Surviving Difficult & Turbulent Times by Taking the Strategic View
How to develop a strategy to survive the recession
To survive these difficult times please do not panic and make strategic decisions based on your competitive advantages. We are in very turbulent times when Nortel, one of Canada’s most admired and largest cap companies, just 10 years ago, is now in bankruptcy protection. What is happening in the auto industry is another example. Both Toyota and Honda are in much better shape to survive the recession with rock bottom pricing then the former big three GM, Ford and Chrysler who are in a desperate fight to forgo economic extinction.
Therefore it is very important that you take a strategic perspective and carry out a SWOT analysis (strengths, weaknesses, opportunities & threats) of your current situation. Of particular importance is a business leader determining what his or her competitors will be doing in a recession based on perceived opportunities and threats. In order to predict your competitor’s actions during a recession you determine the gross margins of your competitor’s products. This information can be collected by doing an environmental scan with common customers, suppliers and by breaking down products or services that your competitors supply. Once you have accumulated this data you will be able to determine the approximate gross margin of your competitors. This data can then be compared to your actual gross margins for each of your product or service offerings.
In highly competitive industries competitors have taken this to an extreme analytical process. For these companies only a dollar or two cost advantages can make the difference to making a profit or a loss. These companies will have war rooms with product break down processes that determine the manufacturing cost of products down to the last dollar. There will be a central person, usually in Marketing or Sales, who will gather and centralize all useful information from customers, suppliers, industry associations and former employees of competitors to construct competitor’s gross margin calculations per product. All legal avenues are utilized to gather this competitive information such as counting the number of cars per shift in a competitor’s parking lot or obtaining publicly available municipal tax and building plans on competitor plants to determine the cost of operating the competitor’s manufacturing plant.
During a recession prices, as is happening in the auto industry, have a tendency to be lowered as competitors chase after fewer sales. Let’s review the following scenario. If one of your competitors enjoys 33% gross margins on a product and your company has only 10% or 15% gross margins on a similar product you will not be in a very good position to match price reductions with this competitor during the recession. Once this stronger competitor starts to reduce pricing for a product that they have a large cost advantage over your company’s product then your company will start losing money on that product as you match lower pricing tit for tat to maintain your market share. If you cannot reduce your cost then you will be in a continuing loss situation for the duration of the recession. You must decide if you want to exit this product line and maintain the products that have stronger margins and can withstand price reduction. Sometimes it is better to become a smaller company in sales revenue in order to have continuing profit to survive the recession with the products and services that you are best at providing. What is better to be a $20 million in sales company showing losses or a $12 million in sales company showing a healthy profit? Perhaps GM should have considered this downsizing option but as we all know the egos of senior executives and the board of director’s sometimes get in the way of such painful but vitally strategic decisions.
In summary, it is of paramount importance that you scan your competitors and determine their gross margin levels to ensure that you can compete with lower prices. Even if your company is small and lacks resources you can still gather sufficient information to estimate the strength of your competitor’s products and services. If you insist in staying in the market place with a non-competitive product it will be at your peril. Your key competitor may decide that it is time to take-on your company in a fierce pricing war that you cannot win. As a result your company may not be able to survive the recession or your bankers will call in your loans once your income statement, balance sheet and bank covenants start deteriorating. Experience has shown that bankers in a recessionary economy will not give you much leeway before pulling the plug on your loans or your line of credit. Once in this predicament business owners are forced to pony up their house, cottage or boats as collateral to the loans. This is a slippery slope and often in a recession these business owners not only become parted with their companies but also their homes and other assets that they have taken years to accumulate.
the growth side the current recession may be an opportunity to rid yourself of a weaker competitor who has been negatively affecting the profit margins for one of your products by selling solely on low and unrealistic pricing. This competitor is no doubt in worse shape than your company and will not likely be able to ride out the recession because of a weakened balance sheet brought about by low pricing. Once this recession is over your company will be able to achieve reasonable pricing.
In the above scenario where a weak competitor is forced out of a product segment both the supplier and the customer can be long term winners. Your company, the supplier, will be able with additional income to continuously improve the product and provide higher level service to your customer. The customer in turn will have a long term partner that can provide the best product or service. A supplier that is starved financially will not be a long term partner and their demise may even result in less competitive pricing as a result of a monopolistic or oligopolistic supplier base. Great companies understand that strategic partnering with key suppliers is a competitive advantage. It is all part of taking the long strategic view to ensure your company’s survival. This is to avoid being placed in life or death situations as is presently the case for Nortel, GM, Chrysler, Ford and the large US banks and wealth (or wealth destruction) management companies. Would a longer strategic perspective, instead of quarter to quarter profit maximization pre-occupation from the leaders of these companies, have saved these companies from all this pain? In the writer’s opinion the answer is absolutely yes. But that issue can be debated on another day.
As you can see from the above analysis strategic planning is not always exciting with visionary and brainstorming exercises during strategic planning retreats. It consists of a lot of hard work that has to be done to find the right strategic path for your company’s continuing success. This is only one component of the strategic work that must be accomplished to recession proof your company.
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