Why economic downturn should be no barrier to business transformation
Firms may be tempted to defer planned transformations when the economy is faltering. But could pressing ahead with change and investing boldly for growth be the better strategy?
As the unwelcome return of stagflation looks ever more likely in several economies, businesses with transformation plans may well be encouraged to shelve them to secure short-term cost savings and protect their cash flow. But what if they were to go the opposite way, flying straight into the economic headwinds with radical ideas and gutsy investments?
Hakan Bulgurlu is CEO of Arçelik, the Turkish company that owns household appliances brand Beko. He believes that, while conventional wisdom might suggest that focusing on cost control is the most prudent approach during a downturn, there are always new investment opportunities to be seized when times are getting tough. Last year he invested €93m (£80m) in R&D, spotting potential for profit as the seeds of the UK’s cost-of-living crisis were being sown.
“There has always been demand for energy-efficient products as a more sustainable option for households,” he says. “But, with energy prices rising, there is a renewed appetite for efficient, high-performing products that are likely to shape the future of product development.”
Bulgurlu advocates harnessing robust data on every aspect of the business to make the best transformation choices, as well as maintaining a detailed understanding of how markets are developing.
Arçelik had also spent heavily on upgrading its IT infrastructure in early 2020 while the global economy was reeling from the shock of the unfolding Covid crisis. And, despite the current uncertainty, the firm is investing in improving the digital capabilities of its workforce.
Bulgurlu says that the purpose is “to reimagine our future. We have found that robust technological transformation can lead to significant operational improvements and higher productivity. There’s a tendency to shy away from major investments during periods of economic uncertainty. But, as we’ve seen during the pandemic, it can be a strategic risk worth taking.”
An “ideal time” to invest
Noam Toister, co-founder of Israeli company Bookaway Group, is another CEO who has retained the courage of his convictions in a crisis. In early 2020, the firm, which aims to “revolutionise the ground transportation industry by digitising outdated methods”, had raised more than $80m (£66m), including a series-A funding round that had been signed off only days before the pandemic was officially declared.
The company’s belief that there was still “tens of billions of dollars’ worth” of bus and ferry bookings ready to move online in emerging markets enabled it to keep faith with its purpose. Today, having completed four acquisitions in eight months to achieve “market dominance and the right technologies”, Toister claims that Bookaway has taken less than a year to become the world’s largest ground transport aggregator.
He adds: “Starting to build a business when demand is constrained by external factors is not for everyone, but the extremity of the situation intensified our resolve. Anyone operating at the sharp entrepreneurial end of an industry must be flexible enough to negotiate the inevitable headwinds. But that flexibility must exist in a context of steadfastness and the belief that your idea can rise above adversity and flourish.”
Ella Goldner, co-founder and general manager of venture capital provider Zinc, agrees. Despite the gloomy economic outlook, she highlights how her firm will confidently fund a range of 500 “mission-driven entrepreneurs” over the next three years. She believes that this will equip the startups that Zinc is backing to tackle big societal problems over the long term, irrespective of short-term fluctuations in their markets.
“We think this is the ideal time to double down and invest in talents who want to build companies from scratch,” Goldner says. “Those that start today will be getting into their stride in a few years. By that time, the global economy will have moved on from the challenges it’s facing.”
Her advice to longer-established firms would be to “invest in innovation; rethink your supply chains; streamline operations to reduce complexity; spend on training and retention; and build strong digital infrastructure. All this will create a competitive advantage and enable a much faster bounce-back when the economy picks up again. Investment in innovation, coupled with rigorous, well-executed cost management, will separate the winners and losers in this downturn.”
Don’t stand still
Pressing ahead with a business transformation when times get tough will also “shine a spotlight on the long-term viability” of the company concerned. That’s the view of Ema Linaker, MD of marcomms consultancy BIB Inc Ltd. Doing so, she argues, should enable “far-sighted leaders” to ensure that any change effort is sufficiently ambitious.
Linaker worked as manager of corporate communications and public affairs at Google for five years, a period that coincided with the global financial crisis of 2007-08. She points out that the company continued to make substantial investments in R&D rather than dialling back as GDP growth in many regions ground to a halt.
“We focused on understanding what the end user really wanted from us and then improved their experience by making it simpler and more personalised,” Linaker recalls.
She believes that today’s corporate leaders should “ramp things up a notch” and implement “ways of radically transforming the business”, suggesting that downturns can provide a great opportunity to capture a larger market share.
“It may sound risky, but it is also necessary,” Linaker argues. “During difficult economic times, outperformers anticipate the potential for impact and make the first moves. They pay attention to the early warning signals of disruption, then prioritise, refine their focus and act early.”
Warning that “stasis equals death”, she advises business leaders to heed the words of Walmart’s founder, Sam Walton. When asked for his views about the US recession of 1990-91, he is reputed to have quipped: “I thought about it and decided not to take part.”