The softening economy of world markets will defistate firms that have not prepared for the downturn. Michael Turwitt reveals the scenarios that sink many firms and offers practical advice to weather the coming storm.
The abrupt reintroduction to recession in Brazil and some other Latin American markets, as well as the Russian and Asian financial crisis and all that it means, has been an unwelcome change. Many young managers have only known the almost uninterrupted growth of the nineties, and for them the onset of recession in these regions has been a totally new experience. For the more experienced global managers among us it has been an all too familiar return to the business cycles which prevailed while we were learning our international trade.
For most of my managerial life any “boom” period was spent anxiously scanning the horizon for the “bust” we knew would follow. The good times were never prolonged enough to sustain the sort of measured expansion and continuous updating of the capital stock which we knew was required if we were to beat the best in the world. However, the flip side was also true. The downturns were abrupt, but they were also short and sharp. On each occasion some companies would get to the wall, but there was always the conviction that the upturn would recur within a relatively short period of time.
Within the U.S., growth and survival was also helped by low real interest rates and consumer stimulation, leading to a long period of prosperity. However, during the past three decades, on balance and looking at the global market, most of the experienced export executives were more accustomed to bad weather sailing than forging through calm waters. The professionals learned to keep a sharp lookout for signs of a change and to swing into a recessionary mode of export management almost without effort.
Less experienced firms, smaller organizations, just in the process to establish themselves as global players, do not always have such instinct. The prolonged period of growth from 1990 onwards lulled the senses. By 1997 many new export managers did not know, or recognize, the early signs to which they could react, so that the regional recessions of 1998/99 have perhaps proved more painful than it need have been. In addition, many companies had followed the growth philosophies of the early nineties and found themselves over-extended on many fronts.
In global business terms regional recessions can be times of opportunity as well as unpleasant experiences and threats. They test the soundless of the management, and mercilessly punish those who are inadequate. They are times when one can gain an advantage against one’s biggest competitors and where your command of the world market can be substantially enhanced. Nevertheless, it is very difficult to come out in a stronger position vis-à-vis competition which has not been coping with specific local recessionary environments because of their prudent strategy to spread the business risk all over the world.
Experienced firms involved in international practice do not just focus on certain regions. Many management responses to the recessionary conditions in Asia and Latin America are not necessarily the expected ones and the right response can really only be learned as a result of bitter experience or hard analysis. They require the absolute clarity of purpose and willingness to pursue a logical solution through thick and thin, which are the hallmarks of the good manager.
The usual mistakes are slowness and inadequacy of reaction.It is as notoriously difficult to catch a deteriorating situation as it is to overtake a competitor who has the initiative. It is only by what many look like overreacting at the first signs of decline that the global practice executive can get ahead of events and remain in control, rather than continuously having to react to the pressure of a worsening situation.
While regional recessions are times of relative opportunity for those who retain this control and are still working towards their ultimate strategic objectives, these opportunities have a price. Beside spreading the risk early enough, one must be prepared to concentrate completely and to abandon all the frills and slightly superfluous activities which have been accumulated in the good times. All recessions are the major slaughtering for sacred cows—indeed of any cows at all which do not give milk and can no longer pay their way. There is no difference, whether it’s in your home market or in certain world regions. It is only by cutting away at everything which is remotely surplus to the main aim that you can hope to maintain your core export business intact in those recessionary regions—and even, hopefully, make it fitter.
It is not surprising that such decisions are shirked, or put off until necessity is proven. One must be prepared to shift, almost overnight, from full ahead to full astern, and yet if you wait until the actions are unavoidable it is almost always too late to keep the core of your business inviolate.
It is vital that you are even more brutally clear as to what the true core business actually is—and whether it is sustainable in cash and financial terms. It is no use trying to hang on to a cash-hungry opportunity in times like these, even if the perceived opportunity dazzles. Survival is the first prerequisite of recessionary international practice management, for without survival there is, self-evidently, no future at all. In these circumstances it is very dangerous to bank on a turn around in any particular time-scale. Often the financial losses are bigger than a small firm can afford.
As soon as your nose tells you there is trouble ahead, and well before the backlog starts failing, it is vital to get the international business into balance. This means locating and conquering new markets in less problematic regions early enough to compensate, and cutting away at every possible area within your sales process chain, so that costs are covered by minimal revenue earnings. Another familiar trap opens here. There will be those who genuinely believe that conquering new markets to compensate revenue losses in troubled markets is not possible and that cost of sales cannot be cut further and that, therefore, more expense must be incurred to increase revenue.
