BUSS4 Recession Strategies - The Crucial Role of the Business Model

A fantastic piece of survey research from accountants Grant Thornton arrives just in time for AQA BUSS4 students preparing for the Section A essays in June 2010 & Jan 2011…

In our BUSS4 revision workshops we emphasised the importance of the concept of competitive advantage in determining the success or failure of businesses during the recent recession. I challenged all 3,000+ students to name a competitively-strong business that went bust in the recession (with the prize being unlimited ice-cream and chocolate during the day for the first student to name such a business + for all his/her mates too). Of course it was a bet I was willing to offer - by definition, businesses with sustainable competitive advantage are rarely (if ever) derailed by a recession. If anything, recessions make strong businesses stronger.

So the recent research report from Grant Thornton provides some excellent research support for BUSS4 students. I have reproduced their press release below which includes all the main points.

Key points for students to note include:

- Taking advantage of opportunities (a key BUSS4 research bullet) requires senior management to be flexible and innovative in their thinking
- It is not enough simply to cut costs or try to operate more efficiently
- The most successful businesses are those that spot and respond to market changes

————————————————

Nearly two thirds (63%) of UK businesses are hamstrung by their own business models and unprepared for the recovery according to new research from leading financial and business advisers, Grant Thornton.

In a survey conducted for the study, 396 senior UK executives provided details on how their companies have both coped during the economic downturn and how they have positioned themselves for the forthcoming economic upturn.

Analysis of these responses has led Grant Thornton to identify six primary UK business responses to the recession with just two types, representing 37% of the companies surveyed, adopting a strategy that is ‘fit for purpose’.

“This research indicates a dangerous lack of flexibility in management thinking. Too many of the senior executives we interviewed appear to be comfortable with the status quo despite the economic pressures which should be driving businesses towards more innovative approaches to the way in which they operate and interface with their markets. Very few senior executives have shown any wish to challenge their current situation and take advantage of new opportunities,” says Alysoun Stewart, Head of Entrepreneurial Advisory at Grant Thornton.

“Most companies have formulated their plans for the next 18 months on the basis of their historic practices and are exhibiting complacency about the need to pursue innovation in their business models, believing that simply adjusting cost structures will be enough to see them through while market conditions remain tough,” continues Stewart.

Furthermore, little more than one-third of companies in the UK are pursuing or plan to pursue in the near future changes to their core products with only 38% saying that they would make changes to their target markets, 25% would make changes to their distribution channels and only 30% would make changes to their revenue-generation mechanisms. All three factors play an integral role in how a company positions its core products for renewed market growth, showing a clear lack of innovation or direction change.

Business responses to the recession

In depth cluster analysis of the research shows six different characteristic responses to the recession:

Successful business strategies:

Ahead of the curve businesses (19% of sample) are classed as continuous adapters to market change and anticipate doing more of the same. They understand that change is the only constant and are continually adapting their business models accordingly. Companies that fall into this category tend to be younger companies, with revenues under £250m in two thirds of cases, where change is core to their make-up.

Moving to the margins businesses (18% of sample) are looking to reposition growth and shift their focus from cost-cutting to building up their margins. These companies are only moderately confident in their business models’ plans to date and ability to succeed in the future. But while they focused on cost cutting during the recession, they are now focusing on improving margins as market conditions evolve. Companies in this category are established players in the market, are likely to have seen the economic cycle come and go several times over and are quick to read the signs and position their business for the upturn.

Flawed business behaviour includes:

Fighting the last war businesses (25% of sample) are focused on cost-cutting and have a clear lack of focus on future growth. However these companies are only taking care of half of the equation. They appear to be stuck in a recession based, cost cutting mentality, only looking as far ahead as what needs to get done to get through the downturn.

The best before businesses (18% of sample) are those that are at risk of their business strategy being close to expiry. Confidence in this group’s business plan is contradictory. On the one hand resilience is moderate, yet there is a 50-50 split on whether an overhaul is needed.

The heads in the sand businesses (10% of sample) are mainly businesses that have unrealistic assumptions, are complacent in their business outlook and go with what they know. These companies consider their business models very resilient and have strong faith in their plans’ suitability over the next 18 months.

The hitting the panic button businesses (10% of sample) have an absence of strategic clarity and lack of focused or innovative action. These companies appear to be in a state of general panic over their business strategies and are questioning just about everything with little or no focus in their attempts to bolster their plans. Whilst nearly three quarters (72%) agree that their plan has not proved resilient, virtually none describe their business model as set to succeed over the next 18 months.

“The businesses that have fared best over the past couple of years are those that have been courageous enough to change the cornerstone of their agenda, and who went into the crisis with a very clear understanding of their core business proposition, of their key markets and of how best to leverage their strengths,” continues Stewart.

“These results show a certain “fear” or at the very least complacency amongst decision-makers about taking any radical or innovative steps to improve their business offering. Instead they choose to stick with the more conventional methods of coping with a downturn by cutting costs, leaving them in danger of being unable to take advantage of the profitable opportunities that will present themselves when the economy picks up,” concludes Stewart.

———————————————-