The world after Coronavirus is unlikely to resemble the one before it. With wide ranging economic impacts already being felt, businesses large and small have been taking stock and considering the best way forward. Dale Williams, Partner at BPE Solicitors, looks at how businesses can and should adapt as we move through different phases of the crisis.
Discussions we’ve been having with clients have been varied. They’ve been asking us for help and advice on issues around employment law, cost savings, both people and premises, supply chain structure and contract breaches, restructuring and insolvency. These all fall under the umbrella of business remodelling, something that has been, and will continue to be, a priority for many organisations, influenced by Government announcements and initiatives designed to offer support.
And while it is still absolutely prudent for businesses to be thinking in the short and medium term as we all continue to adjust to the new ‘normal’, evidence suggests that the ability to continually adapt is the key to success.
Following the 2008 – 2013 recession, Harvard Business School classified companies, and their management approaches during periods of economic decline, into four types.
- Prevention-focused companies
Make primarily defensive moves and are more concerned than their rivals with avoiding losses and minimising downside risks.
- Promotion-focused companies
Invest more in offensive moves that provide upside benefits than their peers do.
- Pragmatic companies
Combine defensive and offensive moves.
- Progressive companies
Deploy the optimal combination of defence and offence.
While the circumstances now are significantly different, the basic premise that what is normal will be shifted is absolutely still relevant, which makes it worth revisiting. There were some key learnings from the report which could be helpful to businesses, and are perhaps particularly relevant as we move from the short and medium term onwards.
A defensive balance
It’s understandable that many businesses swing into crisis mode, believing that their sole responsibility is to prevent the company from getting badly hurt or going under. They quickly implement policies that will reduce operating costs, shrink discretionary expenditures, eliminate frills, rationalise business portfolios, lower head count, and preserve cash. They also postpone making fresh investments in R&D, developing new business, or buying assets such as plants and machinery.
However, this can cause problems including the prevalence of pessimism leading to a feeling of disempowerment, doing more of the same with less which leads to a drop in customer satisfaction and losing focus on those initiatives that might be the catalyst for post-recession growth. Few prevention-focused organisations do well after a recession, so CEOs may want to focus on more pragmatic or progressive approaches.
Some business leaders pursue opportunity, even in the face of adversity. They use a recession as a pretext to push through change, get closer to customers who may be ignored by competitors, make strategic investments that have long-term payoffs, and act opportunistically to acquire talent, assets or businesses that become available during the downturn. These strategies are designed to garner upside benefits.
But organisations that focus purely on promotion develop a culture of optimism that leads them to deny the gravity of a crisis, often for too long. This can cause damage to their organisation which can be difficult to recover from.
Practicality wins through
The companies most likely to outperform their competitors after a recession are pragmatic. The CEOs of these companies recognise that cost cutting is necessary to survive, but that investment is equally essential to spur growth, and that they must manage both at the same time if they are to emerge as post-recession leaders.
Businesses that concentrate on improving operational efficiency fare better than those that focus on reducing the number of employees. Progressive companies also lay off employees, but they are less reliant on that approach.
In contrast, companies that respond to a slowdown by re-examining every aspect of their business models—from how they have configured supply chains to how they are organised and structured—reduce their operating costs on a permanent basis. Crucially, when demand returns, costs will stay low, allowing their profits to grow faster than those of competitors.
These are unprecedented times, so while it’s helpful to have a point of reference to look back on and see what can be learnt, there are particular characteristics of the current situation that are worth noting.
- The Harvard Business School report applied to a classic recession model rather than the likely “V” shaped downturn and bounce back we are expected to experience.
- The Government is offering far more direct support, albeit largely in accruing more long-term business debt, than it has previously.
- Working practices are now drastically changed for the majority, either not working at all, working from home or working in the business premises in significantly changed circumstances.
Few progressive business leaders have a master plan when they enter a recession. They encourage their organisations to discover what works and combine those findings in a portfolio of initiatives that improve efficiency along with market and asset development. This agility, even as leaders hold the course toward long-term growth and profitability, serves organisations well during a recession and they can also ride the momentum after it’s over. Their approach doesn’t just combat a downturn; it can lay the foundation for continued success once the downturn ends.
As the new ‘normal’ continues to emerge and evolve, we’re working closely with all our clients to help guide them through the crisis. Whether that’s been advice we’ve given as things moved at real pace to begin with, to what we may start to see more of by way of planning for the future. Working practices have altered dramatically and we’re here to offer support to businesses through all the changes yet to come.
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