How to Survive the Economic Storm

DESPITE THE GLOBAL FINANCIAL CRISIS, executives still have businesses to run. There’s no time to wait for the economy to work its way out of this crisis. So, in considering the macro perspectives, leaders also face a number of crucial micro-level issues as they guide their organizations through these stormy times.

But where to start? What should be done first? Does the order matter? Or should everything be done at once? While some strategies might be right for your company today, unforeseen negative consequences could have a lasting impact depending on how the crisis plays out. Developing the best approach requires a measure of tenacity—planning for short-term wins to cut costs and improve efficiency, while scanning the environment for opportunities to improve and grow the top line.

Armed with a macro perspective from the first article in this issue of Executive Agenda, “After the Crash of 2008. Now What?,” we suggest that the “Now What?” begins with re-examining your organization to identify opportunities for top-line growth and cost controls.

The following are 12 suggested areas of focus—at all points along a company’s value chain—that can yield powerful results in the current economic climate. Each area is described briefly in these pages and points to an article on the A.T. Kearney website where you will find a more in-depth discussion on each topic.

1. Get Smart with Your Marketing Spending

Like it or not, marketing makes the commercial world go 'round—and it’s becoming an increasingly expensive rotation. The key to controlling this expense is simple: Effective stewardship of marketing expenditures can easily save 10 to 15 percent of a company’s total marketing budget—and that’s enough to fund a lot of exciting activities or make a healthy contribution to the bottom line.

The timing for a structured approach couldn’t be better. As the economy slows, the principal laws of marketing have been turned on their head and consumer sentiment is fundamentally affected by current economic conditions. Historically, companies stop spending money on advertising in a recession. But such moves are almost always made in a panicked search for in-quarter earnings and not for any strategic reason. As Professor John Quelch of the Harvard Business School explains, companies “can improve market share and return on investment at lower cost than during good economic times.”

Smarter, more efficient spending on advertising can drive dollars from marketing without compromising your marketing objectives. Smart spending begins in three areas:

Analyze your media spending. Fact-based decision-making and the level of analysis that procurement experts commonly use to measure price and volume relationships in other spending categories can easily be applied to media.

Work with your ad agency. Understand the process of creating and delivering great advertising—and identify where your current processes might be falling short. By committing to fix process shortfalls, you can get more work done with fewer resources.

Improve advertising production. Hard data on actual commercial production expenses provides the best foundation for driving production decisions and negotiating costs.

See Keep Your Eye on the I.

2. Break the Classic Rules of Pricing

Are you focusing on your customers’ ability to pay rather than willingness to pay? If so, you’re not alone. Market research and traditional go-to-market analyses are popular ways to measure ability to pay (via consumers’ wealth). Willingness to pay is rarely assessed because it is driven by more intangible factors, such as limitations in access to the product or channel, and psychological factors such as the urgency of the need.

During times of economic downturn, having intimate knowledge of your customers is crucial. Pricing for the “average” customer can hurt profitability, but certain micro-segments of the business often continue to have a high willingness to pay. One of our consumer-products clients identified such micro-segments and increased prices by 40 percent without any customer defection. The result was a 10 percent increase in earnings in three months.

Discounting remains a good method for price discrimination, but without a clear strategy and controls, potential benefits are often replaced by lost revenue. At an industrial services company, we recently redefined the discounting strategy and allowances to increase revenues by 3 percent in a period of four months.

A good pricing methodology should be neither complex nor academic, but rather a structured way of thinking strategically about practical issues and identifying opportunities to raise prices by deliberately breaking the classic rules of pricing. And what better time to break the rules than in a global financial meltdown?

See Pricing: An Eternity of Frustration? from this issue of Executive Agenda.

3. Get Creative with Customer Interactions

In a world with few distinctions among products, quality and prices, it is customer interaction—from sales through service—that is a source of differentiation. Field forces are a frequent early target to cut costs fast. While they might produce a short-term margin lift, the improved margins come at the expense of long-term growth and shareholder value. The outcome is not always positive, as customer relationships crumble and field intelligence deteriorates.

By improving the deployment and effectiveness of field resources, you can reach growth targets without slashing field forces. But not across the board. All efforts, at least temporarily, should be ruthlessly strategic: Target your most attractive customer segments, acquire the high potential (large and profitable) customers within those segments, and serve them through the right channels—doing all of this while also keeping cost-to-serve at an appropriate level.

The top- and bottom-line advantages can be significant, ranging from a 10 to 30 percent increase in revenues to double-digit earnings growth, all within just six to 12 months.

