Six Rules to Maintain Profitability During a Recession

Graham Hill
Posted: 05/04/2009

Let The Value Equation Guide You Through The Recession

We are probably entering into a prolonged recession. Some even talk of a new depression. Many companies have responded with knee-jerk cutbacks.

But smart companies are using the "value equation" to guide their actions. The value equation looks at which customers are critical for the company, how they create profitable value for core customers and what they must do to maintain growth in core customer profitability. The value equation is the key to understanding which business activities to invest in, which to maintain and which to cut back. It is the key to driving profitable growth in a prolonged recession.

Type in the word "recession" into Google and, at the last count, it returned over 32 million hits. Everyone is talking about the recession and many companies have already started to do something about it. Often this means cutting swathes of staff without much thought to their long-term success: British Telecom announced it is cutting 10,000 jobs, Citibank that it is cutting 52,000 jobs and the City of London is forecast to lose over 370,000 jobs during the recession!

No Company Ever Shrunk to Greatness

Whilst job cuts are to be expected, they are by no means inevitable. Research by McKinsey showed that companies that beat the last recession in 2001-2 actually increased spending in key areas. The research tracked almost 1,000 U.S. companies over 18 years, including during those all important recession years. The companies that emerged in the top quartile after the recession actually increased spending on sales, innovation and marketing.

Although this reduced their cash reserves, the companies traded short-term profitability for long-term gain. And it worked; their book-to-market ratio was more than 25 percent greater than their less successful peers.

Understanding Due Diligence in the Value Equation

The companies that beat the last recession understood the "value equation."

When times are hard, cash is in short supply, and customers are in even shorter supply, you need to carry out a "strategic due diligence" to understand how your company creates value. And what might happen if things get worse.

That means understanding what drives sales and margin growth, how core shareholders view the company’s prospects and how the company can return value back to them in the best way. That is the company-side of the value equation. But by itself it isn’t enough. You also need to understand the customer-side of the value equation. That means understanding who your company’s core customers are, what they buy, which channels they use, how much they are willing to pay and what jobs and outcomes they are looking to achieve at different points in the customer experience.

Only by understanding both sides of the value equation can you beat the recession. And the value equation changes a lot during a recession; just think how the customer is now buying private labels rather than branded products at your local supermarket. It is critical that you spend enough time during the due diligence studying how your company delivers value to your customer and how the due diligence creates value for shareholders. The recession is probably going to be with us until 2010, so it makes sense to do a proper due diligence before setting out to beat the recession. And it is no use just relying upon analyses from just before the start of the recession either. The world has changed in the last few months and it might never be the same again.

The Rules for Recessionaries

Although different companies should respond to the recession in different ways, there are a few general rules that they should follow. I call these the "Rules for Recessionaries."

Rule 1: Protect Your Best Customers, Products and Channels

As George Orwell, might have said, "All customers are created equal, but some customers are created more equal than others." You need to understand who your best customers are and to protect the revenues they provide. As pressure mounts to make cuts, it is essential that the cuts fall on the customer who doesn’t provide much revenue or the customer who costs you money.

You also need to protect the products the best customer buys—and the channels the customer buys them through from cuts too. Paradoxically, this may be the time to consider making additional strategic investments in your best customer. You can achieve much more "bang for your buck" when your competitors are reducing their spending.

Rule 2: Refocus the Customer Experience Around the Value Equation

Knowing who your best customer is, what and how the customer buys, and what jobs and outcomes the customer is looking to get done, allows you to refocus the business and provide a superior customer experience that also delivers superior results for your company.

This may require refocusing resources away from your worst customer towards your best one. It may require making further investments in them. The deep understanding you developed during the due diligence will identify the core touch points in the customer experience and the activities which support them. And the focus on customer jobs and outcomes will ensure that you don’t forget about the product in use. This is usually the part of the customer experience where most value is delivered to your customer.

Rule 3: Sweat Your Customer Management Assets

Now that you know who your best customer is and have refocused around value creation, you should look to gain the maximum from the customer management assets you have. This means squeezing a bit more value from each of the core touch points in the customer experience. Doing this requires that all the supporting people, process, technologies and other assets that deliver the customer experience are better aligned, and that they are used a bit more intensively to create value, whether this involves better sales calls, more targeted marketing, or products that are better at helping customers get the jobs and outcomes they want. As has been said elsewhere, a recession means doing better, not just doing less!

Rule 4: Cut Non-value-adding Costs, Protecting Value and Improving Customer Satisfaction

In parallel with using your customer management assets to the full, you should also look to remove all non-value-adding costs, using the lean thinking approach pioneered by Toyota. By following a customer order through the entire delivery process, most companies are able to identify 20 to 40 percent of the activities that don’t add any value, i.e. that neither the customer, nor the business is willing to pay for. These are all candidates for cuts. This not only saves significant costs, it also speeds-up the business, reduces errors and increases customer satisfaction. And just as important, the cuts don’t reduce your ability to create value in the future.

Rule 5: Support and Incentivise Staff to Deliver Value

Tough times call for strong leadership.

And not only from senior management. You should carefully assess your staff and select the people who can help lead you through the recession. And then agree on tough performance targets for delivery. That may mean upsetting the old order and hierarchy as young managers are promoted above longer-serving ones. It may also mean trouble with unions more interested in maintaining the job status quo than in your company beating the recession. You should be prepared to support, coach and mentor managers responsible for running key parts of the customer experience. It will be worth it. Not only will they feel empowered to deliver against their targets during the recession, they will also be much better managers once the recession is over.

Rule 6: Focus on the Long-term while Supporting the Short-term

Many companies make the mistake of just focusing on the short-term, particularly at the start of a recession. And you will certainly face pressure to be seen to be "doing something" about the recession.

The whole point of the due diligence and the previous steps is to enable you to understand what creates value for customers and shareholders over the long-term, and then to develop a plan to beat the recession.

This will no doubt require some tough trade-offs. And sometimes you will be forced to make the wrong ones to placate senior management. That doesn’t mean that you should ignore the short-term, particularly revenue generation. But it will allow you to strike the right balance so that you can plan to beat the recession.

Are You Planning to Beat the Recession?

If you follow the six simple Rules for Recessionaries, you will be in a good position to put together a coherent plan to beat the recession. But if you are just intending to rely on aggressive cost cuts, or untargeted investments in the status quo to save you, then good luck. You will need it.

First published in Customer Futures Series.

Graham Hill
Posted: 05/04/2009

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