The Crisis Has Conducted a Strategic Audit

In what by now is a typical situation, former growth leaders are having a hard time making ends meet, while ambitious development strategies look unjustifiably risky.  Not all businesses have suffered equally, however.  The reasons for these differences lie both outside of and within the companies themselves.

By Dmitry Sirotkin, Partner, ALT Research and Consulting Company, Global Intelligence Alliance's GIA Member in Russia.

Segmentation of the Crisis

The internal reasons have to do with the industry to which a company belongs.  In an economic downturn, it makes sense to divide industries into groups based on the criterion of resistance to crisis. Simplifying the situation slightly, we can divide industries into four segments (see Fig. 1 below):

• Industries highly prone to crisis, such as construction and development.  They combine sales of capital goods and a high debt load. 

• Industries suffering financial problems with a high debt load.  This group usually includes retail chains and the financial sector. 

• Industries with demand problems that sell capital goods, but on the whole do not have a high debt load.  They include car dealers, manufacturers of heavy equipment, and other producers of capital goods.
  
• Crisis-resistant industries—probably it is too soon to put any branch in this group, but it looks as if discount chains, collection agencies, and legal consultants will fall into this category.

It must be emphasized that the quality of the strategy implemented by the company often has greater significance than simply the “crisis resistance” category it belongs to.

Fig. 1. Segmentation based on the criterion of “resistance to crisis”

An Illusory El Dorado

The crisis prone industry groups primarily include those that have relied on major development projects.  Significantly, investors from other industries have become actively involved in construction and development projects in St. Petersburg in the past few years.  These projects were mostly carried out using borrowed capital.  Naturally, with the gradual decline in profitability in most industries, many saw development as a kind of El Dorado, where the main thing was to stake out your own gold-prospecting claim.  Even better – several of them.

You may hear some people voice the following opinion:  It is unfair that the companies with the most ambitious strategies have incurred appreciable losses, while their more cautious competitors have turned out to be in a winning position.  I beg to disagree.  A truly ambitious strategy presupposes attainment of a qualitatively new level of development by a business, development of a business model, or competencies that will enable it to break away from its competitors in some essential way.  In this case, however, we generally have had to deal with sky-high aspirations but an extremely mediocre method of attaining them, a similar method that others have.

In terms of pre-crisis strategic decisions, a number of professional players in the St. Petersburg market look far more interesting.  For example, RBI Holding succeeded in attracting as strategic partners and investors for its projects Deutsche Bank and Morgan Stanley.  We note that this did not happen suddenly, but after painstaking troubleshooting by the banks into the company’s business processes, and by the company achieving a level of transparency that is rare in the Russian construction industry.  Another example is with the general contractor STEP, which deliberately chose and carried out a more conservative plan for financing construction projects, one, though, that was innovative for the industry.  In both cases, these companies succeeded in putting together investment plans for their development projects that substantially lowered the risks of finding themselves in a financial hole when events in the financial market took an unfavorable turn.

On a Financial Diet

As mentioned above, at the present time the industries with financial problems most often include the financial sector and retail chains.  We will look at retailing in more detail.  Luckily, in contrast to construction and development, the peak in retail borrowing passed by 2008, and on the whole companies in this industry systematically have continued to increase their market presence.

For retailers, the crisis has exacerbated the problem of financing inventory.  Meanwhile, retailers often try to stretch out payments to suppliers as a key means of solving this problem.  Certainly, this meets with active resistance from the suppliers, for whom it is more attractive to be given credit themselves than to give credit to others.  In the crisis period, retailers are also increasingly giving attention to internal optimization, most notably to laying off “non-line” personnel.
In light of what has occurred, the feasibility of implementing the pre-crisis strategy of regional expansion is questionable, and not only from the standpoint of reducing the effectiveness of the chains’ operation. 

I would like to call attention to a strategic problem of retail chains in St. Petersburg:  market competition is constantly intensifying, but differences between various chains within the same format are usually negligible.  At one time, the copy-cat strategy allowed Russian players to get their business set up quickly and to replicate it.  But now this strategy has turned against them, especially for small players, to whom it has become difficult to compete with market leaders in terms of cost levels.  There are practically no new interesting retail business concepts appearing in the market, nor are there any interesting ideas for product repositioning and designing business premises.  Very likely, food retailers must learn a lesson here from their “younger brothers”—the chains that sell fashionable clothing. 

