Survival of the fittest? No, survival of the most adaptable
Businesses need radical thinking if they are to survive what Ed Balls described recently as the worst economic downturn since the Great Depression of the 1930s and possibly the worst for over a hundred years.
Over the past twenty years or so the UK and many other countries have been guilty of massive over consumption, living beyond their means and borrowing more money than they could afford. And come the end of this historic economic episode, society might look very different. In the light of such possible changes in consumer behaviours and societal attitudes, businesses need to be thinking about a long term survival plan, one that will insulate them against a potential five year profit squeeze. Managing cash is crucial and accepting low profitability might work for 18 months, but isn’t a feasible long-term option. Focusing on retention of customers and staff and cutting budgets to the bear minimum are only short-term solutions. Business owners must look further ahead and consider more radical changes to fight off the effects of the long-term and deep depression. Three suggested approaches are: a) business restructuring; b) forging of partnerships; and c) business mergers.
Think big, like a revision of product specification, a change of operational location or a different way of distribution. An even more extreme strategy could be to withdraw from the current line of business completely and consider investing in an alternative line of business more suited to the times. But beware; changing a business model is a challenging task and it needs a certain amount of time to devise and implement to order minimise any potential alienation to customers and risk to the business, but if executed intelligently can prove to be an effective safeguard.
Strategic directional change can be profoundly unsettling due to the nature of the unknown. It is vital to research new markets before diversifying which is exactly what Apple did when its iPod was playing second best to the MP3 players on the market. In 2000 Apple acquired SoundJam MP and just nine months later entered the digital music distribution market with the launch of iTunes. Not only did this bolster the bottom line, but also changed the way in which the music industry operated. As a testament to the success of this business strategy, over 5 billion items have been downloaded from iTunes and it is now worth an estimated $8.4bn.
It might have felt different for Jack Cohen when he founded Tesco in 1919. Back then he simply sold surplus groceries from a stall in the East End of London. It wasn’t until in 1973 when Leslie Porter, Cohen’s son-in-law, took on the role of chairman and revolutionised the business strategy that the retail giant was truly born. Eighty years on, Tesco has developed the flexibility and insight to compensate for the changes in the consumer landscape and diversify into additional business sectors beneficial to its customers.
From the humble beginnings of a fruit and veg stall, Tesco’s portfolio of products has expanded to include personal finance, electrical, clothing, home furnishing, telecommunications, fuel and garden centres. Together with the desire to appeal to a greater target market its distribution outlets have also widened to include supermarkets, large out-of-town multi-department stores (Tesco Extra), inner city stores (Tesco Metro), residential convenience stores (Tesco Express and One Stop) and an e-commerce store (Tesco Direct).
In these cases, both Apple and Tesco fully understood the needs, decisions and attitudes of their customers and the success speaks for itself. But what about those companies where the risks were too great and it didn’t work?
Entellium, a supplier of customer relationship management software had redesigned its product to make it feel more like a video game. The new product enabled salespeople to win points on the system for performing relevant operations like entering data. The rationale was based on a stereotype that salespeople are competitive and an on going consumer trend of computer game consumption.
This ‘all in’ bet proved fatal as sales quickly dwindled and the situation at Entellium worsened as CEO Paul Thomas Johnson and CFO Parrish Jones fabricated sales figures. It was hoped that this ‘fake it till you make it’ ethos would entice investment from venture capitalists, but in reality this resulted in them both being arrested by the FBI in 2008 and charged with “devising a scheme to defraud investors in the company by representing that company revenues far exceeded the actual figures.”
There have always been strategic partnerships, take the example of automotive companies and parts suppliers. However, the issue here is a different type of partnership, one that aids survival by sharing costs and resources and developing synergies. Economies of scale can be achieved as service providers pool resources namely shared buildings, shared equipment, shared specialist staff and back office functions. New products can be developed which couldn’t be done in isolation.
Partnership working coordinates action between organisations which can provide additional momentum to get things done. It also allows many organisations to access valuable funding and comply with Government requirements.
But in the same way that a change of business direction is challenging, a working partnership presents its own set of hurdles. Firstly, competition between organisations can act as a motivational tool, but excessive competition can result in an unwillingness to cooperate. It’s also vital that all staff involved in partnership working have the necessary authority to take decisions. A lack of authority slows up decision making and frustrates business progress.
The media industry has been leading the way with working partnerships with the Daily Mail group granting office space to The Independent titles, the Newsquest / Gannett print deal with Trinity Mirror on Teesside and the Telegraph media group titles being published by News International. However, in the US competing newspapers have taken steps not only to share the costs of distribution but also editorial content.
The Dallas Morning News and the Fort Worth Star Telegram, two daily newspapers in Texas, have surprising been sharing picture resources and feature content since November last year! These are not small papers by any means. The Morning News sells 368,000 copies on weekdays and 500,000 on Sundays while the Star-Telegram's last circulation audit showed it selling 210,000 on weekdays and 304,000 on Sundays. But advertising has fallen dramatically in recent months, impacting the overall revenue.
These businesses don’t view each other as competitors anymore; they have a common goal in addressing the challenges presented by an ever-fragmenting media landscape that has affected readerships figures.
Under the spectre of a post depression society, a business may come to the conclusion that it does not constitute an independent viable business entity in the longer term. There may be other businesses in the same position and so a merger may be the most feasible option - minimise competition, increase market share and guard survival. Currently, investors aren’t shy about backing business ventures; there is actually some evidence to suggest that they see opportunities in the present situation since share prices are so low.
We’re now in a position where we need to plan based on the real world situation rather than optimistic aspirations. And by looking at pessimistic economic scenarios as well, will help businesses manage expectations and ensure effective action is taken. And it seems apt to conclude with Charles Darwin’s sentiment that “it is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.”
Malcolm Prowle is Professor of Business Performance at Nottingham Business School and a Visiting Professor at the Centre for Financial Management at the Open University Business School. He is currently engaged in research looking at business perceptions of the current economic climate and how businesses plan to deal with the challenges they face. He would welcome any comments on this issue e-mail: firstname.lastname@example.org