The FINANCIAL — With many countries around the world beginning to emerge from the recession, it's tempting to think that business life will quickly get back to normal – if any of us can remember what that was like. Nothing could be further from the truth.
In fact, the after-effects of this recession are likely to continue to affect businesses for years to come, meaning that some pretty radical decisions still need to be made, claims Aidan Brennan of KPMG's Advisory practice.
This has not been a classic short term recession followed by a swift bounce back. It therefore follows that the typical methods for dealing with such a recession – implementing short term cost reduction and cost deferment initiatives with the simple aim of protecting profitability – will not work.
Many businesses which have simply sought to ride out the recessionary storm on the back of such short term measures may find that the end of the recession doesn’t provide the safe harbour they had hoped for – with many businesses continuing to struggle and fail. Often, it is after the storm that the hard work really begins.
The problem arises because, in my experience, such measures rarely create sustainable changes in a business’s performance. Classically, the first thing businesses do in a recession is to find costs or investments they can stop or defer to protect short term profitability. Typically, things like training, marketing or Research & Development get cut while investments in new plant and machinery get deferred. Ironically, these are the things which provide a long term return so whilst the immediate consequences appear insignificant, these actions can damage the long term health of the business.
Often this is followed by instigating an arbitrary percentage cut in costs across all departments. Whilst these may deliver some savings, they are rarely sustainable as the fundamental questions of how to optimise the overall operations are lost in the rush to find something to cut. After delivering the initial hit of cost relief, all this does, in my experience, is to increase stresses and strains across the business.
Businesses have sometimes adopted a Darwinian view of a recession; seeing it as a time when the weakest competitors are put to the sword, leaving the survivors to emerge leaner and healthier. This global recession however has been marked by the continued strong growth of the Chinese economy, meaning that the competitive threat posed by new and emerging players has been accelerated.
Don’t just take my word for it. It wasn’t a coincidence that the theme at the World Economic Forum in Davos this year was “Rethink, Redesign, Rebuild”. This is something which governments and businesses are having to do as many of the core assumptions that underpinned their economic outlook have been dismantled. Without a fundamental rethink of their business models, there is a real danger that they will not be able to adapt successfully to a new economic reality.
This time around, I have seen a number of organisations looking at more sustainable cost optimisation; reducing costs in one place in order to maximise investment and innovation elsewhere. This is so much more than just cost reduction. This is about taking the opportunity to revisit the way you interact with customers and suppliers, how you manage your supply chain, how you invest in R&D and how you run your back office; taking the opportunity to look at every aspect of an organisation whilst also addressing its tax, regulatory and risk position.
Some astute, long term business thinkers probably had much of this in mind a few years ago. However, it is incredibly difficult to advocate fundamental change when life is rosy. Sure, everyone knew that the rise of the developing economies was going to change the environment in which they operated but it was difficult to mobilise a business for dramatic and difficult changes when you were announcing another record year of profits.
Fast forward to today and that challenge is now exacerbated with China and India powering ahead. While causing Western businesses to stagnate as they cut costs and investments, the recession has done little more than slow the rate of growth exhibited in the East. In essence, the recession has accelerated this competitive threat. If they are to respond, Western businesses should reassess their core strengths and areas of competitive advantage and ensure they are maximising their investment in these areas while reshaping their overall operations.
This is something that many executives are already facing up to. Last June, a KPMG International survey1 showed that 50 percent of businesses were predicting changes to their business strategy in the next year as a result of the economic downturn. Fifty-one percent also foresaw a radical shift in their long term strategy to improve their company’s position over the next decade. Of that number, 49 percent claimed they were looking to change their actual business model. Whilst all this is heartening, the reality is that these questions around strategy and business models are questions that all businesses should be asking themselves.
This is not solely a challenge for businesses. Western Governments are grappling with the same challenges; financially over-stretched, needing to scale back public spending without driving significant cuts in public services whilst maintaining a competitive tax regime to fuel investment and growth. Protectionist measures might appear attractive in the short term but are unlikely to improve the underlying position. Incremental improvements will not unlock this complex equation and governments will almost certainly have to embrace a fundamental rethink of their model for delivering public services.
Recession can be seen as an opportunity to rethink, to reassess priorities and come up with something new. That ‘something’ should embrace a cost strategy which allows innovation and investment to continue. Whilst this requires big questions whose answers will necessitate a lot of hard work to implement, it is also an opportunity to get back on the front foot and to shape the future.
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