In tough competitive conditions with world leaders, the development of Russian companies in this segment that lack interesting, innovative ideas is problematic.  For example, the vigorous growth of Melon Fashion Group (with brands Zarina and Befree) in many respects is associated with their creative store designs, precise product positioning, and use of international partners in design and manufacturing.

Buy an Elephant!

Companies that deal in capital goods are having a hard time right now.  Most of their clients are now minimizing or discontinuing their investment programs.  Manufacturers of technology and equipment for coal industry workers, metallurgists, builders, chemists, power engineers, and transportation workers are being forced to revise their sales plans for 2009.

Let’s take a closer look at car dealers, as the most contrasting example.  As recently as August 2008, at the first conference of Russian car dealers, attendees were still full of enthusiasm and confidence in their own powers.  And their attitude is understandable – in the first 10 months of 2008, sales grew by 36 percent.  As the director of the Avtokadr consulting agency, Tatyana Grigoryeva, puts it, in the pre-crisis period there were two interrelated tasks of key importance to the majority of car dealers: pursuing aggressive development, and attracting investments.  The companies were fighting to expand their brand portfolio and for acreage for construction. 

In October-November 2008, the leaders began experiencing demand problems.  Both consumers’ general wait-and see reaction to the crisis, and the difficulties of obtaining car loans has had an effect.  The expectation on the part of consumers of “crisis-related” discounts certainly have influenced the situation, too.

Of considerable significance for the future of individual dealerships, besides the level of debt load, is the role of post-sale maintenance services in their development strategies.  Presumably, things will be hardest for those that have given scant attention to service: “The main thing right now is to sell more cars, and we’ll see about developing maintenance services once sales fall off.” 

The future looks more secure for those who gave serious attention beforehand to ensuring that their customers do not find excuses to decline service at their dealership, and go to competitors for maintenance.  After all, the 1998 crisis showed that it is precisely maintenance service that is a key source of stable income in unstable times.

In summing up the assessment of the difficult year for managers, a key strategic dilemma can be singled out: "growth or effectiveness?” On the whole, the winners are those who opted for a strategy of increasing effectiveness rather than one of extensive development.  Undoubtedly, it was simpler to adhere to the given strategy in industries that are not showing high growth, such as engineering or the food industry, and far more complicated in a few fast-growing branches.

But how is one to minimize the influence of the economic downturn on the dynamics of sales?

The answer to this question must be sought in a fundamental change in the market situation and the market behavior of customers.  Whoever is the first to “find the keys” to the “crisis” customer will obviously be the winner.

We will try to examine this approach in detail.

How to Sell

How do you sell the crisis to a customer?  Here, things are simpler for consultants.  For example, our company promptly came up with and marketed such products as anti-crisis strategy sessions, and a seminar/workshop called “Development Strategy in Crisis Conditions.”  But how do you approach the task of working out and putting on the market an “anti-crisis air conditioner” or “anti-crisis cookies”?
Apparently, customers will accept as being the most attractive suggestions that enable them to obtain an obvious value.  Of course, many customers ask for price reductions and extended payment deadlines.  But that is not all.  For some customers, the need for a reliable supplier has become more acute.

Of course, when making a suggestion that is advantageous for the consumer, we ourselves must not turn out to be the loser, because the point is to find original, mutually advantageous, “win-win” solutions.

One example that can be mentioned is builders, who before the crisis generally were extremely unresponsive to suggestions from suppliers of building materials about optimizing the delivery system, if this required changes in their own business processes: “Why do we need your weekly delivery of building materials to the sites, if it’s easier for us to buy once a month for our own warehouse and make deliveries from it ourselves.  You think saving 10 percent affects our profitability?”  One can assume that in the present situation, such a suggestion will be met with far more enthusiasm.

Thus, the changed needs of customers have created a need to come up with attractive and economically valid “crisis” offers.  At the same time, I would like to caution against doing pretty “packaging” without creating real value for the customer, or else he will not make a return visit to you.

