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Six courses of action to survive and thrive in a crisis

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Professor Andre de Waal MBA - Expert Author

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Many organizations emerge from a crisis in a weak position because they focused too much on cost reductions. However, a review of past crises reveals that there are always organizations that seize the opportunities offered by crises. During difficult times these organizations tailor their strategy to their specific circumstances to achieve an optimum balance between what they have do and what they can do. These organizations do not automatically choose for a cost reduction strategy but consider a wide range of courses of action. As a result, they strengthen their position and, after recovery of the economy, they emerge as a frontrunner in their industry. This article reviews the possible courses of action during a recession, illustrated by companies that took these actions in practice, and explains how you can determine the course you need to take to help your organization to not only survive but thrive in a crisis.

Context, context, context

Organizations generally respond to times of crisis as though they all suffer to the same extent. The woes and worries are supposedly the same for every sector, every size of company and every circumstance. Consequently, most organizations respond to a crisis in the same manner [1]. However, why is then that there are always companies that not only survive the crisis but also benefit from it? [2] Next to all the doom and gloom reports in the media on failing companies there are also stories on organizations that appear to be relatively unaffected by the crisis. It turns out that these companies differ from the majority in that they approach the crisis situation from their own context: What are our specific circumstances? What is the nature of our market? What are our threats and opportunities? What are our condition and striking power? These companies have an excellent insight into their situation on which to base their decision for a specific course of action, and this does not always need to be the Pavlov reaction of reducing costs [3]. For example, Air France KLM is now making anticyclic investments in new aircrafts. Because currently many orders for Boeing and Airbus aircrafts are cancelled the company can negotiate substantial discounts.

A company’s condition can be determined by reviewing its financial status and the strength of its internal organization. The company’s financial status determines whether it has the financial capacity needed to adopt and execute a specific course of action. For example, the investments needed to begin new operations are higher than those involved in the p of a non-profitable business unit. The financial status of a organization can be characterized as strong, when the company has sufficient funds to undertake new operations; reasonable, when the company needs to adopt a cautious financial approach but nevertheless has some scope for new investments; and weak, a situation in which the company has to be financially extremely cautious.

A company’s internal strength can be determined by carrying out the so-called HPO diagnosis. Studies of high-performance organizations (HPOs) - organizations with better financial and non-financial results than their competitors during a period of at least five to ten years - reveal that five factors determine an organization’s ability to achieve sustainable better results based on a superior internal organization. These factors are: a high quality management, a high quality workforce, a long-term orientation, an open and action-oriented culture, and a focus on continuous improvement and renewal (see box) [4]. An insight into the company’s HPO status is obtained by distributing HPO questionnaires to the company’s management and staff. The individual scores as given by the respondents are totaled and averaged to obtain a score for each of the five HPO factors, on a scale from 1 (a great deal of improvement is required) to 10 (excellent). These scores can be compared with the average HPO scores in the industry to obtain an insight into the relative performance of the organization being assessed. The results from the HPO diagnosis form the basis for discussions with management on potential improvements within the company. An organization with a score of more than eight for all factors is regarded as having a strong HPO status. A score or five or less means the organization has a weak HPO status. An organization with a score of between five and eight has an average HPO status. The combination of the organization’s financial status and HPO status determines the striking power it has for the adoption of a specific course of action [5].

Six courses of action
In general organizations have to always, in both good times and bad times, monitor their costs and profitability and manage their cash flow. Therefore excellent organizations watch their financials since this is basic sound business strategy. Companies that have no cost awareness will lose sight of their costs which inevitably weakens their financial position. At the same time organizations have to continually monitor their profitability to avoid the real threat of non-profitable growth. In recent years there have been numerous examples of structurally-healthy companies that grew themselves to death. So the key question is: what courses of actions are there, besides cost control and profit monitoring, for an organization during difficult times? A review of the activities organizations have undertaken during past crises reveals that there are six courses of action that companies can adopt in times of crisis [6]. The first three courses of action are defensive, where the primary objective of the organization is to survive. The other three courses of action are offensive, where the intention of the company is to benefit from a crisis by growing profitably and becoming market leader. The courses of action are:

