Sunday, February 22, 2009

Recession: It is not the time to abandon Strategy

By Olu Akanmu

As we move to the end of the last quarter of the year, it is clear to many businesses now that they have to do belt tightening. In first month of the year, we saw the stock market decline by as much as 30% and the naira depreciating significantly against the dollar. While declining asset prices as we discussed in “ Marketing Tasks and Issues in 2009” (See December 2008 posting) will impact consumer confidence, the depreciating naira relative to the dollar will result in significant input cost which may not necessarily be absorbable by consumers whose real household income may decline as a result of imported inflation and declining employment. Federal Allocation to states has significantly declined as a result of declining oil prices even in the first quarter of the year. The impact on household income in many states, where government is the biggest employer and economic spender, will be significant in the coming months.

The natural reaction of many businesses to the new economic challenge is to focus on the pursuit efficiency and the control of cost. After-all, if revenue projections are uncertain, the control of cost to maintain descent profit will be critical. The danger however is that what seemingly started as a tactical response to short term environmental challenge can assume a life of its own, consume the psyche of the organization and become the strategy of the business. Strategy is the art of long view. This recession or economic slow-down will probably last two or three years. A going-concern must have a view beyond three years even in an unpredictable emerging economy like Nigeria. While cost management and control, essentially the pursuit of operational excellence will be critical, building the capability to compete and deliver unique propositions to customers is a ball that must not be dropped. It takes nine months to have a baby. If firms, abandon or postpone their strategic initiatives at this time, till after the economic slow-down, they will probably not have the unique capability to exploit the new opportunities which will be re-presented to business at the economic turn to a new cycle of growth in the next two or three years. In essence, the choices that they make now, how they delicately balance cost management and strategic pursuit, will determine if they will be champions in the next economic turn.

This delicate balance might however be tough for some firms especially those who are vulnerable today because they have previously not built unique capabilities to compete and render differentiated services to their customers. Such firms will be most affected by the coming price wars because the commodity nature of their offerings provides little resilience to aggressive competition dictated y the contraction of markets or its slow-down. Such firms will have to battle for survival, to have today and think of tomorrow only if they survive to get there. The lesson however for other firms, is that to avoid the situations described above, they must never lose sight of building unique advantages and capabilities to deliver unique and differentiated products and services. Ultimately, even in an economic down-turn, previously built unique capabilities may be the greatest buffer to the kind of market shocks that we witness today. A theme that runs through many of our previously published articles, some of which could be found on this site (Please, see: Be Different or Die, Some Lessons for Nigeria CEOs) is that operational excellence is not strategy. That, it is critical for firms to recognize this, and not to substitute the pursuit of organizational effectiveness for strategy, which is the art of building unique capabilities to deliver unique product and services to customers.

How should the delicate balance of cost management and strategic pursuit be managed at these times? The first thing is to dimension the organization to determine what is core to its advantage today and its competitiveness tomorrow. All others outside that core can be classified as “nice to have” where outsourcing or other options could be pursued. Secondly, the organization must strive to deliver strategy effectively. In essence, it must do the unique things that it has elected to do, to be different, effectively at optimal prices and optimal quality. While operational excellence is not a substitute for strategy, it is a critical complement to deliver and execute strategy. Business opportunities are time-bound and exist typically as strategic windows, which draws and eventually closes. The timely pursuit and delivery of strategic initiatives, the execution of programs, the translation of strategy to real market advantage and business revenue is critical to these times. Thirdly, organizations must determine the minimum investment intensity or capability maintenance investment levels necessary to maintain its long term competitiveness. Investments below these levels are likely to be a waste and the firm, if it cannot maintain this minimum investment intensity should consider exiting such business and generate cash and resources to keep investments above the minimum intensity required in other businesses.

A discussion on recession and strategy cannot be complete without the subject of leadership. In normal times, organizations need strong leadership. In period of economic downturn, leadership is even more critical as organizations battle for survival. Recession represents a crisis to organizations. It is like war. Like nations in war that need strong leadership, organizations need the strongest of leadership in recessions. The heart and soul of the people must be engaged to win and pull through the difficult times. Leaders must make this happen. They must lead with the highest level of integrity and be a force of example of hard work and sacrifice to the organization rank and file. A good army has generals, colonels, majors and lieutenants. War is never won by competent generals and incompetent lieutenants. In recession times, leaders must invest heavily in leadership competency development several levels below them. Every leader must be trained on how they can engage the heart and soul of people in their unit in alignment with the transformational battle plan of the organization, its tactical trade-offs and its strategic choices. And because resources are very scarce in this period, leadership training must be linked clearly with financial literacy. Every leader must understand how value is created or destroyed in the organization. Cost rationalization and resource optimization will therefore not just be a decree from the top but something that is understood by those who need to execute it. Stronger financial literacy in the leadership cadre will also build a new behavior where leaders align their resources more strongly around value creating activities that support institutional sustainability.

