financial situation, business strategy, marketing activities, human resources, operational imperatives and your core business in general in a meaningful way.
And eventually, there will be an upswing. Recessions usually last for a maximum of two years, and now is the time to get ready for action.
As McKinsey senior partner Sven Smit explains, 'Often what happens [in the face of a downturn] is that people ratchet down, and then they wait too long to bring it back up. That's where the nuance hits. Postponing is a good way to think about it because… once you know [the recession wasn't as bad as expected], you should put the gas back on. Putting the gas back on is a hard thing.
If you've set yourself up properly, the period coming out of a recession can be quite a high growth period, especially for those well positioned for merger and acquisition activity. Failing competitors with a unique competitive advantage are the ones to absorb. With capital, lean expenditure and a clear strategic vision for your business, you will come out on top.