Fears about the return of stagflation to the UK are prompting firms to consider cutbacks. Yet growth is still possible for those bold enough to invest, rather than retrench, during a downturn
When Dame Angela Ahrendts was CEO of Burberry from 2006 to 2014, her tenure at the FTSE-100 fashion house coincided with the global financial crisis and the so-called great recession that ensued. Despite nearly two years of economic turmoil, the company’s valuation more than tripled while she was at the helm.
Ahrendts said later that she’d been “taught never to waste a good recession”. Her spin on Sir Winston Churchill’s wartime quip, “never let a good crisis go to waste”, goes against the conventional wisdom that economic downturns are universally bad for business. History has shown that they can present opportunities for growth. But how can companies best identify and exploit those opportunities?
As another recession looks increasingly likely in the UK, the first move for business leaders should be to run a thorough check on their firms’ fundamentals. That’s the view of Ben Parry-Jones, COO of CFPro, a consultancy advising businesses in a wide range of sectors.
“Put back-up lines of credit in place, bring down aged debtors and ensure that you have a strong relationship with your shareholders,” he advises. “Get to grips with your cost structure and run a sensitivity analysis (also known as a ‘what if?’ analysis) to look at how changes in variables such as unit costs would affect your profits. Then get your team thinking about what they would do in each of those scenarios.”
The quality of your firm’s finance department is key, because the accounts team will provide the foundational data on which all commercial decisions will be based. More crucially, it has oversight of the whole enterprise and can therefore contribute to processes ranging from reallocating staff to renegotiating contracts with suppliers.
“Getting these decisions right will free your business to invest just as your competitors are pulling up the drawbridge,” Parry-Jones says.
The first instinct of most companies when a recession is looming is to focus on cost-cutting. Often, one of the first casualties is expenditure on marketing. This is despite a body of historical studies indicating the advantages of maintaining or even increasing advertising budgets during a downturn.
As Dr Irute Karanicholas, associate professor of marketing and reputation at Henley Business School, points out, marketing is an investment, not a cost. She recalls the words of Peter Drucker – widely viewed as the father of modern management thinking – who said: “Because the purpose of business is to create a customer, the business enterprise has two – and only two – basic functions: marketing and innovation. Marketing and innovation produce results. All the rest are costs.”
Karanicholas says: “This message seems to be lost when bad times hit. Yet half of the Fortune 500 were created in crisis. If you can survive a crisis, there is only one way to go – and that is upwards. If you are advertising when no one else is, you are simply becoming more visible. If anything, a recession is probably the best time to advertise.”
Nonetheless, the instinctive reaction from business leaders when facing a recession is to batten down the hatches, become very operational and concentrate on the downside risks. Instead of thinking operationally, they need to think differently, argues Phil Jones, managing director of Brother UK, a provider of IT hardware and advisory services.
“A downturn is a good time to invest in your brand,” he says. “The price of services becomes more competitive when the market tightens, which means that you could achieve your goals at a much lower cost.”
Jones also recommends studying trends in other industries and looking out for innovations that your company could adapt for its own use.
After the pandemic started, Brother UK started providing subscription services for its print products in what has proved a successful tweak to its business model, Jones notes.
“The changes you make don’t have to be transformative,” he stresses. “There will be small things you can do to add value for your customers at little cost.”
Businesses should beware of trying to diversify in search of a quick sales boost. If they aren’t thought through carefully, such moves often prove unsustainable and costly in the longer term. Instead, the leadership’s focus should remain fixed on the firm’s core areas of expertise and on adaptions and innovations within those areas, with a clear understanding of the needs of the main customer base.
Mark Wilson is managing partner and CEO of Wilson Fletcher, a business innovation consultancy that specialises in designing digital enterprises. He recommends moving customers towards more self-service experiences online.
“This can offer businesses greater price flexibility and enable them to reduce their costs,” Wilson explains. “Almost everyone understands that DIY takes more effort but costs less than it would if someone were doing it for them to achieve broadly the same result.”
One of the simplest ways to attract and retain customers in a recession is to offer them greater payment flexibility, he adds.
“As cash flow is critical, for consumers and businesses alike, recessions quickly encourage an aversion to commitment and inflexible contracts – fixed-price subscriptions, for instance,” Wilson says. “If you can offer customers the same service on more flexible terms, it gives them a greater feeling of control. A good number may even end up spending more with you as a result.”
One thing that the Covid crisis has taught businesses is the importance of being agile, which should stand them in good stead for dealing successfully with other challenges, including a recession. There is no disputing that downturns are generally bad for business. Indeed, they put an end to many companies. The key to surviving and, potentially, thriving as the economy falters is to avoid knee-jerk reactions such as slashing the ad budget, as such moves are likely to prove counterproductive in the longer term.
A leader who can stay calm and focused, yet flexible, with an eye for opportunity amid the gloom, stands a far better chance of keeping – and growing – their business while all around are losing theirs.