  1. Focus on cost reduction. When the financial situation of the organization is in a dire state, reducing the company’s complexity, streamlining processes, postponing investments, reducing stock levels, cutting back on travel and accommodation expenses and refraining from extensions of temporary employment contracts can achieve a significant decrease in the costs and increase the financial capacity of the organization fast.
  2. Focus on core operations. By investing solely in the company’s core operations whilst at the same time p the non-core operations that distract management, the organization can exclusively focus on improving and strengthening these operations, thus increase its capacity to serve specific clients well.
  3. Downsize. Divesting the organization’s marginally profitable and loss-making operations increases financial capacity and creates more scope for investments in the core operations and more promising ventures.
  4. Strengthen the internal organization. Improving the quality of management and staff, improving the primary and supporting processes, and devoting more attention to innovation and renewal enhances the internal organization and improves the organization’s ability to deal with changed circumstances and profit from them.
  5. Focus on increasing turnover and margin. Streamlining the sales process, paying more attention to pricing, focusing on a smaller and higher-quality product range, and strengthening relations with customers, increases turnover and the margin.
  6. Exploit opportunities. The period in which many competitors are occupied with defensive measures offers an ideal opportunity to undertake activities that will enhance the organization’s position in the market, such as launching new products and services, taking over companies, entering into partnerships that enhance core operations, and recruiting excellent staff currently employed by the competition.

Aligning the course of action to the organization’s context
By combining the financial status with the HPO status of an organization a matrix with eight squares originates. This matrix can be used to plot the six courses of action (Figure 1). The matrix contains eight rather than nine squares because, pursuant to the definition of a HPO, an organization with a strong HPO status and a long-term weak financial position is not really feasible.

Figure 1: Matrix of courses of action that can be undertaken,
based on an organization’s striking power

http://www.hpocenter.nl/uploads/Matrix%20of%20courses%20of%20action%20that%20can%20be%20undertaken%20based%20on%20an%20organization’s%20striking%20power.jpg

An organization with both a strong financial and HPO status has sufficient financial scope and internal strength to make maximum use of the chances that arise during a crisis such as a recession. It can therefore exploit opportunities to the fullest by for instance starting new operations that enhance its market position during a period in which the competition is struggling to survive. Witteveen+Bos, a European consultancy and engineering company that ranks ninth in terms of turnover but first in terms of profitability, is in a strong financial position due to its continuous profitable growth since 2002. At the same time the company, owned by its 500+ staff/shareholders and characterized by a powerful family culture, has a strong internal organization as manifested by a high score in the HPO diagnosis. Witteveen+Bos always monitors the cost and profitability of its operations, but does not place extra emphasis on these in the current difficult times. Instead, the organization manages its operations primarily on the basis of authenticity and passion: increasing quality, enjoying carrying out high-profile projects, acting as the partner of ambitious clients, and creating scope for the development and entrepreneurship of staff. In the midst of the recession Witteveen+Bos started new operations in Belgium by setting up an office in Antwerp and entered in a new partnership in the railway consultancy industry with Royal Haskoning, DB International and Verebus. In so doing, Witteveen+Bos is considerably enhancing its leading position in the sector (matrix position 1).

When an organization has a strong financial position but an average HPO status it still is able to exploit opportunities, although the scope of the new operations and the pace at which these opportunities can be utilized depends on how much the internal organization can handle. Therefore the company has to devote explicit attention to strengthening the internal organization so it can make effective use of the opportunities. Cofely GDF Suez, the global leader in the provision of technical services, has a strong financial position. The company balance sheet does not show any (bank) debts. Cofely GDF Suez customers require solutions that have a direct relation with sustainability, corporate social responsibility and cost efficiency. For this reason the company anticipates on social trends by distinguishing itself with the themes of increased efficiency of energy supply, increased comfort in the living and working environment, and lower overall consumption of energy. The current crisis offers Cofely GDF Suez the opportunity to fulfill its ambition. Several business propositions have been developed at an accelerated pace that will achieve an immediate desired effect: a permanent increase in turnover and margin at the expense of competitors. Cofely GDF Suez has improved its services to customers by increased cross-selling of its solutions, and approaches new customers with sophisticated solutions at lower financial and social costs. At the same time, as Cofely GDF Suez has an average HPO status, the company focuses on the enhancement of the internal organization. Cofely GDF Suez has always been cost conscious, the company began to focus on its core operations several years ago by p unprofitable units. A process has been initiated to amalgamate Cofely GDF Suez 40+ individual units into one group that will be able the company to operate more powerfully in the market. A great deal of effort is being devoted to the merger, simplification and harmonization of processes, and the implementation of an unified SAP system for the entire company that will make performance information better measurable and more transparent. In addition, Cofely GDF Suez is also working on improving the quality of management as in the new constellation new management skills are required. As a result some managers of the formerly independent units who were unable to adapt to the change have left the company, whilst other managers are still receiving coaching (matrix position 2).

