Strategy in a recession - Don’t Panic Mr Mainwaring!

One of the key lessons from the recent recession is a need for firms to take a much closer look at how their business really operates. Those that really knew their business - their strengths and weaknesses (their competitive position) - have usually been able to respond successfully. Those that were caught by surprise have been badly hurt, or worse.

Those of you who remember the classic Dad’s Army sitcom (based on the antic of the Home Guard during the Seconda World War) will recall Corporal Jones. At the merest hint of an impending German invasion, Jones would dart in several directions as once, whilst at the same time imploring his boss (Capt Mainwaring) not to panic. A wonderful metaphor perhaps for the strategic actions of some managers during the recent recession?

As the economic downturn dawned in late 2007/early 2008, it would have been easy to take knee-jerk actions. Some businesses delayed or cancelled investments in production capacity, postponed new product launches. Some CEOs found that advertising campaigns and recruitment programmes were easily cut, as were loyalty programmes for customers and staff. Overheads were (often quite rightly) the subject of much closer scrutiny, particularly as a way of improving profits and cash flow in the short-term.

Of course, for many businesses, cost-cutting was an appropriate strategy in response to a significant reduction in market demand. The danger, though, is that some of those cost-reductions will have damaged the long-term position of the business. Knee-jerk cost-cutting actions may bring short-term benefits, but can leave a business too lean and ill-equipped to cope with rapidly changing conditions (many of which provide revenue opportunities).

In a later blog entry, we’ll look at the strategy of cost-optimisation. This can be contrasted with a strategy of cost-minimisation - which poses inherent threats to a business.

As we have seen in several blog entries recently, some businesses (with confidence in their competitive position) took a different approach and have invested where others were cutting back. As the UK emerges from the recent recession, these are the businesses that will benefit in the long-term.

The key to developing an appropriate strategy response to the economic downturn is to understand what is really going on in the market. This is a fundamental point that high-performing students in their synoptic exam papers will make.

Are falling sales the result of a general decline in market demand? Or is declining revenue also a function of some competitive disadvantage that the firm is experiencing? In the last couple of years, it has been easy for firms to blame the recession for problems, when for many there has been something more fundamental at work.

Businesses that understand their competitive situation can navigate a recession in a way that makes the most of the opportunities that inevitably arise.

Those who don’t know enough about their strengths and weaknesses, or about what is really going on in the external environment, often take the path of least resistance. Their strategy becomes defensive and negative. It is a recipe for losing market share and emboldening competitors.

When it comes to writing about strategy in a recession, what kind of questions should students be thinking of as they analyse and evaluate case study businesses put in front of them during exam revision and on the exam day itself? Here are some suggestions?

For the business or product in question:

- How much performance is driven by the market and how much is down to the competitive position of the business? (remember - the recession was “general”, but every market has experienced its own specific downturn)

- What evidence is there about what customers are saying about what they value and are prepared to pay for in the market?

- Is there any evidence that customers switching to other competitors, moving over to the firm, or moving out of the market altogether? Movements in market share tell you much about the competitive positions of firms during a recession.

- What are the actions of competitors? Is the industry moving as one, or are there competitors that are adopting a very different strategy?