|
|
Strategic
Issues
___________________________________________
Exploiting
the Economic Slowdown
Winners' Business Model
Dr. Ranjan
Das
|
|
Professor
of Strategic and International Management, Indian
Institute of Management, Calcutta; Consulting Editor,
Strategic Marketing.
|
Economic
slowdown, circa 2001-02 Are we really surprised to see
the economic slowdown that is being experienced since
late 2000? Economists have told us time and again that
after every long economic expansion, there will always
be short recessions—11 to 12 months on an average. This
is based on the experience that we have had since the
Great Depression of the 1930s and specifically since
World War II. For example, according to the National
Bureau of Economic Research’s (NBER) Business Cycle
Dating Committee, the US economy began contracting from
March 2001 after 119 months of expansion, its longest
period of expansion since 1854. According to NBER, the
average boom period, post-WWII, lasted for about 50
months while recession lasted for 10 months and hence
the conclusion about an ensuing boom effective February
2002.
It remains to be seen how correct is NBER’s assessment
since the downturn experienced in USA during 1973-75
and 1981-82 lasted for a record of 16 months. The economic
slowdown that various economies are passing through
presently has already resulted in adverse movements
in output, unemployment and prices. The first sign of
decline was felt when the off-take of consumer durables
slowed down and inventory started building up. Thereafter,
a number of negative factors such as reduced investment
in plant and machinery, declining demand for labour,
increasing layoffs and unemployment emerged. All these
led to a decline in firm-level profits and depressed
stock prices.
Traditional corrective actions such as lowering of interest
rates have already been initiated by many countries
to boost credit off-take and consumer sentiments; alongwith
this, various fiscal and monetary steps have been taken
to prevent the recession snowballing into a persistent
and profound slump. With all these actions in place,
it now remains to be seen when and to what extent the
countries at large can come out of the current slowdown.
At the latest reckoning, the most liberal estimates
show that the US economy will start looking up from
March 2002, and countries such as India will have to
wait till the last quarter of the same year.
This paper argues that during a period of economic slowdown,
an aggressive stance is likely to be more beneficial
for a firm desiring to strengthen its long-term competitive
position in the industry. There will, however, be a
need to adopt a correct business model to realise such
a winning strategy. In the following paragraphs, we
will first describe some select features of the suggested
business model and then briefly examine what kind of
firms will be able to pursue such an aggressive stance
during an economic slowdown.
Business model for growth during an economic slowdown
Whenever there are significant changes in the macro-economic
environment and underlying industry structure, a firm
faces a number of new opportunities and threats to respond
to which it will need to initiate a set of new initiatives.
The choice of such initiatives is influenced by the
underlying basic motive that the concerned firm has.
If the basic motive is one of pursuing an aggressive
stance and one that this author recommends, the firm
will require a new business model to successfully execute
the new initiatives. An aggressive stance here will
include two broad categories of initiatives, namely
a) a quick build-up of market power in existing areas
of business, and
b) make a low-cost, rapid entry into new but related
business areas.
The new business model must spell out, among other things,
the following with specific reference to the aggressive
stance proposed to be pursued:
Product market selection
Capabilities required
Value chain configuration
Value appropriation
Designing a business model for pursuing an aggressive
stance involves taking correct decisions along the four
dimensions referred to above. Such decisions need to
be tailored to the macro-economic and specific industry
situation the firm is facing during the economic slowdown
and also the micro- or firm-level issues that need to
be addressed to execute the specific strategic initiative
proposed to be pursued.
Product market selection
Product-market segments should be chosen keeping in
view the aggressive stance being aimed at. The segments
to be targeted are those where the firm already has
a toehold but the current share is relatively low, competitors
are weak and not likely to retaliate fast, the size
of the segment’s profit pool is still large and where
incremental efforts and investments will lead to disproportionate
payoffs. Similarly, for making a low-cost, rapid entry
into a new business area, product-market segments should
be so chosen where opportunities exist to use currently
under-exploited capabilities and resources and where
options are available to make a low-cost, rapid entry
through, say, M&A. During an economic slowdown, it is
not unusual to find many opportunities of such a kind,
and organisations aiming for rapid growth should perceive
an economic slowdown as an opportunity to acquire high-quality
assets or businesses which are badly managed by existing
management groups.
|
It
now remains to be seen when and to what extent
the countries at large can come out of the current
slowdown. At the latest reckoning, the most
liberal estimates show that the US economy will
start looking up from March 2002, and countries
such as India will have to wait till the last
quarter of the same year
|
Capabilities required
Requirement of capabilities will change depending on
the extent of aggressiveness aimed at and value proposed
to be delivered to the chosen product-market segments.