Until recently a Dutch temporary employment agency had a strong financial position which was used to initiate a range of new niche-market operations. However, as the agency had an average HPO status the company could not handle this extension and started slipping financially. Therefore the agency now has to p many of the recently acquired operations and has to make additional time and resource investments to accelerate an increase of profitability in the remaining niche operations. While doing so the organization, in spite of the financial pressures, will need to expressly devote attention to strengthening the internal organization otherwise the risk exist that the company will slip even further (from matrix position 2 to position 5).
A Dutch multinational positions itself as an organization with a strong financial position and an average HPO status. According to the Chief Financial Officer, the current crisis is not a normal economic crisis but a credit crisis, not a cost crisis, but rather a liquidity crisis. For this reason he states: "Cash is king. The real problem is the difficulty in obtaining credit so there is not enough oil to lubricate the trade. The banks are no longer functioning adequately and it seems that the business sector has to take over their role. However, that is not what companies are for. For example, they cannot extend their credit periods to customers indefinitely because they don’t have the financial capacity to do so. Moreover, their suppliers also want to receive their payments. Consequently, at present solvency is much less important than liquidity. A company can have a very high solvency ratio but if it cannot meet its payment obligations it can go bankrupt overnight. Another element characterizing this crisis is the changed nature of refinancing, which is no longer an ordinary business process. Companies with a high leverage find it very difficult to secure refinancing, and when they are offered refinancing the costs are substantially higher and, consequently, profits are lower. Obviously, at the moment issuing shares is out of the question. This is an additional reason for dealing carefully with liquidity: pay off debts quickly and refrain from unnecessary investments. As such, acquisitions currently do not have priority. A competitor that goes under is one competitor less anyway! Obviously, you mustn’t miss a golden opportunity but any takeover will need to generate added value and cash flow straight away." For these reasons the multinational attaches great importance to managing its operating capital well so that it can meet its obligations and make use of opportunities. Consequently, the net debt/EBITDA is now the most important ratio, and the organization is implementing measures such as lowering stock levels, reducing assets on the balance sheet, cutting costs, and focusing on the management of cash flow. The board of management has intensive discussions on these topics with managers in all p to coach them in executing these processes efficiently and flawless. The multinational accepts that during the crisis some of its clients will go bankrupt as the organization will not be able to lend a helping hand without placing itself in jeopardy. In the CFO’s words: "This crisis is not about survival of the fittest but survival of the fattest" (matrix position 2).

When an organization has a strong financial position but a weak HPO status it needs to focus on strengthening the internal organization. This is the case for many healthcare organizations that built up a very strong financial position during the past decades of their monopoly. They however have, as a result of a series of failed mega mergers and due to poor management, a weak internal organization and are increasingly confronted with financial pressures as the free market enters the sector. The same goes for housing corporations who, because of their unique position as state-funded organizations, did not have any interest in the HPO idea as they could set their own financial agenda by for instance dictating rents. As this situation is changing quickly because of free market principles, these organizations need to make use of their strong financial position to strengthen their internal operations rapidly (matrix position 3).

An organization in a reasonable financial state needs to focus on strengthening its financial position. When the company has a strong HPO status it has to reduce costs and increase turnover and margin in order to create the financial striking power to make use of opportunities and ensure that the company is elevated to the top-right field in the matrix (matrix position 4).
An organization with an average HPO status needs to follow the same courses of action, supplemented with strengthening the internal organization so that the company is able to effectively carry out the requisite actions. Bagels & Beans, a franchise company with 38 outlets, has a reasonable financial position. Franchise organizations grow by attracting new franchisees who invest in the franchise formula by paying a franchise fee, so Bagels & Beans needs to continually monitor organizational costs in order to keep this fee low. Bagels & Beans can increase the chain’s profitability by opening new franchise outlets. As the franchise formula and franchise organization is already in place every new franchisee makes an immediate contribution to the profit. Bagels & Beans opened four new outlets in the second half of 2008 - when the recession was in full swing - and has plans for opening at least a further four outlets this year. Bagels & Beans has an average HPO status. This is due to the nature of a franchise organization which has a p of franchisees such that it is difficult to create a uniform culture. Bagels & Beans appreciates this problem, and for this reason during the coming year the company will determine the profile of a successful Bagels & Beans franchisee (including the profile of a successful Bagels & Beans manager) and then design a training programme for the franchisees accordingly (matrix position 5).

A subsidiary of Grohe, a global supplier of sanitary fittings, recently carried out a HPO diagnosis which revealed that the company has an average HPO status. In addition, it has a reasonable financial position. The company has decided to focus primarily on reduction of costs that do not have an immediate bearing on the manufacture, distribution and marketing of products (such as travel and accommodation expenses, office supplies, give-aways, and visits to trade fairs), and increase of turnover by placing the emphasis on supplying the more expensive-home segment of the market. The HPO diagnosis also initiated project groups that will work on further strengthening the internal organization (matrix position 5).
An organization with a weak HPO status has no other option but to reduce costs, since the company lacks the strength and innovative capacity required to increase turnover and margin. A good means of cutting costs rapidly is to p all non-core operations and exclusively focus on core operations. Of course companies in this middle-left field also need to strengthen the internal organization (matrix position 6).

