Type in the word “recession” into Google and at the last count, it returned over 62 million hits. Everyone is talking about the recession and many companies have already started to do something about it too. Often this means cutting swathes of staff without much thought to their long-term success: British Telecom announced it is cutting 10,000 jobs, Citibank that it is cutting 52,000 jobs and the City of London is forecast to lose over 370,000 jobs during the recession!
No Company Ever Shrunk to Greatness
Whilst job cuts are to be expected, they are by no means inevitable. Research by McKinsey showed that companies that beat the last recession in 2001/2 actually increased spending in key areas. The research tracked almost 1,000 US companies over 18 years, including during those all important recession years. The companies that emerged in the top quartile after the recession actually increased spending on sales, innovation and marketing. Although this reduced their cash reserves, the companies traded short-term profitability for long-term gain. And it worked; their book-to-market ratio was more than 25% greater than their less successful peers.
Understanding the Value Equation
The companies that beat the last recession understood the “value equation”. When times are hard, cash is in short supply and customers are in even shorter supply, you need to carry out a ‘strategic due diligence’ to understand how your company creates value. That means understanding what drives sales and margin growth, how core shareholders view the company’s prospects and how the company can return value back to them. That is the company-side of the value equation. But by itself it isn’t enough. You also need to understand the customer-side of the value equation too That means understanding who your company’s core customers are, what they buy, which channels they use, how much they are willing to pay, and what jobs and outcomes they are looking to achieve at different points in the customer experience.
Only by understanding both sides of the value equation can you beat the recession. And the value equation changes a lot during a recession; just think how people are now buying own labels rather than branded products at your local supermarket. It is critical that you spend enough time during the due diligence studying how your company delivers value to customers and how that creates value for shareholders. The recession is probably going to be with us until 2010, so it makes sense to do a proper due diligence before setting out to beat the recession. And it is no use just relying upon analyses from just before the start of the recession either. The world has changed in the last few months and it might never be the same again.
Six Proven Rules for Recessionaries
Although different companies should respond to the recession in different ways, there are a few general rules that they should follow. I call these the “Rules for Recessionaries”.
Rule 1: Protect Your Best Customers, Products & Channels
As George Orwell, might have said, “All customers are created equal, but some customer are created more equal than others”. You need to understand who your best customers are and to protect the revenues they provide. As pressure mounts to make cuts, it is essential that the cuts fall on the customers who don’t provide much revenue or who lose you money. You also need to protect the products the best customers buy, and the channels they buy them through from cuts too. Paradoxically, this may be the time to consider making strategic investments in your best customers. You can achieve much more ‘bang for your buck’ when your competitors are reducing their spending.
Rule 2: Refocus the Customer Experience Around the Value Equation
Knowing who your best customers are, what and how they buy, and what jobs and outcomes they are looking for, allows you to refocus the business and provide a superior customer experience that also delivers superior results for your company. This may require refocusing resources away from your worst customers towards your best ones. The deep understanding you developed during the due diligence will identify the core touchpoints in the customer experience and the activities which support them. And the focus on customer jobs and outcomes will ensure that you don’t forget about the product in use. This is usually the part of the customer experience where most value is delivered to customers.
Rule 3: Sweat Your Customer Management Assets
Now that you know who your best customers are and have refocused around value creation, you should look to gain the maximum from the customer management assets you have. This means squeezing a bit more value from each of the core touchpoints in the customer experience. Doing this requires that all the supporting people, process, technologies and other assets that deliver the customer experience are better aligned. And that they are used a bit more intensively to create value, whether this involves better sales calls, more targeted marketing, or products that are better at helping customers get the jobs and outcomes they want. As has been said elsewhere, a recession means doing BETTER, not just doing less!
Rule 4: Cut Non-value-adding Costs while Protecting Value
In parallel with using your customer management assets to the full, you should also look to remove all non-value-adding costs using the lean thinking approach pioneered by Toyota. By following a customer order through the entire delivery process, most companies are able to identify 20-40% of the activities that don’t add any value, i.e. that neither the customer, nor the business is willing to pay for. These are all candidates for cuts. This not only saves significant costs, it also speeds-up the business, reduces errors and increases the satisfaction of your best customers.
And don’t listen to the ignorant naysayers who clain that lean thinking only works in manufacturing. Just look at companies as varied as Vodafone, Ducati and Tesco, and of course, Toyota, who have all applied lean thinking with great success to improve their service operations.
Rule 5: Support & Incentivise Staff to Deliver Value
Tough times call for strong leadership. And not only from senior management. You should carefully assess your staff and select the ones who can help lead you through the recession. And then agree tough performance targets for delivery. That may mean upsetting the old order and hierarchy as young managers are promoted above longer-serving ones. It may also mean trouble with unions more interested in maintaining the job status quo than in your company beating the recession. You should be prepared to support, coach and mentor managers responsible for running key parts of the customer experience. It will be worth it. Not only will they feel empowered to deliver against their targets during the recession, they will also be much better managers once the recession is over.
Rule 6: Focus on the Long-term while Supporting the Short-term
Many companies make the mistake of just focussing on the short-term, particularly at the start of a recession. And you will certainly face pressure to be seen to be ‘doing something’ about the recession. The whole point of the due diligence and the previous steps is to enable you to understand what creates value for customers and shareholders over the long-term, and then to develop a plan to beat the recession. This will no doubt require some tough trade-offs. And sometimes you will be forced to make the wrong ones to placate senior management. That doesn’t mean that you should ignore the short-term, particularly revenue generation. But it will allow you to strike the right balance so that you can plan to beat the recession.
Are You Planning to Beat the Recession?
Try and answer the five questions below. If you can answer “Yes” to most of the questions, you are on the right track. But you still have a little work to do? But if you can only answer “No” to most of the questions, you had better look again at your approach to beating the recession. Your best competitors already have!
Question 1: Do you understand the total value equation?
Do you know how value is created for your company? Do you understand how value is created for customers? Can you keep abreast of changes in both as things change?
Question 2: Can you protect the value created by your best customers?
Do you know who your best customers are? Do you know what they buy, at what price, through what channels? Do you know what your competitors are doing to attract them?
Question 3: Are you using all your resources to create value?
Are you sweating your customer management resources? Are you cutting out non-value-adding costs? Are the resources aligned and integrated to let value flow seamlessly to customers?
Question 4: Are you supporting your staff and partners?
Are the right people in charge of customer management? Do they get senior management support when they need it? Are they incentivised to deliver value? Are you supporting & incentivising your partners?
Question 5: Are you focussed on the long-term?
Are you preparing plans to beat the recession over the next 1-2 years? Are you pro-actively managing customers for short-term value creation? Are you measuring the health of your business on a regular basis?
If you follow the six simple Rules for Recessionaries, you will be in a good position to put together a coherent plan to beat the recession. But if you are just intending to rely on aggressive cost cuts, or untargeted investments in the status quo to save you, then “Good Luck”. You will need it.
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McKinsey, articles in the McKinsey Quarterly
Boston Consulting Group, a series of very detailed articles from BCG’s Collateral Damage practice
Harvard Business Review, articles in the Harvard Business Review
The Economist, articles in The Economist