How India Inc. can emerge stronger from the slowdown
Leaders must avoid knee-jerk reactions that harm long-term health and instead align strategy to their competitive and financial strengths.
- Article |
- 09 December, 2019
When the economy enters a slowdown most companies are afflicted by either panic or paralysis. The former leads to knee-jerk reactions that often do more harm than good while the latter results in a failure to act until it's too late. Both responses can be fatal or, at the very least, leave behind weakened organisations poorly-equipped to prosper when the upturn comes. However, both of these outcomes are avoidable. Indian companies can emerge stronger from the current economic slowdown if they have the presence of mind to deeply understand its impact on their business along with their competitive and financial strengths and then respond with coordinated and adaptive actions.
The Indian economy is in a slump
The Indian economy appears to be suffering from a sharp and possibly protracted slowdown. GDP growth has dropped from a high of 8.1% in the fourth quarter of 2018 to only 4.5% in the most recent quarter. At the same time, both consumer and business confidence paint a gloomy picture which has led forecasters like the RBI and CRISIL to cut growth projections to 5.1% for the current financial year. This is substantially below the high single-digit growth rates Indian business had become accustomed to over the last decade or more.
What is more, the slowdown appears widespread. Manufacturing growth has fallen from 12.1% in the first quarter of FY 2019 to negative territory in the second quarter of FY 2020. This was triggered by a very sharp decline in the automotive sector but also weak performance in capital goods. Meanwhile, the construction sector which was previously holding up also appears to be slowing. Further, growth in private consumption, which has been the key driver of India's economy over the last two decades has also gone into reverse.
The combination of these factors along with a credit crunch caused by a crisis in the shadow banking sector and a volatile global trading environment presents one of the most significant challenges to Indian companies in the post-liberalisation era. Consequently, the actions business leaders take today will determine whether they succumb to the current slowdown of the Indian economy, simply scrape through or emerge stronger to seize the subsequent upswing.
India Inc. should seize the opportunity in the slowdown
Faced with the current slowdown some Indian companies are already making the kind of knee-jerk reactions like across the board cost cuts and price reductions that can do long-term harm to the business. Such instinctive responses fail to take account of the varied and uneven impact of the slowdown. They also fail to consider the relative performance of individual business units which may have very different competitive and financial strengths. Further, they tend to blind the organisation to the emerging opportunities the slowdown may present. These include the chance to innovate better by listening more closely to customers, to hire high-quality talent that becomes available, or to acquire a struggling competitor at an attractive valuation.
Instead of falling into the trap of reflexive actions, Indian companies should instead take a deep look at both the external environment and their internal strengths and weaknesses to develop the right strategy to beat the slowdown and emerge stronger.
India Inc. can emerge stronger from the slowdown by following three steps
Drawing on insights and experiences from previous slowdowns we have identified three steps India Inc. can take to emerge stronger from the current downturn. First, they must assess the current situation thoughtfully and correctly diagnose their condition. Second, they need to align their strategy to their unique situation. Third, they must act in a concerted and coordinated manner to effectively implement their strategy to beat the slowdown.
This three-step approach may seem simple. However, in the pressure-cooker environment of a slowdown, it is anything but. It requires CEOs to keep a cool head, step back from the daily crisis management, and dive deep to analyse the implications of the slowdown on their business. All the while keeping an eye on the future beyond the current crisis and how their business can emerge in a more favourable position.
The first step for Indian business leaders in the current slowdown is to make the right assessment of their current situation. This is critical to determining the appropriate strategy and requires an objective and rigorous approach. In assessing the current situation leaders need to examine four aspects: the impact of the slowdown on their industry, its likely duration, their firm's competitive strength, and their financial position.
Firstly, leaders should assess the unique impact of the slowdown on their industry. While the slowdown is widespread its severity varies significantly across sectors. For example, while automotive linked sectors have suffered from a sharp downturn, consumer durable categories have been less badly affected. To understand the impact of the slowdown of the Indian economy, companies should compare their industry growth to the overall GDP growth rate and compare the current industry growth rate with its average for the last ten years. With a clearer picture of the slowdown's impact on their sector companies can better calibrate their response.
Second, companies must assess the likely length of the slowdown and the potential recovery period. While precise predictions are close to impossible, by closely tracking key leading indicators like IIP, PMI, consumer and business confidence, leaders can get a sense of when the tide might be turning. These insights can help the company quickly shift gear and take advantage of the recovery.