Many companies face a need to get away from using a single set of standard commercial terms and put together “package proposals” for key customer groups.  Practice indicates that for various branches it now is critically important to have various combinations of commercial terms.

Who to Sell To

As previously mentioned, in a crisis situation it is logical to segment your customers on the basis of a criterion such as “resistance to crisis” (see Fig. 1).

Of course, concentrating the efforts of sales managers on the more crisis-resistant segments will ensure better sales results and less indebtedness.

Very likely, this approach can be used not only for segmentation of clients at the branch level, but also within branch segments, right up to classifying all the companies in your client base on the basis of the criterion of crisis resistance.

Whoever is Faster

Not only the consumer market, but also the competitiveness of the market, is changing dynamically.  Monitoring and forecasting competition in conditions of crisis makes it possible to find answers to a number of important questions: From which of the weakened competitors should an active attempt be made to gain market share?  From which competitor should you expect dumping, and for which goods?  What gaps are appearing among the competitors, and how can they be effectively used to your advantage in your own proposal?  And so forth.

What competencies and skills must be developed in a company so that it can effectively take advantage of the aforementioned opportunities offered by the crisis and overtake the competition?

Probably the following ones:

• Analytical (applied marketing and economic analysis);

• Group work and inter-functional cooperation (effective horizontal interaction among sales, marketing, manufacture, economists, etc.);

• Effective formalization and correction of management decisions, regulations, and procedures;

• Constructive communication with outside contracting parties (clients, suppliers, competitors, etc.).

One can assume that crisis-related opportunities can be taken advantage of more quickly and ably by “analytical” companies, where these competencies and skills are sufficiently developed.  In the period of uninterrupted growth, “analytical” companies at times lost out to their more aggressive competitors in terms of growth rates.  Sometimes this was even perceived from the inside as “paralysis due to over-analysis.”

But the competitors, in pursuit of market share, energetically opened regional offices, invested in expansion of capacity, and built up warehouse inventories.  In the process, the issue of effectiveness took a back seat.

Here, however, the “analytical” companies, not encumbered with excess assets and loans, can put their analytical competencies and internal technologies to use with extreme effectiveness. The main thing is not to overdo the analysis and planning, and to act promptly.

Plan for 2009

There should not be a lot of scenarios and alternatives for the plan, but ideally only three, one of which is the basic plan.  The customary optimistic, pessimistic, and realistic scenarios will hardly do; a deeper examination of the alternatives is necessary.  For example: the market drops sharply, but as a result, weak competitors leave it and some of their clients switch to us.  Elements of a pessimistic scenario and an optimistic one are combined here.  It’s important to plan some priority measures, prioritized according to their importance in the execution of each alternative plan.  They include reduction of a number of expenses, curtailment of part of the development projects, sale of inefficient assets, and the like.

To prepare a viable sales plan, clients must be divided into groups:  resistant, not resistant, and moderately resistant to crisis.  The “not resistant to crisis” category includes producers of “capital goods,” whose drop in volume can reach 50 percent and more.  The resistant ones are the makers of products that focus on basic needs, and the expected drop in their volume is insignificant.

Most likely, the promotion budget will be slashed in the new year.  One action worth concentrating on is promotion of proposals and services that really help clients enhance effectiveness in crisis conditions.

There is also a need to clearly write down in the plan which projects are being discontinued, which ones will continue to be financed, and which ones will be financed only in the event of a favorable scenario.  Possibly you are planning to buy, cheaply, a competing company that is flat on its back.  It is important not to put such a “crisis” project on a “however it turns out” basis, but to immediately put the sum into the plan.

There is a probability that after putting together the plan, the financial result will be negative.  In this case, you must nonetheless obtain a balance of income and expenditures, to at least not be in the red.  You also must honestly forecast the worsening of a number of the plan’s parameters, such as the extent of debtor liability.

For the plan to be viable, you must actively work with the contracting parties.  From meetings with clients, suppliers, banks, and competitors, it will be clear what to expect from them and what to put in the plan.  Practice indicates that by so doing we not only make the figures in the plan more precise, but find more flexible suppliers, better terms of credit, and so forth.

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