One thing is clear. Due to the corona crisis, all strategy plans can be trashed. We are transitioning to the ‘new normal’. With a huge economic recession and an unknown 1.5- 2.0 meter society. What now? What do you have to do to stay upright? Which strategy do you choose as a multinational, Small/Medium company or self-employed person? The answer lies in a smart combination of a defensive and offensive approach.
What is the best basic strategy?
The corona crisis is leading to a global recession like we have never seen before. The consequences are enormous. Both in the field of health, society and economy. The Netherlands Bureau for Economic Policy Analysis (CPB) and the International Monetary Fund (IMF) expect the Dutch economy to experience an unprecedented contraction of perhaps -8 percent.
What is the best ‘basic strategy’ for companies and institutions during such a global recession? You understand that this question is not easy to answer, if it can be answered at all.
We are not only dealing with a unique crisis, but also with the greatest crisis since World War II. What can we possibly learn from previous recessions? Immediately cut back and wait for the storm to blow over? Or if it is possible to make targeted investments in new developments and market opportunities that also arise during times of crisis?
Harvard Business School professors Gulati and Nohria figured it out in 2009, just after the outbreak of the financial crisis. They wrote about this in 2010 in the article ‘ Roaring Out of Recession ‘ in the leading Harvard Business Review. They were the first to find that little empirical research has been conducted in this area. So it remains a matter of coffee grounds, but let’s see what they encountered and what their advice is. Remember that history often repeats itself, but always in a different way, in a different form.
Learn from survivors in the past
Gulati and Nohria analyzed the corporate strategies and business performance of companies during three global recession periods, namely those of 1980-1982, 1990-1991 and 2000-2002. Unfortunately, at that time, they were unable to include the results of the recession caused by the 2009-2014 financial crisis.
They studied turnover and profitability data from 4,700 companies over three periods: 3 years before the recession, 3 years after the recession, and during the recession years themselves.
Immediately the hard figures: 17% of the companies did not survive a recession. They went bankrupt, were taken over, or disappeared from the stock exchange. Most survivors recovered slowly. Eighty percent of the companies that survived a recession were not on the old growth figures in terms of turnover and profit three years after the recession. In fact, three years after the recession, 40 percent of survivors were still not at the old absolute level of turnover and profit.
Only a small number of companies, around 9% in the study, rebounded after a slowdown, outperformed key financial parameters before, and outperformed their industry, with at least 10% in terms of sales- and profit growth. What did these successful survivors do different from all the others?
Four types of companies
The researchers saw that the companies investigated tackled the recession in various ways. In terms of strategy and management approach, they saw four types of companies:
- Prevention-oriented companies , which are primarily defensive and more concerned than their competitors about avoiding losses and minimizing downside risks.
- Promotion-oriented companies , which invest more in offensive movements, with new upward benefits, than their peers.
- Pragmatic companies that combine defensive and offensive movements.
- Progressive companies that use the optimal combination of defense and attack.
Only cutbacks are counterproductive
The companies that emerged most strongly from a recession were not the companies that cut costs the fastest and most deeply during the recession years. In fact, these types of ‘prevention-oriented companies’ are statistically relatively least likely to outperform their competitors in times after the recession has ended.
Anti-cyclical investing is not the solution
This seems to argue in favor of countercyclical investment, but that is not the solution, according to the researchers. The chances of these ‘promotion-oriented companies’ emerging as the winner after a recession by growing the fastest in terms of turnover and profitability are also relatively small for companies that (only) dare to invest anti-cyclically.
Pragmatic approach helps
The companies that, according to the researchers, are most likely to outperform their competitors after a recession are the ‘pragmatic companies’. Depending on the situation, these companies pragmatically combine more defensive and offensive actions.
Combining defensive and offensive actions is the best approach
However, the companies that perform best after a recession are the ‘progressive companies’. Their growth in sales and profit after the recession is the best among the four types of companies in the study. The defensive choices these companies make are selective. They mainly save on costs by improving operational efficiency and not by reducing the number of employees compared to colleagues.