In a period of crisis organizations with a weak financial position have no choice but to opt for one of the survival courses of action. This automatically implies a focus on reduction of costs, since there is little or no financial scope for initiation of new operations, improvement of turnover and margin, or even strengthening the internal organization. The effects of cost reduction can be enhanced by withdrawing to the core operations, thereby avoiding the spending of funds on operations in areas in which the company lacks the strength to reap the benefits (matrix position 7). In addition, when the financially weak organization also has a weak HPO status, it needs to downsize to rapidly generate financial resources. After many years of growth an international fashion company entered a difficult phase because it was unable to manage the rapidly increasing scale of operations adequately. Management started to waver in its strategy and quality and performance of the operations began to decline at an alarming pace. Parts of the company had to be sold and ultimately ownership of the entire company passed into other hands. What once was a world-famous, well-oiled and profitable company had become a shadow of its former self. The new management is currently endeavoring to break the impasse by drastically reducing the size of the head office. All ‘fat’ in the staffing is being cut out and the processes are being simplified and reduced to the essence. The company’s focus is now on ‘back to the core business’ and therefore it is in the process of p all secondary operations. The entire HRM cycle is being redesigned in line with the new focus and the remuneration structure is amended. Pursuant to this operation staff will exchange part of their fixed salary for a variable reward system. In addition, management is devoting a great deal of effort to strengthen the internal organization. In the words of a member of the management team: "During times in which you have few funds available for investment it is essential to gain everyone’s support for the investments you do make. We are making every effort to promote open dialogue in which everyone is free to contribute what he or she can. This ensures that good people keep confidence in the future of the company and dedicate themselves with heart and soul to its success" (matrix position 8).

Conclusion
The examples of the courses of action as taken by the organizations described in this article clearly reveal that ‘one size does not fit all’. Each organization needs to examine its position carefully to identify the status of its financial situation and internal organization. Organizations can then use the matrix of courses of action, to determine the most appropriate course for the coming time. This requires management to be brutally honest when identifying not only the company’s strengths and weaknesses but also its own strengths and weaknesses. ‘Improve the world, start with yourself’ is an approach that is certainly appropriate here. Management needs to take the lead in enhancing the five HPO factors, including strengthening the quality of management itself, so that the company can not only survive a crisis but even thrive. And the real HPO always keeps the long-term goal in its visor: to become the best in its industry!

This article is based on research by dr. Andre de Waal and Esther Mollema of the HPO Center. Over 280+ studies and a worldwide survey among more than 2,500 organizations in over 60+ countries were involved in this five year study.


[1] S. Banerij, N. McArthur, C. Mainardi and C. Ammann, "Recession response, why companies are making the wrong moves," White paper, Booz & Company (2009).
[2] D. Rigby, "Winning in turbulence, pull the right levers for your situation," White Paper, Bain & Company (2009).
[3] R. Faas, "Navigating the Downturn," White paper, Deloitte Consulting (2009); A. Wileman, "The six million dollar cost manager," Paper, The Conference Board Review (January/February 2009).
[4] A.A. de Waal, "The secret of high performance organisztions," Management Online Review (April 2008), http://www.morexpertise.com/download.php?id=88.
[5] J. Reingold, "Jim Collins: how great companies turn crisis into opportunity," CNNMoney.com (January 22, 2009); J. Collins, "How the mighty fall, and why some companies never give in" (London: Random House Business Books, 2009).
[6] R. Charan, "Leadership in the era of economic uncertainty" (New York: McGraw-Hill, 2009); G. Colvin "How to manage your business in a recession," Fortune (January 19, 2009); G. Colvin, "The upside of the downturn, 10 management strategies to prevail in the recession and thrive in the aftermath"(London: Nicholas Brealey Publishing, 2009); C. Mainardi, P. Leinwand and S. Lauster, "How to win by changing the game," Strategy + Business (issue 53, Winter 2008); E. Thornton, "The new rules, managing through a crisis," Business Week (January 19, 2009).


About the Author

Professor André de Waal MBA is an associate professor of strategic management at the Maastricht School of Management (The Netherlands) and Academic Director and owner of the HPO Center , as well as a renowned global Performance Management expert. He has been selected as one of the ten Dutch Masters in Management, thinkers and writers that have influenced management thinking in the Netherlands the most in the past decade. He is also a former partner at Arthur Andersen.



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Article Published/Sorted/Amended on Scopulus 2011-03-28 12:48:21 in Business Articles

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