Managing in a downturn: Strategies for Success Part II

The second area for CEOs to focus on to manage a downturn, is marketing and communication. Again, I have put down some thoughts in an earlier post, so will not go into too much detail now. But I would like to emphasise that a well planned marketing and communication campaign can be carried out at a reasonable cost with a high impact.

The third area relates to new initiatives. I have mentioned earlier that investments dry up and new initiatives are ignored in a downturn. So what is the solution?

Let me emphasise that, by no stretch of the imagination am I recommending that investments continue to be made in the same manner as during good times. Far from that. It is good to be circumspect about investment and new initiatives in a downturn. But the tap should not run dry.

Let me take the example of a manufacturing business. Until the downturn, the factories of this business would have been busily engaged in churning out products for a specific industry, which they had been set up to cater to in the first place. Nothing wrong with that. And the good times witnessed over the last few years would have ensured that the factories performed at 100% levels, delivering a solid return on investment and ensuring growth.

Then, came the bust. And the industry the business supplied to would have been severely affected by the downturn. As a result, output would have dropped, the load at the factories reduced and idle time would have increased.

What are the options in such a scenario? One is the list of mistakes I have outlined since I began this blog. What would those initiatives result in? Definitely not an increase in revenue, or a growth in profitability. All that would be achieved would be consolidation of some amount of revenue and profit or perhaps maintaining a steady loss that does not grow further. And the factories would continue to have idle capacity. Not a great situation to be in.

A second option could be to go for volumes. Take in any business that comes in or that can be grabbed, irrespective of the price or profit margins. After all, in a downturn, all companies are interested in increasing their margins or, at the very least, reducing costs. There would be plenty of takers, beginning with existing customers and going on to customers of competition, who would be happy to give additional business at lower prices. But what would this strategy result in? Sure, the factories would not be idle any more and fixed costs would be spread across a larger output. But what about profit margins? They would be unlikely to increase significantly. In fact, there would be greater chances of profit margins not just dipping, but also sinking into the red, chalking up losses. For the additional high volume low margin (or even loss making) business would not just counterbalance the existing business, but perhaps also cannibalise existing margins since current customers would clamour to shift all their business to the lower prices.

Is there a strategy that could help fuel growth? Perhaps even increase profitability? I am sure you can think of some and I’d like to hear them.

But let me suggest one for now. Suppose the organization were to remove its blinkers that blinded it to new opportunities. Suppose it went out into the market and proactively looked at new industries that it never looked at before, for lack of time and/or inclination. You may be surprised (or not!), but for businesses that have done this, there are innumerable new opportunities just waiting to be discovered. New industries that can be tapped, either with existing assets and resources or with a minor investment. But these new initiatives can result in exponential growth even in a downturn. I’ve seen this happen. I’ve spoken to CEOs who have growth their revenue and profitability by upto 30% over the last eight months, which have been the worst months of the downturn.

The fourth area pertains to efficiencies. In all areas of the organization. Just as managerial inadequacies get glossed over during the good times, inefficiencies within the organization are overlooked and sometimes even swept under the carpet during a boom. The organization can afford to turn a blind eye to these inefficiencies, since the peak of the business cycle provides opportunities for growth and profitability that more than compensate for any negative impact these inefficiencies may have. But when a downturn begins, there are no buffers, and the inefficiencies stand exposed, with their impact on the bottomline a damning indictment of the excesses of the good times.

The downturn, then, is a great opportunity to weed these inefficiencies out of the system and trim the flab. This will create a leaner and nimbler organization which will be well prepared to grow rapidly when the upturn begins.

And that brings me to the topic that is extremely relevant as the downturn bottoms out and the upturn beckons.

How should organizations prepare for the upturn?

Managing in a downturn : Mistakes CEOs make - Marketing Budgets

The other area that CEOs seem to find convenient to axe in difficult times is the marketing budget. I find this a bit of a paradox. Why, you may ask?

The answer is simple. Everyone knows and agrees that marketing is essential to build brands, establish positioning, create differentiation, influence perceptions and preferences and build consumer loyalty. But aren't these the very things that are critical to focus on in a downturn?

When the environment goes downhill and consumers become selective about the products and brands they purchase, it becomes even more important to ensure that the brand is visible and the consumer's purchasing behaviour is influenced in its favour. Surely no one believes that in such a situation, cutting marketing expenses will help in increasing brand visibility and brand preferences?