Better customer service is guided by key questions: Which interactions will make or break the relationship with key customers? How can these touch points be revamped cost-effectively? What new processes must be forged to deliver on customers’ expectations? What new roles and organizational capabilities will help support these processes and create “customer advocates”? What metrics (retention, revenue, tenure of relationship, product growth) will ensure that strategies are achieving projected benefits?

The right answers can result in significant wins: A retail bank increased customer retention rates from 1.5 to 3.6 percent, representing more than $500 million in loan balances. A global hardware manufacturer increased overall growth in annual revenues, including $30 million a year in additional revenues from one key customer. A large pharmaceutical retailer reduced wait times for acute prescriptions by 80 percent, labor by 30 percent and working capital requirements by 16 percent.

4. Gain Control of Out-of-Control Complexity

Although the good times may be behind us for now, companies have had ample opportunities to grow. Globalization brought new and exciting markets within reach. Supply chains extended to all corners of the world. Consumers were anxious to absorb every new product or service even as they scrambled for better customized offers.

It should be no surprise then that many companies have paid a high price for this growth: excessive, extensive and out-of-control complexity. Product and service portfolios are exploding, processes and systems are proliferating and organizational structures and interfaces are becoming increasingly convoluted and problematic.

Complexity must be controlled so companies have a clear path to the next growth frontier. Now is the time to take a step back and deal with those complexity challenges by:

• Adopting a strategic view on complexity—don’t just cut the SKU tail, but optimize the overall product portfolio based on customer needs
• Creating the appropriate transparency on revenue and the cost impact of complexity
• Taking a comprehensive value chain perspective
• Installing the right processes and governance to ensure sustainable results

See Taking Control of Complexity.

5. Streamline Research and Development without Stifling Innovation

Innovation and R&D go hand-in-hand, and never more so than when the economy falters. In a recent study, we found that innovation leaders achieve roughly 70 percent higher earnings over a four-year period than companies without an explicit innovation focus.1

Success depends on rescoping or rationalizing a significant number of R&D projects without affecting growth and future profitability. Companies should also refocus on their core competencies—not only to capture cost savings, but also to sustain a competitive advantage through technology and product leadership. When noncore activities are sent to competent third parties in low-cost locations, the latest advancements in collaboration technology allow for a seamless integration of product development centers around the world.

See Innovation Management: Strategies for Success and Leadership.

6. Cut Direct Material Costs: Kumbaya with Your Suppliers

In tough times, companies often attempt to “squeeze the last penny” out of their suppliers, thus opening the door to years-long confrontations. Smart companies, however, avoid the conflicts and instead try to understand their suppliers. They make use of powerful cost models (such as cost-regression analysis) to understand how their suppliers compare to world-class competitors in apples-to-apples price comparisons for items with totally different specifications in the same category.

For example, we helped a large global consumer packaged goods company, which annually buys more than 10,000 variations of primary paper packaging, make valid price comparisons on hundreds of items with different specifications simultaneously. The analysis identified a one-time savings potential of more than 15 percent in the category, addressed on a supplier-by-supplier basis.

When both parties—buyer and supplier—engage in open and transparent analyses it spurs collaborative behavior in reducing overall price.

See Restoring Cost Transparency.

7. Slash Demand and Indirect Materials Costs

When the economy sinks, so do costs. But instead of focusing primarily on suppliers and their prices, we recommend company-wide initiatives in “demand management”—a proven approach to take costs out of an organization without further reducing its capacity to perform.

With demand management, companies can cut 10 to 20 percent off their addressable spending in certain categories; savings can begin in as little as three months. You address the underlying drivers of your external spending, align purchases to business needs and eliminate unnecessary consumption. You also gain a better understanding of the rationale behind your purchases. Unlike traditional sourcing efforts, it targets the quantity of products purchased from suppliers—not just the price paid. Demand management fundamentally changes the way organizations acquire their goods and services.

Consider this: One company applied demand management to its technology spending only to discover that it had little control of the purchase of small, non-essential peripheral items. While most of the items cost less than $200, together they represented half a million dollars per year in spending. By educating its workforce and implementing proper controls, demand for these non-essential items nearly vanished.

8. Take a Tough Approach to Manufacturing

For companies that have already made significant progress in implementing Lean manufacturing and applying Six Sigma tools, an economic downturn presents even tougher questions: Do we have the right manufacturing footprint? Should we consolidate facilities? Can we reallocate production to lower-cost sites? Should we be in the business of manufacturing at all?

