Professor Malcolm Prowle, urges businesses that radical thinking is needed if they are to survive what Ed Balls described as the worst economic downturn since the Great Depression of the 1930s.
Economic depression is now starting to be the word on everyone’s lips. Cabinet Minister Ed Balls declared that the downturn was the most serious global recession for “over 100 years” which seems to contradict the Government’s prediction that the economy will start to recover in the later part of 2009.
In reality no one truly knows what the future holds. The economy is still in free fall and until it plateaux, speculation will be rife. The reason being that this situation is very different to anything we’ve experienced before. The unique combination of the credit crunch, the recession and the global impact is creating the perfect ‘financial’ storm which many might struggle to survive. However a long term vision maybe the key as when we start to see the light at the end of the tunnel it won’t just be business as usual.
Over the past twenty years or so we have been guilty of massive over consumption, living beyond our means and borrowing more money than we could afford. And come the end of this historic economic episode, society might look very different. Consumers may be more conservative spenders, more risk averse, less likely to borrow and more focussed on getting a good deal. One of the biggest impacts is expected to be on house prices. Over the last decade property investment has boomed and people enjoyed the wealth, rising houses prices brought. This nurtured the British psyche that house prices were an insulated investment and that the market will bounce back. But this is an unlikely scenario now. The realisation is that houses prices might not recover and we could see property being valued at half of what it was at the peak in 2007.
In the light of such possible changes in consumer behaviours and societal attitudes, businesses need to be thinking about a long term survival plan, one that will insulate them against a potential five year profit squeeze. Managing cash is crucial and accepting low profitability might work for 18 months but isn’t a feasible long term option. Focusing on retention of customers and staff and cutting budgets to the bear minimum are only short term solutions. Business owners must look further ahead and consider more radical changes to fight off the effects of the long term and deep depression. Three approaches that might work a) business restructure, b) forging of partnerships and c) business mergers.
Think big, like a revision of product specification, a change of operational location or a different way of distribution. An even more extreme strategy could be to withdraw from the current line of business completely and consider investing in an alternative line of business more suited to the times.
There have always been strategic partnerships, take the example of automotive companies and parts suppliers. However, the issue here is a different type of partnership, one that aids survival by sharing costs and resources. This can be beneficial in many ways namely shared buildings, shared equipment, shared specialist staff and back office functions.
Under the spectre of a post depression society, a business may come to the conclusion that it does not constitute a viable business entity in the longer term. There may be other businesses in the same position and so a merger may be the most feasible option – minimise competition, increase marketing share and guard survival. Currently, investors aren’t shy about backing business ventures, there is actually some evidence to suggest that they see opportunities in the present situation since share prices are so low.
We’re now in a position where we need to plan based on the real world situation rather than optimistic aspirations. And by looking at pessimistic scenarios as well, will help businesses manage expectations and ensure effective action is taken.
Malcolm Prowle is Professor of Business Performance at Nottingham Business School and a Visiting Professor at the Centre for Financial Management at the Open University Business School. He has a strong background in financial management, economics and business strategy. His career has spanned a range of service sectors and he has worked for a number of service based organisations in both public and private sectors. For many years he also worked at a senior level in the consultancy practices of both KPMG and PWC and has held a number of academic posts both as an employed member of academic staff and as a visiting academic.