Times of economic turmoil require businesses to adapt quickly. Sometimes that requires radical, even painful action.
Times of economic turmoil require businesses to adapt quickly. Sometimes that requires radical, even painful action, writes Malcolm Prowle, professor of business performance at Nottingham University.
This is no ordinary recession: it is now generally agreed it will be the worst since the 1930s. Businesses need to be thinking about a long-term survival plan, one that will insulate them against a potential five-year profit squeeze. Cutting costs, accepting low profitability and focusing on retention of customers and staff might work for 18 months, but these are short-term fixes. Business owners must look further ahead and consider more radical changes such as business restructuring, forging deep partnerships or even merging with another company.
Think big, like a revision of product specification, a change of operational location or a different distribution method. An even more extreme strategy could be to withdraw from the current line of business completely and consider investing in an alternative more suited to the times.
Such profound changes can be unsettling, but they can be remarkably successful if proper research is undertaken beforehand. Take Apple: there was a time when its iPod was playing second-best to the MP3 players on the market. In 2000 Apple acquired SoundJam MP and nine months later entered the digital music distribution market with the launch of iTunes. Not only did this bolster the bottom line but also changed the way in which the music industry operated. As a testament to the success of this business strategy, over 5 billion items have been downloaded from iTunes and it is now worth an estimated $8.4 billion.
It might have felt different for Jack Cohen when he founded Tesco in 1919. Back then he simply sold surplus groceries from a stall in the East End of London. It wasn’t until 1973 when Leslie Porter, Cohen’s son-in-law, took on the role of chairman and revolutionised the business strategy that the familiar retail giant was truly born.
Both Apple and Tesco fully understood the needs, decisions and attitudes of their customers and their success speaks for itself. But what about those companies where the risks were too great and it didn’t work?
Entellium, a supplier of customer relationship management software, redesigned its product to make it feel more like a video game. The new product enabled salespeople to win points on the system for performing relevant operations like entering data, all based on the stereotype that salespeople are competitive and an ongoing consumer trend of computer game consumption.
This ‘all in’ bet proved fatal as sales quickly dwindled and the situation at Entellium worsened. Last year CEO Paul Thomas Johnson and CFO Parrish Jones were arrested by the FBI and charged with grossly inflating their sales figures.
There have always been strategic partnerships: take the example of automotive companies and parts suppliers. However, a different type of partnership can aid survival by sharing costs and resources and developing synergies. Economies of scale can be achieved as service providers pool resources such as buildings, equipment, specialist staff and back office functions. New products can be developed on the back of the companies’ combined expertise.
Of course, a working partnership presents its own set of hurdles. Firstly and most obviously, the companies have to work together. It’s vital that all staff involved in partnership working have the necessary authority to take decisions, or decision making will be slowed and progress frustrated.
The media industry has been leading the way with working partnerships, with the Daily Mail group granting office space to the Independent titles and the Telegraph media group titles being published by News International. However in the US competing newspapers have taken steps not only to share the costs of distribution but also editorial content.
The Dallas Morning News and the Fort Worth Star Telegram, two daily newspapers in Texas, have been sharing picture resources and feature content since November last year. These are not small papers by any means, but advertising has fallen dramatically in recent months, impacting their revenues.
These businesses don’t view each other as competitors anymore; they have a common goal in addressing the challenges present by an ever fragmenting media landscape that has affected readership figures.
Most fundamentally, a business may come to the conclusion that it does not constitute an viable independent entity in the long term. If other companies are in the same position, a merger may be the most feasible option, minimising competition and increasing market share.
In November 2008 the shareholders at Lloyds TSB voted overwhelmingly for a merger with ailing HBOS. The rationale was that this could create an ‘unrivalled’ network of heavy-hitting brands (Lloyds TSB, Bank of Scotland, Halifax, Clerical Medical and Scottish Widows) and provide much needed strength in such turbulent times for banks. With the group now in government ownership its ultimate success is not guaranteed, but the decision to merge the two banking institutions was expected to reduce overall running costs by as much as £1.5 billion a year, an attractive prospect in the cash-strapped financial sector.
We’re now in a position where we need to plan based on the real world situation rather than optimistic aspirations. As Charles Darwin wrote, it is not the strongest nor the most intelligent that survives, but the most adaptable to change.
Malcolm Prowle is professor of business performance at Nottingham Business School and a visiting professor at the Centre for Financial Management at the Open University Business School. Email him here.