Publication 26 March 2020

COVID-19: A Survival Strategy for Extreme Economic Turbulence

Due to the increasing levels of anxiety across the world as the Coronavirus pandemic develops, sharemarkets are suffering, supply chains are being disrupted and many companies are already being driven into deep losses. Due to these unprecedented events, businesses and wider economies are facing a period of extreme market turbulence.
Roger Perry_Headshot

Roger Perry

Managing Director, Bevington Group

 

In this time of uncertainty, how do we lead our organisations through this crisis?

Though these events are unique to our time, there is a lot of up-to-date information, research and critical analysis that we can utilise to prepare and protect ourselves, and our businesses.

The research

Following the Global Financial Crisis (GFC) of 2008, three respected academics (Gulati, Nohria and Wohlgezogen, 2010) conducted invaluable studies on the best coping strategies during economic turbulence. Further analysis and research have validated the findings which can be implemented swiftly and practically.

Their research shows that strategies which only focus on cost cutting, as opposed to productivity improvement, experience sub-optimal outcomes as the world normalises. Furthermore, those that fail to invest in growth risk being left behind in the recovery.

The best response is one that combines a productivity focus (done with a sense of urgency) with targeted growth investments, all whilst keeping an eye on changing customer needs. We will call this superior approach the ‘Balanced Response’.

Two extremes

So, why not just cut costs immediately and deeply? This strategy implies taking out people without taking out the work (as would be the case in a productivity project). This can lead to poorer customer experiences as service standards drop or mistakes happen. Furthermore, reducing staff, without understanding what they do, can increase risks. As risk management has become so important in the modern workplace, and regulators are making sure we understand that fact.

Massive redundancies can also result in secondary outcomes, such as poor morale amongst workers. This can leave staff being more concerned about keeping their jobs than responding creatively to the crisis at hand, thus leaving your business more worse off than your (more prudent) competitors.

If you want loyalty from staff in the good times, it helps to show them that you are not going to drop them in the bad times.

However, the research also found that organisations which only chased growth investments fared little better. While they may have slowed the decay of the revenue line, their higher cost-to-income ratios eventually put them at a disadvantage to those who pursued a Balanced Response.

Furthermore, whilst they benefited from buying assets at reduced prices to support growth, many of them did not deeply examine the changes in customer needs. For example, customers in leaner times might be more interested in ‘value’ than in product ‘bells and whistles’. In effect the organisations became overly-focused on growth at the expense of the customer’s desires.

Four pillars of a Balanced Response

The research has shown that a Balanced Response is the right strategy for many organisations, but how do we go about executing on the challenge?

There are four components to a Balanced Response:

  1. Rapid tactical cost reduction of redundant activity or obvious waste
  2. Moving on productivity opportunities with a sense of urgency
  3. Finding growth opportunities in existing and new markets
  4. Prioritising growth and productivity opportunities in ways that don’t lose sight of the changing customer needs

Rapid cost reduction is the first step for many companies, and it is often necessary. It can incorporate big moves, for example, cutting loss-making products, geographies or even businesses. As well as making major adjustments, cost reduction can also consist of a range of micro actions which accumulate to a substantial benefit such as bonus freezes, non-paid leave, discretionary spend reductions, delayed asset replacements, and so on.

Though cutting costs helps the bottom-line, what successful businesses really need is productivity.

Productivity shifts the dial on the sustainable cost-to-income ratio. It includes actions that reduce waste and improve asset utilisation. Productivity is often associated with disciplines such as ‘lean’ and ‘process reengineering’. Many leaders buy-in to the false hypothesis that we need large capital spends to improve productivity. Certainly, capital expenditure can help a business, but there is usually a lot that can be done without financial investment. When we examine processes, we often find that half of the waste (which can be around 20 per cent of the people costs) can be addressed without major technology change.

Finding and executing on growth opportunities is also an important part of a Balanced Response. This requires taking the time to pause, reflect and think strategically.

Great companies responded to the GFC by stepping back and critically examining their strategy and business model (or the way they were organised to make money). Target in the United States were a shining example of this. While the retail giant improved productivity, it also focused on online sales and lifted its investment in ‘chic value’ products. Consequently, they came out of the downturn stronger than when they went in.

Strategic delivery

Delivering on all this potential change requires three key disciplines:

  1. Communicating strategic intent throughout the organisation (so everyone stays on track)
  2. Using distributed management to deploy cost and revenue changes quickly
  3. Listening to the customer’s response.

Of these three disciplines, ‘distributed management’ can be the most contentious as we tend to think that a crisis demands central command and control. However, recent research has made it clear that Agile teams solving specific cost problems can give you a much better result (Rigby, Henderson, D’Avino, 2018).

CEO’s need to resist the temptation to control everything – or risk becoming the ‘bottleneck’ that stops adaptation.

Recovery in the new world

A Balanced Response will be a logical way forward for many organisations throughout this global pandemic and its repercussions. This means drawing on the best of what management science has recently taught us on how to lift productivity, find growth opportunities and prioritise well – all whilst keeping focus on the customer.

The prize for the Balanced Response is much more than mere survival, for executing it well will mean out-competing your rivals as the global markets calm and recover. 

Bevington Group will be holding a webinar on Friday 27 March discussing ‘Strategies and Tactics for Turbulent Times.’ Click here to register for the event.

 

Media Contact

All media enquiries may be directed to the Media and Communications Manager

03 8662 5310

0423 883 945

media@victorianchamber.com.au

For all other enquiries please contact the Victorian Chamber on 03 8662 5333

Workplace Relations - your employment experts every step of the way