For rapid build-up of market power, a firm will require
capabilities in such areas as speed and first to market,
low-cost position and sourcing, ability to scale up
quickly, operational flexibility to deploy resources
to serve multiple markets, strategic acquisition of
competitors’ businesses to widen product-market mix
and build market share rapidly and so on. Likewise,
for pursuing growth in a new business area, the list
of capabilities required will include ability to identify
un-leveraged and under-utilised assets belonging to
the existing activities, create and exploit synergies
between existing and new business areas, achieve integration
of acquired businesses (in case of entry through M&A),
execute projects and learn nuances of the new business
area at a rapid pace.
|
During
an economic slowdown, the need for such deconstruction
and reconfiguration is more since opportunities
available get shrunk and only the best, in terms
of cost and differentiation, manage to sail
through the crisis period
|
Value chain configuration
A specific strategic initiative chosen by a firm will
more often than not require deconstruction and reconfiguration
of the current value chain (and hence the underlying
asset base) to deliver the value required under the
new initiative. The need for periodic deconstruction
and reconfiguration of a firm’s value chain is now considered
necessary for its continuing survival and growth. The
progress in information and communication technology
is enabling companies to rebuild their business models
into one that is able to create value through an optimum
combination of tangible and intangible assets, where
some of the tangible assets may not even be owned by
such companies.
A growing trend is to separate the commodity part of
the offering from the value-added part, and undertake
only those activities in-house where the target customer
groups believe that the firm in question has distinct
advantages in terms of cost or differentiation or both
vis-à-vis the competition. In these days of fast-changing
consumer preferences and technologies, value creating
activities keep evolving and thus timely deconstruction
and reconfiguration of such activities, including their
underlying asset base-both tangible and intangible-is
a must to ensure sustainability of advantages in the
long run. During an economic slowdown, the need for
such deconstruction and reconfiguration is more since
opportunities available get shrunk and only the best,
in terms of cost and differentiation, manage to sail
through the crisis period.
Specifically, to build market power rapidly during an
economic slowdown, a firm will need to possess or develop
assets and capabilities to offer solutions that are
unmatched by competitors. Investments are to be made
to exploit new technological progresses for creating
novel customer value without commensurate increases
in cost. Value-creating services are offered to customers
through networking with specialised organisations.
Also, the asset mix is kept as broad as possible to
facilitate redeployment from one business segment to
another, and launch an attack on competitors on multiple
fronts without the need to commit additional resources.
For entering into a new business area, the firm will
need to build or acquire marketing assets (such as customer
database, trademarks, brands, distribution network,
after-sales service network etc) as well as strategic
assets (such as patents and licenses), divestment of
non-essential activities that were acquired as a part
of the original acquisition at the time of entry, and
extracting synergy of acquired assets and capabilities
with the same already available in existing business
areas.
Value appropriation Value appropriation is the relative
capacity of a firm to retain the value it creates and
not distribute it to other stakeholders such as customers,
employees, suppliers, government etc beyond a threshold
minimum level. The higher its ability to appropriate,
the firm will be in greater control to retain the value
created. Such an ability depends on the nature of strategic
and specific assets the firm has put in place, relative
bargaining power vis-à-vis suppliers and customers,
level of mobility barriers (including innovation and
reputation) and the network of relationships it has
established with suppliers, customers, employees and
other stakeholders.
Plans to build market power rapidly during an economic
slowdown will require a firm to leverage its broad-based
capabilities that employ optimum asset configuration-both
tangible and intangible-and use the same in a large
number of market segments. While sustainability of such
distinctive capabilities over a number of segments may
be difficult vis-à-vis operating in a narrow segment,
operating in multiple segments not only enhances the
overall profit but will also ensure that the bulk of
the industry profit is appropriated by the firm.
