Corporates are having to deal with a highly volatile recessionary marketplace. The credit crisis has spilled over from the finance industry into nearly all areas of business. There have been falling share prices, a depressed housing market, movements in fuel prices, bank ownership by taxpayers and erratic inflation figures.
The news is the same across the globe. Leaders, political and business alike, have been rocked by waves breaking from all directions. Few have experienced this kind of volatility before.
No surprise, then, that UK consumer confidence has fallen to its lowest point in over a decade, with further drops likely. This is rapidly translating into falling consumer spending - the British Retail Consortium said last month that sales had fallen for six of the past seven months. With no quick fix in sight, the duration of the downturn is unknown: many current market trends could persist for years.
The prospect of doing business in this environment is forcing a re-think of what success looks like, and what it will take not only to survive, but to thrive. Business leaders will be tested on their ability to drive growth while managing the cost-base of their organisation. The downturn of the 1990s provides valuable insight into the strategies and tactics that differentiate the winners from the rest during such times.
HOW DO HIGH PERFORMERS ACT IN A DOWNTURN?
Research undertaken by Accenture using its High Performance Business methodology has shown that high-performing companies understand success through three dimensions: ensuring focus on the right markets in the right way; developing capabilities that make the difference; and conducting performance analyses that deliver with agility and efficiency. This understanding confers greater advantage in times of economic stress, and the criteria for success are confirmed again and again, regardless of industry and over extended periods.
Research into the Return On Invested Capital results of 850 of the largest US companies following the 1990-91 downturn demonstrated that the winners during those years continued to outperform their peers for six years after the recession (When Good Management Shows, by Jane Linder and Brian McCarthy, Accenture Institute for Strategic Change, 2002). Put simply, testing economic times broaden the gap between winners and the rest, conferring on the former a competitive advantage that lasts well into the economic upturn.
Looking at the strategies pursued by these companies in the downturn, the value of recognising opportunities and relentlessly focusing on achieving the results becomes apparent. High performers prioritise cashflow generation and ensure that they are executing in a manner different from that of their peers.
They make investments that promise profitable growth, avoiding those that generate growth but lack a clear profit follow-through; they focus on market areas that will bring success; and are circumspect about making investments outside the core. Future markets must be taken into consideration, and investments to position the company for success in these areas made. High performers do make acquisitions during downturns, but only when the company can quickly consolidate the operations and release value to the bottom line. Such acquisitions are made to establish a leading position both at home and abroad.
BUT THE DISTINCTIVE CAPABILITIES OF HIGH PERFORMERS DURING SUCH PERIODS TAKE THINGS MUCH FURTHER.
Recognising the need to reduce costs and maintain a healthy cash position is a sensible approach, but is not distinctive. Most companies will manage their operations frugally so that they can build up a war-chest, limit debt and so remain capable of exploiting opportunities that may arise. But actions to free up cash become increasingly important. These include a focus on the release of working capital by tightening the less stringent behaviour patterns acquired in times of abundance and re-assessing present and future market demands. Such actions indicate appropriate cuts in areas such as inventory and capacity.
High performers also think differently. They do not become over-focused on survival in the short term or lose sight of the future. Instead, they understand the opportunity that a downturn presents to introduce capabilities such as cost management and to start creating new skills for the longer term. So programmes to shore up cash positions and release liquidity are often complemented with longer-term schemes such as streamlining and process optimisation - for example, 'Lean Six Sigma' quality management. Such initiatives will not reap immediate benefit but create a strand of organisational DNA that will generate competitive advantage over the years to come. Some even look to their operating model and start moving to a new vision for the shape of the organisation to face future markets.
Often neglected in the face of turmoil is the need to strengthen relationships with customers and improve value propositions for their specific needs. Understanding the pressures on customers is necessary to preserve market position - and this is an area to review in tough times. High performers may incorporate improvements in pricing strategies, in innovation and in quality initiatives. These actions will deliver the short-term success to ride the turbulence and ensure continued high performance in a leading position when the market turns positive - as it inevitably will.
LEADERSHIP AND GOVERNANCE IN TURBULENT TIMES
As to the all-important element of performance analysis, the combined features of governance, leadership, talent retention and a determination to win remain key to success. Leaders of high-performing companies take decisive action quickly and then focus on growth and performance. It takes courage and strength to make such decisions when the volatility in the market is at its highest, when risk pervades all aspects of the business and the impact of a wrong turn is extreme. They weigh the options and make a decision; the rest prevaricate, falsely trusting that a benevolent market will take the decision for them.
High performers exploit detailed knowledge of their industry and markets, not just to reduce costs but to do so in the right areas, and deploy any savings to strengthen their competitive advantages. To accomplish this, they share insights and knowledge across their organisation, recognising, for example, that cost is not the province of finance alone and that market activity should not be confined to the marketing organisation. Their networking capability makes it easier to take decisions based on the right information.
High performers recognise that testing times provide scope for improving the talent pool. Best and scarce talent is often released into the market as companies contract or go into liquidation. High performers take advantage of changing economic conditions to attract talent from competitors, and even from other industries and regions. And, of course, leaders with a good record and admirable reputation are most able to benefit during this time.
For many, the challenges we face now are significant. But superior companies have the wherewithal to exploit opportunities by tailoring their businesses to meet the new market realities, with an intensified focus on growth and performance. It will be the high performers who succeed and thrive into the next upturn, for success breeds success.