Will You Emerge Stronger or Weaker After This Most Recent Cost-Cutting?
by Sims HulingsIn the current economic environment, the vast majority of companies are cutting costs. Most of these cuts are now incorporated into 2009 budgets and the companies have plans that will, at least on paper, allow them to be profitable this year. However, they are still at risk in at least one important way: if they have cut in the wrong place(s), they may lose significant share in the industry re-organization that often accompanies a recession.
Recessions often lead to significant reorganizations of industries, in two ways:
1. Acquisition of the weaker players by the stronger ones.
2. Investment choices made during the downturn (e.g., in which technologies to
pursue, what types of marketing spending to reduce, which channel partners to
support) can determine who wins in the next business cycle and who loses
Both of these ways in which industries reorganize are well-known. The key is determining whether or not your company will emerge stronger or weaker, and what to do about it.
How to Tell if You Will be Stronger or Weaker
There is no definitive way to tell how your company will emerge from a recession, but the answers to the following questions give a few good indicators:
Did we exit specific businesses or did we cut activities whose value-added is difficult to determine (e.g., NPD, advertising)? Exiting specific businesses (and not just stringing them along until things get better) will generally allow you to emerge stronger in the remaining businesses. The more common approach – reducing the level of investment in activities whose value-added is difficult to determine– is a double-edged sword. Although it is never wise to carry excess overhead, and recessions can offer an opportunity to reduce that overhead, it is also the case that stripping the back office can leave the company without any new products, weak customer relationships, an atrophied brand, and an overall inability to capitalize on its renewed healthy customers when the time comes.
If you are a division of a larger company, how is the larger company doing? This is a key question to ask of your own company and of your competitors. If the parent company is healthy, the division can often invest during a recession – making a formidable competitor both during the downturn and during the subsequent business cycle. If the parent company needs cash or profit contribution, the division can often be constrained and easy to attack.
Where did our competitors reduce costs? Most companies become so internally focused during cost-cutting that they forget to keep track of what their competitors are doing.Paying attention to how competitors are cutting costs will help determine who in the industry will be relatively stronger and relatively weaker (and may also give you ideas to consider for your organization).
While answering these questions will not definitively tell you whether you will emerge stronger or weaker, they should give you an indication of whether or not you need to worry.
What to Do If You Will Emerge Stronger
The strongest player in the industry (who is not necessarily the biggest) is often aware of this fact and generally tries to take share during the downturn.If they are wise, they will specifically target the customers of those competitors who are not committed to the industry – either the ones who are withdrawing from the industry or segment, or whose parent company is in trouble.
Often, the strongest competitor makes the parallel mistake to the industry’s weakest competitor – they invest in everything across-the-broad, just like the weakest competitor cuts costs in an untargeted fashion.Instead, they should target the specific competitor and/or segment whose business they want and not dissipate their advantage by attacking everyone.
The strongest competitor can also use a downturn as an opportunity to acquire at a reasonable price.Given the myriad advice available on acquisitions, we will not repeat it here.
What to Do If You will Emerge Weaker
To the extent possible, switch from across-the-board cuts to more targeted ones, so that you can defend the parts of your business that are likely to be most valuable during the next business cycle.If this is not practical, try to do one of two things:
1. Identify a competitor who is likely to emerge even weaker than you are and target
their customers/segment
2. Make your company as attractive as possible to the most likely potential suitor(s)
Following these techniques can help even companies who might be expected to be hurt most by recession to create above-average shareholder returns.
For more information, contact sims.hulings@mkt-strat.com.