However, their offensive actions are comprehensive. They develop new business opportunities by making much greater investments than their competitors in R / D and marketing, and they invest in assets such as factories and machines, taking advantage of steeply plunged prices.
Mix of defensive and offensive strategies
The best performing companies manage to strike a good balance between (1) cutting costs in time to be able to sing out the recession and (2) investing at the same time to grow tomorrow. In practice, such a combination strategy with defensive and offensive choices is not as simple as it seems.
According to the researchers, three defensive strategies can be distinguished:
- Reduce the size of the workforce
- Improve operational efficiency in business processes
- A combination of the two
In addition, there are three offensive strategies :
- Investing in the development of new markets
- Investing in new capital goods
- A combination of the two
When we combine these 3 defensive approaches with the 3 offensive, a total of 9 combinations are created, which not all work out equally effectively in practice.
The most profitable combination, applied by the progressive companies, consists of using cost savings to increase operational efficiency in particular. And therefore not to put the primary focus on damaging the number of employees at all costs. You must combine the savings on business processes by investing more in marketing, R / D and (where relevant) in capital goods such as machines and factories, compared to competitors.
Smart marketing in times of crisis
It is therefore important to continue to invest in targeted marketing and R / D. Stay closely connected to customers’ wishes, needs, expectations and behaviors. Because they change due to the strongly changed circumstances. Just think of the enormous flight that teleworking, digital care, distance learning, aid initiatives, home entertainment and online shopping have taken.
We know from various other studies that marketing can make the difference, especially in times of crisis and recession. That requires a different, smarter way of marketing companies .
Agile organizations have an advantage
As we can see, the best performing companies cleverly combine defensive and offensive actions. Agile companies have the advantage here. After all, you have to be able to switch quickly and often take drastic decisions. Companies that have invested in ‘ strategic agility ‘ in recent years are now at an advantage.
Working on agility and resiliency
Strategic agility consists of two elements that reinforce each other. On the one hand, the agility and agility of the organization to quickly take advantage of offensive opportunities that arise due to changes in the market. On the other hand, the resilience and robustness (resiliency) of the organization to absorb the consequences of often large and unforeseen changes. Agility and resiliency are therefore two sides of the same coin.
Organizations can enhance their agility by increasing agility and agility at all organizational levels. For example, through a cyclical strategy process ( rolling strategy ), business model innovation, digital transformation and a flexible work organization.
Resiliency is mainly enhanced by a strong organizational identity (such as with companies such as Coolblue and organizations such as the Red Cross), strong shared values (think of the solidarity among care providers), strong partnerships (think of the help of distribution and chain partners) and sufficient financial buffers (think of the banks that have been busy strengthening their financial buffers in recent years).
Balancing between cutbacks and investing
In short, the best strategy during a major crisis and recession generally seems to consist of:
- Reduce costs wisely to create lean and mean business operations,
- targeted investment in marketing, R / D and new capital goods, doing more than colleagues
- strengthening the agility of the organization.
According to researchers Gulati and Nohria, this is the formula for success to emerge from the recession as the winner. Because so they say:
This agility, even as leaders hold the course toward long-term growth and profitability, serves organizations well during a recession.
That means ‘ Investment in both existing and new businesses ‘. And ‘ stay closely connected to customer needs, a powerful filter through which to make investment decisions’ .
But it is balancing, because the researchers write: ‘Don’t be too defensive, Don’t be too aggressive.’
Choose the approach that suits you
One crisis is not the other. Past performance is no guarantee for the future and a ‘ one size fits all ‘ approach does not exist. And as they often say: history repeats itself, but then know this is always different than in the past.
Find out what suits your organization, in your sector, in your situation, at the moment. Listen to what Richard Branson, the famous Virgin Group CEO, once said:
When it comes to the future, there are three types of people: those who make it happen, those who make it happen, and those who wonder what happened. Some companies are determined to belong to the second group.
The question remains: how ‘progressive’ is your organization? Good luck with your strategy!
The Caribbean Blog Authority