In conclusion, times like this do not make strategy irrelevant. Firms must keep their long view, recognizing that the economy moves in cycles and that this slump shall turn upwards in the coming years. While they do cost management today, they must do so without damaging their long term capability to compete and take advantage of the next economic upturn. The clever balance of cost management and control with dogged pursuit of strategic initiatives for long term competitiveness is the art that firms will need at these times.

Olu Akanmu
February 2009

6 comments:

abiodun said...

Boss

Nice write-up. I agree with you. The strongest recession proof is organization structure and the character of the leaders. It is very much like human beings. As they say tough times don't last but tough people do. Organizations that focus on cost cutting to the detriment of strategic business building are at best short sighted. They will eventually have themselves to blame when the tough time passes and they need to deliver tangible value to their customers in a post recession world, a world that, I'm sure, will be dramatically different vs pre recession

Abiodun Ogunlabi

SAMUELI said...

Certainly, times like this calls for us to bring out the best in us to face the certian challenges ahead.
Thank you for letting me know of your blog.Will surely visit regularly for more insights.

Sola Adeyegbe

andrew said...

Organisations must develop cost cutting measures in the short run to savage what is left at this time. the critical decision will be what must they do in the short run to make amends for the mess we find ourselves, the scholars form Adam smith would always say while worry about the long run for we shall be dead by then.

This is not to say firms shouldn't keep their long term strategy to growth but in desperate times we need desperate solution and this solution will also impact the future. For instance GM in America may worry about the cars of the next 20years that will be fuel efficient or hybrid versions if they must be number one again, this is a long term goal but right now that is the least of their worries as they need cost saving measures or they become history. Yes, keep the strategy that will take them there but now they require quick win-win solution to a present problem.

gregory said...

Olu
Thanks for this article. I agree with the principles you put forward.
In one of my articles (http://www.ubigen.org/?p=83), I discussed what companies can do to ensure that the monies spent on translating strategy into marketing deliverables is measured properly. The idea is to determine the best mix of marketing initiatives that work, and report to the business how far the funds spent on marketing (as should be the case with technology spend) have taken the business.

Tokunbo said...

Great write up. What we would likely find in most organisations in time of recession like this, is a frenzy of activities mostly not well thought through and largely reactionary. While an organistaion needs to survive today to see tomorrow, what will happen when tomorrow comes? As stated in the writeup the organaiton must be clear on what are the "must have" and "nice to have". I believe of greater importance is the need to have some rigorus thinking and analysis of how the post recession market will pan out. What opportunities will likey immerge, will there be a redefinition of the current market space, e.t.c. All efforts to survive the recession must not compromise the ability of the company to remain competitve and relevant on the longer term.

Sade O. said...

Brilliant and thought-provoking article.

I couldn't agree more that now than ever before, organizations need to keep a long term perspective on strategic thinking if they are to survive the post-recession era.

The sad reality though is that this admonition may go unheeded- especially now that the unspoken objective appears to be survival first, above all else.

Long before the global realities of the recession hit home, many organizations especially in these parts have found themselves grappling with frequent discontinuities in the operating environment and so have jettisoned strategic planning and implementation for short term profits.

Whether this will augur well on the long run remains to be seen as the consistent interplay of industry dynamics with economic realities may yet throw up market opportunities only smart thinking organizations can take advantage of.

I nonetheless concur that organizations must retain the key strengths and capabilities needed to sustain them in the post-recession economy. This is because cost-cutting as a coping strategy is at best a palliative that may not survive the new dispensation where delivering value for money will become critical and new value segments emerge to disrupt the long-drawn out price wars companies often embark on in a bid to grab or retain market share.

It is no gainsaying that the post-recession economy will witness changes in consumer demand and spending patterns. As consumers keep a tighter rein on their wallets and stretch their limited earnings to cater for their basic needs, they may invariably be drawn towards only those products that offer an extended value for less. Companies who desire a piece of the future could thus see this as an opportunity to harness the potential of their immediate and future profits by redefining their existing cost and profit structure to accommodate these emerging value segments and developing better value-for-money products to cater for them.