There are approaches for improving business performance that use many of the tools and techniques made popular by Lean manufacturing and Six Sigma. The focus is on achieving tangible results quickly, rather than losing valuable time putting an elaborate program in place. For example, a “Next Generation Six Sigma” approach helps reinvigorate existing continuous improvement efforts and Six Sigma infrastructures help refocus efforts. Attention is drawn away from “program” parameters (for example, number of training sessions or how many certified black belts are in the organization) toward efforts that will have a tangible impact on the bottom line. This way, manufacturers not only weather a downturn, but also are positioned for growth when new opportunities arise.

Listen the podcast Next Generation Six Sigma: Capturing More Value with Less Effort.

9. Avoid the “Whack-a-Mole” Approach to G&A Cost Cutting

Companies often view back-office functions such as finance, IT, human resources and legal as non-value-added areas and ideal for cost cutting. This short-term approach to cost cutting almost always resembles the classic arcade game of “whack-a-mole” as cost reductions in one area show up as increases elsewhere. When the economy is in a nosedive, a more appropriate response is to transform the entire general and administrative (G&A) set of functions—not only focusing on short-term cost reductions, but also on long-term performance improvements. Balancing the need for near-term savings with the desire for deep and long-lasting results requires the following:

Simplify and automate processes. Standardize, simplify, automate and provide self-serve web-based approaches—all result in lower over-all costs.

Develop an outsourcing and offshoring strategy. Companies that simply outsource back-office functions to reduce costs without a comprehensive strategy are often dissatisfied with the results and end up in-sourcing at a later date.

Source vendors aggressively. Aggressively negotiating contracts with suppliers is a good opportunity for both short- and long-term cost reductions.

Manage demand. Defining what services these functions should provide, finding the appropriate charge-back mechanism and controlling demand are all ways to reduce total costs.

Redesign and consolidate. A measured review of both organization and process structures will determine the optimal design, control costs and ensure appropriate accountability and oversight.

See The 3 As of Integrated G&A Management.

10. Unlock Millions (Billions!) of Dollars in Cash Flow

Conserving cash and managing the balance sheet are two actions that take on more importance during a downturn. Companies can unlock millions of dollars in cash flow—delivering immediate and substantial bottom-line benefits—by systematically identifying gaps and problems in the complete order-to-cash cycle. Doing so not only releases immediate cash, but also reduces inventories and creates shareholder value. One client generated more than $1.7 billion in total cash flow using this approach.

A working capital reduction effort focuses on addressing longer-term problems to ensure that those lofty levels of working capital never return. By improving existing processes, policies, organizations and information systems, companies can release more cash for growth and investment. These steps can also reduce interest expense associated with not having to borrow, decrease the risk of bad debt, improve customer service and dispute resolution and ultimately increase shareholder value.

11. Design a Leveraged Organization

The best companies today are modular, where joint ventures, alliances, pooling, shared services, offshoring and outsourcing are common tactics. Growth no longer requires optimally managing a firm’s resources, but rather having access to competitive resources, whether they are internal or external, exclusive or shared. In an economic downturn, survival will depend on maximizing a wide range of opportunities for every piece of the value chain. If you do not consider optimization step changes—scaling up individual processes, relocating them and fundamentally reengineering the configuration in which they operate—you may be denying your company competitive advantage.

There are three dimensions to what we call a leveraged organization:

Work smarter. Improve fundamental processes to address work systems, resources and IT enablement

Work cheaper. Optimize costs through better locations while considering factor costs and pools of expertise

Work bigger. Build economies of scale through improved processes and increase critical mass through specialized processes and shared investments

See Designing the Leveraged Organization.

12. Become a Selective Acquirer

Deals made in downturns create more value than those made in upturns. Yet success still relies on old-school tactics: identifying solid acquisition targets and confirming that those targets fit with your strategy and business model. An acquisition process that improves the top- and bottom-line performance of the acquired business will result in a significantly higher valuation multiple with the integrated business compared to its stand-alone value. Valuations have come down substantially, now favoring acquirers with strong balance sheets and cash flows. Deals can be made at more favorable prices, although equity stakes are higher and financing is more expensive. Still, the trade-offs can be beneficial to wise acquirers.

See Build Your Own Acquisitions Factory.

Be Smart, Nimble and Quick

A successful leader in a world of continuous, disruptive change manages both the strategic and operational dynamics of a business. It is no longer enough to “stick to your knitting” without having good strategic insight into how fundamentally the business paradigm might be changing. Nor is it possible to identify and seize strategic opportunities without the right kind of effective performance platform necessary to sustain new growth and profitability. The combination of new strategic foresight and operational rigor will define who wins and who loses in today’s challenging environment. Companies that are smart, nimble and quick will emerge from this downturn stronger and more competitive than ever.