The list of initiatives for building market power rapidly
includes: providing solutions that enhance customers’
competitiveness and profitability, being the first to
market new products and reap profit before imitation
takes place, emphasis on blockbuster products with finite
lifecycles and large R&D or launching costs, the offer
of new products and services to current installed base
of customers, high product and service standards for
each product and market segments being targeted (implying
development of high-entry barrier), and also the ability
to operate in niches where the firm is considered ‘insider’
or ‘local’ and exploit the same. During an economic
slowdown, such an aggressive stance will require the
firm to be a leader in reducing prices. Firms adopting
offensive postures understand that while overall industry
profits are set by business cycles, correct managerial
actions can help lower break-even volume and create
price or cost edge during the period of slowdown.
For firms planning growth through entry into new areas,
an acquisition-led entry strategy will be the logical
route to build a toehold in the new segment(s). Once
the entry has been made, the right approach will include
exploiting all possible synergies that can be achieved
between the assetsof existing businesses and those available
with the newly acquired unit, after deconstruction and
reconfiguration of the latter has taken place. Extension
of intangible assets such as brands, distribution networks,
business processes and systems, and general management
capabilities available with the existing business will
be particularly useful to appropriate value in the new
field.
These four dimensions will broadly define the business
model that should be adopted under the aggressive stance
recommended in this paper. Needless to say, these dimensions
are not independent of each other, and decisions regarding
any one will be influenced by the decisions taken for
other dimensions. For example, decisions on product-market
selection cannot be taken without a clear understanding
of, say, capabilities already possessed (or to be developed),
feasibility of deconstruction and reconfiguration of
assets given the time-frame and the resources available
and the risks underlying such an initiative. The success
of the new business model will depend on how these dimensions
are internally consistent. While there will be a number
of possible combinations among these four dimensions,
success will depend on finding an optimum combination
that is breakthrough and yet believable and actionable
from the points of view of investors (shareholders and
lenders), customers and suppliers, and also managers
and employees.
|
For
firms planning growth through entry into new
areas, an acquisition-led entry strategy will
be the logical route to build a toehold in the
new segment(s). Once the entry has been made,
the right approach will include exploiting all
possible synergies that can be achieved between
the assets of existing businesses and those
available with the newly acquired unit
|
Managerial implications
During an economic slowdown characterised by depressed
sentiments, conservatism and risk-aversion among consumers,
firms and investors at large, firms having a long-term
strategic intent to build market power will find the
aggressive stance as the best mode to achieve their
objective. As the rest of the firms of the industry
become risk-averse to undertaking new initiatives, follow
a wait-and-watch policy (a symptom of pessimism and
conservatism), take defensive stances and go on the
back foot to consolidate the current position, aggressive
firms will see the slowdown as an opportunity and invest
in new products, markets, capabilities and value propositions
when the rest of the industry is cutting back in these
areas.
Well-managed companies (either domestic firms or affiliates/subsidiaries
of MNCs) operating in emerging markets will exploit
the ‘selective advantages’ available in such emerging
markets which are not available to firms that are not
‘insiders’. It is well known that emerging markets have
certain positive and negative aspects which together
provide certain advantages to firms already operating
in such markets. During a global economic slowdown,
such selective advantages can insulate the ‘insiders’
from global developments, even though such advantages
will be for a limited period and to a limited extent.
Firms that have plans for entry and growth into new
but related business areas will find the period of economic
slowdown as an opportunity to make a low-cost rapid
entry into their chosen field. This is because organisations
that are pursuing defensive strategies may choose to
divest some of their non-core activities and, as a result,
opportunities may open up to acquire high-quality assets
and businesses at a comparatively lower price.
Even in cases of business areas where acquisition opportunities
do not exist but scope for entry is attractive (such
as the telecom and insurance sectors in India), firms
desiring to set up ventures in such areas may be able
to acquire critical project-related inputs such as licenses,
plants and machinery, key technical and managerial people
and debt finance at a comparatively lower cost. These
companies, finding that not many firms are feeling bullish
about such opportunities due to general depressed sentiments,
will take advantage of the supply of project-related
inputs exceeding demand to bring down their effective
cost of entry. Overall, the impact of such an aggressive
entry into a new business area during the economic slowdown
will help in building the initial beach-head at a cost
that can be lower than what it will be during a period
of economic boom.
|
|
|
Magazines