Very little in business life is totally impossible—but increasing total earnings in a declining market is close to it. People will cling to almost any straw and hope to avoid making cost of sales cuts. It is amazing how many see their salvation in an expensive advertising campaign, more effort put into selling, a relaunch of the product and so on, to stimulate sales in troubled markets. All of these actions involve avoidable expense, in the illusory hope that they will more than recoup the outlay as soon as the regional recession ends. Even in good times there is little correlation between expense and return on marketing expenditure of this type. Even when the pay-off occurs, it only does so after a long gap in time, during which the extra expenses are adding to your outflow.
One of the time hallowed laws of regional global market recessions is that no matter how bad things are, they can—and probably will—always get worse.No one ever went bust by cutting cost of sales too much. On the contrary, those who get a grip most quickly are those who have the opportunity to overtake, or to buy up the optimists who have hung on in there for too long.
Those who wish to survive, to continue to prosper, and manage their way through regional recessions, therefore, have to start by concentrating on the control of cost of sales, the outgoings from the business and look anew at every aspect of them. It should go without saying, but seldom does, that such attack always involves doing things differently. Sometimes very differently to what’s the norm today.
Even an operation run in the sloppiest fashion, you can imagine, will yield only relatively small savings on telephone bills, reducing travelling, or stationary and so on. Doing things differently means looking at every major outlay of cash and attacking it with an open mind. One of the aims has to be to transform fixed costs into variable ones, and to reduce the expenses accumulated between the moment work starts on a project and until the final construction documents and specifications leave the office.
It is surprising how quickly costs build into an inflexible burden which carries on regardless of need or contribution.
The advantage that a regional recession brings is, firstly, the concentration of the mind on such matters which, in good times, are viewed as somewhat irrelevant, and secondly, a more general acceptance by people that things cannot go on as they have in the past. Apart from the possibility of relative commercial advantage, vis-a-vis your competition, this is perhaps the greatest opportunity for business improvement that a time of recession offers.
I pointed out earlier the great difficulties of introducing change against the grain of expectation of some people. In bad times however, everyone knows that change will have to occur. It is not necessary to heighten dissatisfaction with the present. It is more than obvious to every person in the firm and outside service providers, that the situation is untenable and that change will soon be forced upon you—in the last resort by the firm going bust. This part of the change-management process is already done for you and the expectation of your people and service providers (outsource functions) is not whether, but what, how and when.
In most smaller firms about ten percent of the business development costs are almost certain to have to go, and probably another twenty percent saving potential can be found. Every action taken must be selective and designed to strengthen the core marketing function. Marketing is a key responsibility and needs to be managed in-house.
Very small firms do not need to recruit expensive marketing employees. This function is generally best taken care of by the owner, or principal himself. The first requirement is clarity of focus about where you wish to end up, followed by a savage and calculated attack on business development costs. Remember that cash, lean structures and speed are highly important and key to achieve competitive positions in world markets around the globe.
Surviving in a rapidly changing world of global markets is a challenge and increasing your market share must be seen as strategical necessity. For a number of clear reasons, many U.S. firms are temperamentally and historically less well prepared to excel in now than competitors in other industrial nations. By virtue of their geographic location practically all businesses in Europe and Asia have to serve other national markets besides their own.
The concept of designing across frontiers, of being exposed to competition from other nations, of having to cope with differing standards, business cultures, languages, exchange rates and alien laws, is a natural part of everyday life in many other countries. This is not the case for most of us in the U.S. Selling to a client outside the U.S. is still counted as unusual, and an adventure, despite the fact that it may very well be easier and much more profitable to deal with a client in Germany than to do the same for someone in California.
To plan adequately for the future of a global practice, we have to look a great deal further ahead at some of the fundamental changes which are occurring. Then we must ask ourselves how these changes affect us, and how we can turn them to our advantage. There is much more to this than just bracing ourselves for a more competitive environment—even though the environment is indeed certain to be a more competitive one! The prizes will go to those who have methodically set out their structure and processes in order to be successful survivors.
It’s not a matter of size. Small or large, every firm will be influenced by global developments and increasing competitiveness. Firms who cannot think and operate internationally will be few and far between by the end of the next decade. It is not yet too late to start learning the skills of global management, but it soon will be.
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