Chills, Thrills and Frills was a popular ice cream parlour in Ahmedabad in the 1990s. Thirty years later, it would aptly describe the range of emotions and thoughts engulfing business leaders. The COVID-19 crisis and its effect on the economy and livelihoods are foremost on everyone’s mind. Many companies have initially adopted a hibernation strategy, stockpiling and conserving resources and reducing their metabolic rate to survive. But this alone is not enough. It does appear – and most commentators are converging to this view – that the aftermath of the crisis will be both severe and protracted. Most business organisations have not amassed adequate resources to survive through an extended period of adversity. Moreover, it is increasingly clear that the world (of business and consumers) will undergo irreversible changes throughout this period. If that were to happen, this crisis will be throwing up several opportunities that hibernating companies will miss while in their caves.
Learning from past downturns – the financial crisis of 2008 being the most recent memory – most management teams have the popular playbook at hand. However, they might be limiting themselves to the common-minimum actions that could help them survive but might not set them up to thrive when the worst is past.
Managing cost in a way that builds capability
Cost-reduction is an instinctive and necessary reflex reaction to a downturn. But, as most dieticians would advise, crash diets never work. A dispassionate examination of the “main sequence” of the business will reveal opportunities for optimisation as well as areas for investment. Shedding non-essential costs, or frills, is the need of the hour. But this is also an opportunity to not merely reduce costs, but also to realign them to facilitate non-linear growth in future. Supplier contracts can be renegotiated, for example, to both lower sourcing cost and simultaneously improve service levels and interlocks. Digital enablement is an obvious area to redouble efforts at this time. It will help reduce people dependency going forward and equip companies to spring faster out of the downturn.
Exploiting the full value of pricing
It is tempting to assume price reductions are necessary to attract demand in a downturn. Naked discounting is, however, the least defensible competitive lever and is a race to the bottom. Furthermore, many markets exhibit far less price elasticity than we naively assume. Dropping price in such a situation merely erodes value. Instead, restructuring payment terms and pricing structures to better share risk and value with customers might be a better stance to adopt. Bold managers might even experiment with a price increase if they are convinced that the demand they are likely to see at this time will be triggered by need rather than greed.
Getting deep visibility into the cash position
In the current scenario it will be critical to manage the business for cash and not just the P&L. A detailed view of projected cash flow over the next four to eight quarters, stress-tested for extreme positions – e.g. 25 percent volume reduction in addition to a 15 percent price compression – could help assess risk objectively. Two important yet under-exploited levers to optimise cash are net working capital management and capex management.
Building a focus on the balance sheet
It is the balance sheet that will separate the ‘haves’ from the ‘have-nots’ in a distressed financial environment. Calibrating balance sheet risk includes a hard look at the portfolio of assets and their value creation potential in the emerging world post-COVID-19. High debt in an environment of falling business valuations increases the cost of capital and limits access to funds for growth. Companies in weak positions need to move proactively to shore up parts of their balance sheet. Those with strong positions may find this the opportune moment to take advantage of M&A and venturing.
Assessing both M&A and venture incubation opportunities
It is well-chronicled that a vast majority of M&A deals destroy value. Yet, M&A deals done in downturns outperform those done in boom cycles by a significant margin. Similarly, evidence suggests that startups that are birthed in tougher economic cycles have greater longevity and value creation than those founded in times of froth. They are more inventive with their customer propositions and learn to make do with less on their operating model. Every company, even if they choose to sit out the deal flow, will be well served by drawing out potential consolidation scenarios in the core of their industry as well as constantly scanning the disruptive start-ups active on the periphery.
Leading companies are realising the inadequacy of just attempting to survive and are stepping beyond to more attacking moves. Emboldened by the empirical evidence which points to sales growth being the biggest driver of out-performance when emerging from a downturn, these companies are successfully formulating a range of both defensive and offensive moves. And they are doing these concurrently and not sequentially. As they make sense of this crisis, far-sighted business leaders will surely be sensing both a chill and a thrill down their spine in equal measure.Arvind Subramanian is Chief Executive at Mahindra Happinest. The views are personal.