A triple whammy of bad news has hit consumers everywhere: falling equity values, poor credit markets and mounting unemployment.
Anxiety about the economy has spread to every market in the world. Consumer confidence is plummeting. In recent recessions, appetite for goods pulled the economy out of the doldrums. But this time around, Canadians have put the brakes on their spending.
Executives are responding in turn, taking action to ensure survival. A broad playbook for action is being executed: protect the top line, reduce cost structures, manage cash positions, and make selected investments. Over and over again, however, we see companies struggling to turn the recession to corporate advantage. Typically, they are saddled with two, three or more of what we've come to think of as the fatal flaws of managing the downturn:
Forgetting to play offence
Inaction is the riskiest response to the uncertainties of an economic crisis. But rash or scattershot action can be nearly as damaging. The merits of an aggressive approach are borne out by research conducted by The Boston Consulting Group. It indicates that companies whose early responses to a downturn are tentative, typically overreact later on, leading to an expensive recovery when the economy rebounds. The silver lining of the crisis is that it creates a once-in-a-generation opportunity to catch competitors off guard and dramatically improve market share position.
Leading companies continue to pursue opportunistic and transformative mergers and acquisitions, upgrade systems, pursue top talent, invest in brands and rethink existing business models. Investments made today may only bear fruit after the recession is over, but failure to do so may compromise the ability to capitalize on opportunities when the economy rebounds. And the cost of these investments will be lower now, as competition for resources slackens.
Assuming the consumer has changed forever
Pundits continue to predict that the consumer has changed forever, that the era of opulence has ended and self-sufficiency is here to stay. But the consumer has not changed. The environment has. We are experiencing unprecedented times and consumers have assumed a war-like mentality, with self-imposed rationing that maylast several quarters. But they'll be back; their hopes, dreams and aspirations remain. With confidence will emerge the same deep-rooted desire to consume that has driven our economy over the past several years. Firms need to up their game and continue delivering against the consumer value equation. Innovation is more important than ever - delivering on the technical, functional and emotional benefits that consumers require before opening their wallets. We see many firms cutting back on innovation in these turbulent times. But now is the time to overinvest.
Cutting prices 'across the board'
Companies across all industries are facing seemingly irrational pricing by competitors, and responding on a "one-off" basis, finding themselves in price wars from which it is difficult to disentangle. The key is to de-average the pricing strategy. If competitors start lowering prices, choose your battleground: Take offensive action when you have a comparative cost advantage and can price aggressively lower to gain share; take defensive action when you are not the lowest-cost producer and must selectively defend share.
Defensive price moves must be de-averaged by segment, region and product, depending on market share and fragmentation. Instead of matching downward moves, leading players are also changing the rules and proposing innovative strategies to compete - offering financing schemes, changing secondary pricing, unbundling product and service offerings, or downsizing packaging to cut prices. A corporate pricing strategy that has not been refreshed in the past three months is likely obsolete.
Underappreciating the private label threat
Branded players in the fast-moving consumer goods market have benefited from a robust economy over the past 15 years. Retailers have become much larger and more sophisticated brand developers and have expanded the breadth and quality of their offerings. Furthermore, the one-two punch of a dramatic rise in commodity prices followed by an equally dramatic drop has put branded players in a tough position. Just as branded players completed a round of price increases, commodity prices dropped, and private label products have been quick to pass on cost savings to consumers. Brands need to address the private label price gap. One way is to reduce "perceived prices" by decreasing product size, unbundling products, and either lowering prices by charging for extras or raising them while discounting other features. While managing the price gap is critical in the short term, the only long-term defence is investing in the brand and continuing to innovate to increase the perceived value of branded offerings.
Taking too narrow an approach to cost savings
Most companies have undertaken the usual steps to reduce spending: freezing salaries and headcounts, trimming underperformers, rationalizing plants, and restricting budgets. However, there is no better time to attack the systematic and structural drivers of inefficiencies. Companies should be streamlining their portfolio of products to eliminate the hidden costs of complexity across the value chain, upgrading their procurement capabilities to manage volatility in commodity prices, and rebuilding their marketing budget plans from the bottom up to eliminate the inefficiencies that creep in on an annual basis. Short-term actions can help weather the storm, but meaningful progress is difficult without addressing the root cause of inefficiency.
Cliff Grevler, partner and managing director at The Boston Consulting Group based in Toronto, heads the company's Canadian Consumer Goods and Retail practice.