Then why slash marketing budgets in a downturn?

Perhaps, because it is an easy way out. Operating costs cannot be slashed without serious implications for productivity, quality and revenue. Payroll costs can be reduced and I've dwelt on that already. Real estate and administration costs cannot be reduced quickly in the short term without a negative impact on the business. So it is marketing which is the only significant cost that can be reduced without a perceptible short term impact.

Which gives rise to the question: if there is no significant or tangible short term impact, what's wrong with slashing the marketing budget?

The answer lies in the objective of marketing as I have defined it earlier. Marketing shows results over a period of time. Mid term to long term. The only situation where marketing shows results in the short term is when there is a tactical promotion like a limited period discount. Brand building, positioning, creating differentiation, influencing consumer behaviour and preferences and building brand loyalty are all results of marketing that are perceptible over a period of time.

Which means that cutting marketing budgets can have serious mid term to long term implications.

Another factor to consider is the lead time for marketing to have an impact. The results of marketing always show up over a period of time after the money is spent (this is also one of the reasons why the effects of marketing are only felt over a prolonged period of time). The best effect of marketing is felt in a consistent marketing campaign. Breaks in a campaign may be strategic, when they are used to reinforce the campaign and strengthen the brand. But this applies by exception.

What this means is that a break in marketing, especially in a downturn, sets the product and brand back a bit. When the marketing budgets are restored, it will take time to re-establish the results that had been achieved at the point of the break.

So, what's the answer?

One way an organisation may tackle this conundrum is by being highly selective about the deployment of marketing funds. Marketing strategy has to be highly focused on the most effective means of achieving results without a break. Metrics to assess the ROI on marketing campaigns must be stringently enforced. A good marketing department should, in any case, be tracking the ROIs on different marketing options, even in good times. So, when it is time to reassess the marketing strategy, it becomes a fairly straightforward exercise to look at the various options, analyse the metrics and then zero in on those marketing actions that are most successful with the least expenditure.

This process of weeding out the least effective options will help organisations in a downturn to optimise their marketing expenditures without compromising on results. Also remember that while everyone else is cutting their marketing budgets, there is much less clutter in a downturn. Which means that if you are sensible about how to optimise your marketing spend, you automatically become more visible.

Now, isn't that a great situation to be in?

Managing in a downturn: Mistakes CEOs make

I've never understood this. Whenever there is an economic downturn, organisations go into "survival mode". They begin slashing costs, retrenching employees, restructuring the organisation, cutting marketing budgets...in sum, a host of "priorities" take over. I can't help comparing it to a kind of preparation for hibernation, where the metabolism begins to slow, the body tries to conserve energy and in general, the organism becomes sluggish and sleepy.

Does this analogy extend to the world of business? In today's competitive scenario, I believe it does. The impact of all these strategies for survival is to stifle opportunities which the organisation would have otherwise aggressively pursued in its endeavour to grow profitably. It reduces the inclination to be innovative and experiment with new business strategies, especially those that are the most innovative and, therefore, appear to carry the greatest risk. The net result of these measures may well turn out to be the equivalent of commercial hibernation; stagnation or even reduction of revenues and profits, and it may be difficult to recover in the long term.

While I do not for a minute believe that organisations should not attempt to protect their bottomlines when the market for their products or services is shrinking--and I would not like to generalise, since there are organisations who have genuine cashflow problems which can only be tackled through drastic measures--I would like to argue that organisations should not adopt a blinkered approach or ignore opportunities for growth.

The purpose for the existence of any firm is to grow through acquisition of new customers, increasing the business, profitably, from existing customers and retaining their existing customer base. I believe that organisations would be better served if their managements were to focus on these three key areas in a downturn; strategies to achieve these objectives would be more effective in at least maintaining revenues and profits in a downturn, as well as ensure that the organisation is well prepared for the upturn when it happens.

The next few blogs will dwell on some of the issues I have outlined in this blog, and explain:
a) how an organisation in survival mode can harm its long term prospects and weaken itself when the upturn arrives
b) what are the strategies organisations can and should adopt in order to protect themselves from the downturn, without any adverse side effects
c) how these strategies will benefit organisations during the downturn and when the upturn finally arrives