Once the external picture has been clarified companies need to take a hard look at their competitive strengths. This can help them identify vulnerable areas that may need to be reinforced and advantages that can be leveraged to emerge stronger from the slowdown. When assessing competitive strength companies should consider the current status and the recent trends in several key metrics. These should include relative market share, customer loyalty, cost position, product and brand strength, and customer responsiveness.
The fourth and final area to assess is the company's financial position. This determines the company's room for manoeuvre in the slowdown and is a critical factor in determining the right strategic path. Specifically, every company should take stock of its current cash position, debt-to-equity ratio and interest coverage ratio.
After objectively assessing the current situation, the next imperative for Indian companies in the current slowdown is to align their business strategy with their firm's financial and competitive strengths in the current scenario.
There are four broad strategic directions companies can follow depending on their competitive and financial position. Companies with low financial strength and low competitive advantage need to focus on the core by trimming or divesting from non-core businesses. Those with high financial strength but low competitive advantage can build for the future through acquiring complementary businesses and brands. Companies with strong competitive advantage but low financial strength should leverage their market position, for example by leveraging loyal customers or dominant market share. While those with financial firepower and high competitive advantage should seize the opportunity to extend their lead.
Once the broad strategic direction is defined companies then need to determine the precise actions to pursue. In particular, leaders need to judge which levers to pull, to what degree, and in which sequence.
A company's performance is determined by five key levers that have complex inter-connections and need to work in concert to deliver the desired business results. The five levers are strategy, marketing, operations, sales, and organisation. Each plays a vital role in strengthening cost position, right-sizing cost structure, and increasing sales.
First, the strategic lever determines the area of focus for the business in the slowdown. Essentially, where and how the company should strengthen its competitive position. Here, companies need to carefully evaluate their current business portfolio to determine their core and adjacent areas. Once the core is defined it can open up opportunities to strengthen it - through the acquisition of a struggling competitor for example. One leading FMCG company has developed a path to improve its market leadership position during the slowdown by way of acquiring regional players. The strategy is based on its strong cash situation and future plans to expand further in rural India.
Second, the marketing lever determines what aspects of the company's product and brand strength should be leveraged to improve its position. For example, in a slowing economy new customer acquisition becomes a challenge, so doubling down on loyal customers and increasing your share of wallet is key. Further, pricing becomes a pivotal tool in a slowdown but it demands a differentiated approach rather than the standard one-size-fits-all strategy. By discriminating between customers, companies can protect margins while supporting overall revenues.
Third, the operational lever helps bring greater efficiency to the business, trimming excess fat but strengthening the business' muscle. During a slowdown, three areas of operational efficiency are particularly important. First companies need to simplify the business by reducing complexity in areas like organisation, processes and products to reduce inefficiencies and increase the speed of execution. Next, they must right-size their overheads to eliminate unnecessary costs. Finally, they need to maintain vigilance and discipline in cash management including accounts receivable, accounts payable and inventory.
Fourth, the sales lever is key to sustaining revenues in a slowdown. Sales strategy should focus on increasing sales productivity by focusing on growth segments and effectively managing key accounts. Sales productivity can be driven through analytics to gain deeper insights into customer behaviour and salesforce efficiency and better target activities and resources.
The final but equally important lever to align in a slowdown is organisational. To emerge stronger from the slowdown companies must avoid a slash and burn approach to headcount. Instead, they should use the opportunity to re-align the organisation structure with business strategy and make it more agile.
After aligning strategy with the external scenario and the current business strengths, effective and timely implementation requires continuous communication and adaptation.
A slowdown can be an unnerving time for employees, suppliers, customers and other important stakeholders in the business. Therefore strategic changes need to be correctly communicated to ensure they are executed effectively and don't result in wrong reactions. This requires continuous communication from the business leaders that is both wide and deep. Management must clearly articulate the reasons behind any change in direction, how it might impact each stakeholder and the longer-term goals it aims to achieve. When people understand why a course of action has been taken, the larger objective at stake, and their role in the process, they are more likely to engage with the plan.
Once the strategy to beat the slowdown is set it can't remain static. Leaders must appreciate the dynamic nature of the external environment and adapt their strategy review system accordingly. Before moving to implementation, companies should re-examine their management review system including the performance metrics used, their granularity, and the frequency of review to ensure they are fit-for-purpose.
Further, organisations should strengthen their antennae to better tune-in to changes in the external market that may trigger adaptations to their strategy. To do this leaders must put in place systems that enable them to separate important signals from the noise and train their staff - particularly those in the field - to capture relevant information in a way that can be speedily transmitted to decision-makers.
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