The dim outlook shows that Eurozone manufacturing orders are falling at the fastest pace since the debt crisis in 2012 with an increasing number of producers cutting production in line with the deteriorating demand environment, as well as scaling back both their purchases of inputs and hiring of staff, this while the largest European economy i.e. Germany, registered the largest fall in annual retail sales since records began in 1994 as the cost of living crisis led households to tighten their belts, leading to a drop of 8.8% in retail sales in June compared with the same month last year. All this could easily lead any business leader to become ultra defensive in his or her business approach.
Various studies of global companies’ performance during and after the past several recessions, indicate that around 20 % of such companies don’t survive, the vast majority, around 70% will need around 3 years after the recession to start achieving their pre-recession performance growth, whilst only about 10% of surviving businesses roared out of the recession and thus posted results that exceeded both their peers and their pre-recession performance. Studies show that these 10% of companies managed this because they managed to achieve a delicate balance between playing both offense (investing in growth opportunities including new businesses) and defense (cutting costs and finding operational efficiencies) in response to external economic conditions.
Many of these companies managed to reduce overall spending whilst still carving out resources for new endeavours. This is a very important point. Even in the best of times, many companies fail to fund and staff new opportunities, and not for lack of good ideas. Leaders could seize new opportunities not by increasing expenses overall but by shifting existing funds, leaving their income statements untouched. And yet, most of the time, they refuse to make even mild changes in existing budgets. This is normally the result of business leaders, who although aware of the need to respond more quickly to sudden shocks, still struggle to respond quickly and proactively enough when crises arise.
To understand why organisations struggle to play both offense and defense when crises arise, it is important to analyse the emotions that bear on resource allocation decisions. For reallocation to happen, deallocation must also occur. Leaders fear losing not just money, but also people and focus. Business owners want to protect the top talent they have wherever they are, rather than shift them to different areas or bring in new people. Or maybe they’ve built a strategy around certain things and worry that trying anything else will divert too much time and energy from the core. These emotional dynamics leading to a certain level of inertia which then becomes amplified in some contexts more than others.
So how can business break certain lethargy to adapt during a difficult external environment?
Here are two key measures leaders might adopt to further enhance their agility and flexibility in times of crisis, so that they can play both offense and defense effectively.
- First, leaders can set the strategic frame for resource reallocation decisions. By focusing people on a positive vision of the future, rather than holding onto what they have done in the past, they can foster more alignment for future reallocation of resources.
- Leaders can reform the budgeting process by delineating which types of projects the organisation will and will not fund and what metrics will be used to evaluate both existing and potential projects.
H.G. Wells famously wrote: “Adapt or perish, now as ever, is nature’s inexorable imperative.” The overall message here is that to protect your company, you must go beyond relatively superficial reforms such as implementation of agile structures and instead address the internal dynamics that affect how the organisation deploys and uses resources. Leaders must prod themselves free from the powerful emotional forces that prevent them from a readiness to respond to and innovate during a crisis. This is the best way you have at surviving the never ending volatility we seem to be in for quite some time.
(All factual and statistical information presented in this blog has been obtained from an extract of a blog from Mr Silvan Mifsud Director Tax Advisor EMCS Advisory Malta ) Follow us on our Facebook page and Family Business Office website at www.familybusiness.org.mt
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