19/05/2009 | Careers Advice, Recruitment Trends

Businesses use strategy to think their way out of recession

Strategy is the long-term direction of a business and during a recession this can be skewed by short-termism and a negative outlook. So say Professor Gerry Johnson and Professor David Pettifer from the Lancaster Centre for Strategic Management, Lancaster University Management School.

The current economic situation is not helped by the fact that so few managers have experienced a recessionary environment before, as well as the depth of uncertainty now being faced. The challenge of making strategy in such circumstances certainly involves managing for a recession, but that does not necessarily mean neglecting the longer term. The critical first step to achieve this balance is to understand the nature of the recession and its possible effects on the longer term business environment.

In this respect there are two significant factors that management needs to be aware of.
First, not all recessions are the same, and their impacts are not predictable. The indications are that the current downturn will be deeper and longer than any we have witnessed for decades, and will be coupled with a significant ‘credit squeeze’. So managers need to build this into their long-term plans as well as short-term budgets.
Second, recessions can mask deeper structural changes, more fundamental than cyclical corrections.

Realignments in economic power, restructuring of global financial markets, credit availability and costs have important long-term strategic implications for many businesses and whole industries. Predicting the out-turn is impossible, but we can be certain business dynamics will be significantly different coming out of this recession than coming in and, as we argue later, maintaining strategic flexibility will be important.
When balancing action to deal with recessionary conditions with longer term strategic needs, there are several points to consider.

Cutting costs is an inevitable aspect of working through a downturn, but strategy-makers need to be cautious about the basis on which they are made. The temptation is to cut those costs that are easiest. A more strategic approach, and likely a more effective one, is to identify the costs least important to delivering what customers, particularly major customers, really value. This not only needs to be based on a deep understanding of customers’ needs, but also on re-evaluating what business activities actually deliver what customers value and, crucially, which don’t. This isn’t just a short-term exercise in identifying unnecessary costs. It has the long-term benefit of identifying which activities really deliver competitive advantage. It also ensures that costs cut now do not harm the future potential of the business.

Strategy in a recession is also about building and maintaining as much flexibility as possible, both to ready the organisation for the post recession situation and to deal with unforeseen events. This is especially important when considering major expenditure, such as capital investment. Development should only be initiated where there is the option for extension, rather than making an immediate commitment to major and long-term spend. In the same way, strategic alliances and partnerships might be a more appropriate flexible option than merger or acquisition for example.

An obvious point, but one not always systematically dealt with, is that a recession presents opportunities. Businesses become available at a lower cost; competitors pull out of markets; more firms are looking to outsource their costs; other businesses need a ‘safe haven’, a partner or parent through difficult times. All of which present opportunities; but they need to be considered in the context of longer term strategy.

A further issue is people strategy and development. Again, short-term needs must be balanced against developing long-term capability. Do you have the right expertise to deal with a recession? If not, you need to work out how to bring this into your business. Given the good times of the recent past, it is likely that some boards will not have the experience needed for the current situation. Could the addition of one or two non-executive directors with relevant experience be useful?