Business Strategies to Beat the Downturn. PAPER: 2/10/11

Business Strategies to Beat the Downturn

Introduction: The Effect of the Downturn and How Companies Can Cope

The ongoing global economic crisis has impacted most of the companies in the world as they have to not only reckon with falling sales, stagnating demand, oversupply, and inflation all at the same time mean that businesses are operating in “chaotic” and “uncertain” environments. Further, with globalization making it possible to produce where it is cheapest and sell where the profits are more, western as well as eastern companies are realizing that it is an entirely new ball game altogether. Therefore, they need to put in place strategies that would enable them to compete on fair basis with firms from all over the world.

The typical response of businesses during recessions is to lay off workers, accumulate cash and retain liquidity, and put off expansion plans until the business environment improves. While these are certainly understandable strategies, our contention here is that these strategies are counterproductive.

For instance, downsizing might seem attractive because it enables businesses to cut costs. However, the companies have to realize that once they downsize, the best along with the worst of the employees leave the company. The latter because they are laid off and the former because they see that in future they might be the targets. Of course, the companies can retain the best performers by increasing their compensation but this strategy is pointless when the whole objective is to cut costs.

Next, research has shown that American companies are sitting on a cash hoard, which means that they have accumulated enough cash reserves just in case they face a liquidity problem in the same manner in which banks found themselves in the aftermath of the Great Recession of 2007 when liquidity dried up and nobody was lending to anybody. Again, this is legitimate as long as the companies do not keep cash without making use of it productively. In other words, if the firm is simply having lots of cash in hand, it is akin to individuals keeping money without generating returns. Moreover, this strategy also means that recovery is delayed and no matter how hard the government tries, businesses simply do not want to spend cash.

Third, putting off expansion plans is a good idea as the uncertainty in the external environment means that businesses should wait for a sunnier day. However, in cases where the company has to enter new markets, putting off expansion might be a bad idea as nimble and agile competitors can steal a march on them. Moreover, with so much of emphasis being placed on innovation and inventiveness, putting off expansion might backfire as competitors and startups with innovative and game changing ideas might outperform the market and which leads to folding up of existing firms.

Therefore, it is the case that businesses must rethink their strategies during economic downturns. A possible solution for them would be to ramp up their IT infrastructure and invest more in cutting edge technology so that they leverage the synergies from the integration of disparate and discrete business processes as well as actualize the advantages from the economies of scale. For instance, when IT is leveraged to the fullest, the result is often an increase in productivity as well as a benefit that accrues because of more efficiency. Further, IT enables companies to produce more and ramp up the volumes as it is obvious that machines can do more than humans do and at the same time, work tirelessly.

Of course, one might point out that this strategy leads to obsolescence of workers and entails downsizing. We consider this inevitable as the processes of creative destruction that are inherent to capitalism means that the old changes into the new and that the only constant in the world is change which is relentless and hence, IT and innovation are the buzzwords for any actualization of business strategies during downturns.

Synergies, Integration, Ocean Strategy, and Cost Cutting

We have discussed how IT and innovation can help businesses during downturns. Similarly, through the use of these game changers, businesses can also integrate vertically and horizontally as well as venture into new markets (or oceans that are blue meaning that they are yet to be fished in contrast to red oceans that are already saturated). As cost cutting has been touched upon briefly, we return it to point out that IT and innovation along with integration and expansion save costs from the holistic approach that we suggest here. The point here is that businesses must think out of the box to deal with economic downturns and this means that they cannot rely on old models and discarded theories in their endeavor to remain profitable during bad times as well as good times.

Vertical integration refers to the integration of the entire value chain from procurement to after sales and including processing of raw materials, producing finished products, marketing them, enabling customer service, and closing the feedback loop. An example of a global conglomerate that is vertically integrated would be the Reliance group in India that owns all the steps in the oil and gas value chain right from exploration and drilling, to refining and processing, and ending with retail outlets which sell the product.

Horizontal integration refers to integrating breadth wise meaning that businesses can venture into blue oceans through merging their core competencies with that of aligned businesses. for instance, the TATA group in India has ventured into disparate and discrete businesses as varied as IT and steel, which means that using the core competency of sustainable and profitable business strategies, their aim, is to ensure that they make profits even during economic downturns by following their business philosophy.

The point here is that instead of just sitting on hoards of cash waiting for the business environment to improve, businesses can proactively actualize strategies that are in line with the points made above. The key aspect to note here is that businesses ought to shed their conservative mindset especially during recessions and only by recognizing the fact that the world waits for none that they can ensure that they are not left behind. Moreover, the other imperative here is that for businesses to remain competitive during downturns, they need to embrace the chaos instead of running away from it.

Ride the Recession: The Way Ahead for Businesses

We have discussed the various strategies that businesses can employ during economic downturns. Of all the strategies discussed, the common theme around them is innovation. Therefore, by recruiting visionaries and game changers, businesses can ensure that they keep ahead of the competition and they can also ensure that their existing employees are sufficiently motivated to self actualize themselves. To do this, they need to have innovative HR (Human Resource) policies that encourage out of the box thinking, make their employees become inventors, and innovators in their own right, and make the companies get ahead of the curve.

Further, by hiring the best in the field and linking their compensation to performance, companies can ensure that their employees are a source of sustainable competitive advantage. As recent trends in HRM show, companies that invest in their people during downturns are more likely to be profitable when compared to those that simply downsize just for cost cutting reasons alone.

This means that companies must ride the recession instead of waiting for someone or something to pick them up and even if it means that they ride alone in terms of being the early movers, there are benefits from this as the saying that the early bird catches the worm is very apt metaphor here. Apart from this, even if they have to take the slow route initially, they must remember that once they conserve the energy, building momentum later on becomes easy, and hence, once the green light is on as the market improves; they are in the driver’s seat, which means that they can accelerate easily.

Conclusion

A the risk of being repetitive, we cannot but overemphasize the importance of innovation and inventiveness. These qualities or traits of successful companies indicate that those with the right mindset win and those whose arteries are clogged because of inertia and apathy find that they cannot walk fast enough let alone run to outpace the competition. In concluding this article, it is the case that economic downturns are temporary whereas businesses are permanent. Therefore, if businesses suffer setbacks due to temporary reasons instead of outliving their peers, they have only themselves to blame.