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During periods of economic disruption, research shows that, of four common strategic postures, only one is likely to see you significantly outperform your competitors. So what is the right strategy and what can you do to ensure you’re positioned to win? Salesforce’s Shreya Sethi and Ben Chesterman offer insights. 

 

Inflation, rising interest rates, declining consumer sentiment and ensuing margin pressures are putting the squeeze on businesses across Australia. While conditions are challenging, it’s not all bad news — in fact, this uncertainty comes with opportunities.

But the economy is not necessarily your destiny! Boston Consulting Group research shows that business performance during and after a market downturn more heavily correlates to internal factors rather than external ones. 

This isn’t to downplay the role of those external factors, since operating in an impacted industry certainly can impact growth potential. But internal factors play an even bigger role when it comes to your business performance relative to your patch.

Here’s the big spoiler: there’s a significant correlation between post-downturn performance and a focus on operational efficiency, together with investment in digital transformations for long-term performance. 

But what are the other approaches and why do companies adopt them? Is the answer really so simple? Yes and no — let’s look at why.

Four potential postures and their post-downturn performance

Research published in the Harvard Business Review explored the choices of 4,700 organisations across three different economic disruptions, as well as those organisations’ performance three years after the disruptive event.  

The researchers assigned organisations to one of four postures based on the reductions — or investments — they made across six expenditure categories: headcount, cost of goods sold (COGS), research and development (R&D), selling, general, and administrative expenses (SG&A), property, plant and equipment stock (PPE), and capital expenditures. 

From there, researchers categorised four different postures: 

  • Prevention: a cost-focused approach with deeper cuts and less strategic investment relative to peers. 
  • Promotion: a ‘grab the bull by the horns’ approach with increased expenditures on one of the six expenditure categories and limited cost reductions compared to peers. 
  • Pragmatic: a balance of cost reductions and investments, but with greater focus on headcount reduction relative to organisations whose posture was categorised as progressive.
  • Progressive: a balance of cost reductions and judicious investments where operational efficiency was prioritised over headcount reductions, which — while still a part of the strategy — were comparably lower than those of competitors. 

The prevention posture was the worst-performing, followed by the promotion posture. Those who adopted a pragmatic posture fared better, but the stand-out performers — that is, those who significantly outperformed their peers three years down the track — adopted a progressive posture. They focused primarily on improving operational efficiency and less on reducing headcount.

And it makes sense. Employee redundancies are an immediate cost savings, but you’ll need those people back once the disruption passes. It doesn’t reduce costs in a systemic way, and losing talent creates major disadvantages in the short term and long term.

Easier said than done: barriers to striking a progressive posture

We know from the research that your business is better-positioned for success if you’re able to land a progressive posture. Not only does this avoid the pitfall of losing talent or getting caught on the backfoot once the market recovers, but there’s a higher chance of identifying opportunities to pivot, develop new offerings and capture adjacent segments. 

In other words, it’s not just about preventing losses — with the right strategy, a downturn can be an opportunity. Still, we’ve been seeing many companies adopt either a prevention posture or pragmatic posture.

That’s because this is all well and good in theory, but in practice when you’re running a business things are rarely this straightforward. And, without the benefit of hindsight, it isn’t always easy to strike the right balance.

So what steps can you take?

How to keep your strategic lens while managing immediate challenges

As companies grapple with maintaining or growing revenues and look for ways to drive increased productivity, many will no doubt land on a combination of short-term and long-term initiatives — with the mix largely dependent on the degree to which their industry is impacted by economic disruption.

The key to selecting the right short-term, more reactive initiatives is ensuring that you retain strategic alignment across the decisions, ensuring that decisions today are taken with a view to the impact across the next three to five years.

That will look different in each company, but a high-level blueprint will often prioritise: 

  • Focusing on operational efficiency as the primary preventive lever. Look for opportunities to enhance processes across your business. Your employees are a great source of information — consulting them on pain points will help you uncover the parts of your business that are least efficient and identify opportunities for improvement. While headcount reduction may be required, the businesses who were most successful at weathering recent economic disruptions have more heavily focused on operational improvements.
  • Expanding while competitors cut back. Disruptive events can be a prime opportunity to scoop up talent, acquire assets at fire-sale prices and win over customers from competitors that have cut back on customer service or experience in an attempt to reduce cost.
  • Doubling down on digital transformation. Digital transformation drives operational efficiency and is one of the most impactful routes for reducing costs and doing more with less. It can deliver quick wins as well as the changes that poise your business for success in the long run. Accordingly, in a 2022 Gartner survey of CEOs and CFOs, nearly half say that talent and digital transformation were the last areas they were considering cutting. 

Again, this can be easier in theory than practice. That’s why it’s critical to approach digital transformation thoughtfully, focusing on the changes that will deliver the biggest savings for the business and the best outcomes for customers. 

One of the best ways to do this is through the right technology partner. After all, successful digital transformation isn’t just a matter of making the right strategic decisions (though that is crucial!) — it’s also a matter of driving adoption and continuing to evolve solutions as the market shifts. That requires a partner with a holistic, long-term view of your business rather than quick, bolt-on point solutions. 

You can also hear how other Trailblazers have driven digital transformation during turbulent times and strengthened their businesses for the long run. 

 

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