Evidence from previous downturns indicates that the largest numbers of company failures take place when the worst is over. This is the point at which businesses find it most difficult to obtain the finance they need to fund growth.
The weaker companies tend to run out of money as the banks shut up shop, while the stronger, better-capitalised businesses survive and prosper.
But this has been a different kind of recession. Weaker companies have been propped up by banks keen not to crystallise their bad loans and a previous government which allowed delayed tax payments.
All of this was designed to avoid the bad PR and huge social costs of job losses arising from thousands of companies going to the wall.
Yet the result is almost worse than the scenarios we have seen in the past. Instead of the usual pattern of shake-out and renewal taking place, more companies than ever have managed to hang on.
What this means is more competition for the small numbers of contracts out there and a struggle for survival that looks like it will last many years to come.
This has been compounded by significant increases in the costs of the most basic commodities such as food and energy, pushed even higher by the recent instability in the Middle East. In days gone by, companies would have had some scope to pass on those increasing input costs to their customers.
But with the recent sharp reduction in consumer confidence and the increasingly competitive marketplace, this usually difficult task has become near impossible to achieve. Across the board, businesses and consumers are looking at ways to save money and will simply find an alternative supplier if the price is not right.
Plan B
To survive in this environment, it is important to look very carefully at sales and marketing. Many growing companies get confused between the two. Simply put, sales are tactical, all about interfacing with the customer, while marketing is about defining what it is you think you can sell and just as importantly, where you can sell it.
There is simply no point trying to compete head-on in an area of the market where you are being undercut or where you have less of an edge in your offering. This is not about beating up the head of sales, but about rethinking your product and pricing strategy. To achieve this it is critical that the business has access to the appropriate level of marketing skills and experience.
Why? Because in most market sectors overall growth rates will remain anaemic; what companies need to do is to take market share from their rivals rather than waiting in the vain hope of being rescued by a swift return to strong economic growth.
That means not just aiming at the right target markets and customers, but also refocusing what it is you have to sell. Innovation is not solely about inventing things but about squeezing out cost and thinking about whether you can do things a different way, as well as investing in your business’s capacity to achieve a greater return.
Making a difference
IT-enabled services are a good example of where innovation can make a real difference – something we have seen first-hand at two of our portfolio companies. Nexus, a business-to-business car hire broker and ITG, a company which helps marketing departments work more efficiently, have both created work-flow technology to simplify administrative processes and eliminate errors in basic tasks.
In both cases, what these companies have done is recognise a gap in the market, not for a new product or service, but for a way of delivering something that is already there more conveniently and cost-effectively. This is an approach that many SMEs could adopt if they only took the time to really think about it.
In the new world, companies need to get smarter in order to survive and prosper. It is not going to be good enough to be an also-ran in the race for growth: market and service innovation will be key in determining the winners and losers.
