2015: Between strategy and cost-efficiency

As we start the new year, it is clear to many businesses that they have to do belt-tightening given emerging economic scenario. We have seen stock market decline by 30 percent year-on-year and the naira depreciating significantly against the dollar. While declining asset prices will impact consumer confidence, the depreciating naira relative to the dollar will result in significant input cost which may not necessarily be absorbable by consumers whose real household income may decline as a result of imported inflation and declining employment. Federal allocation to states has significantly declined as a result of declining oil prices. The impact on household income in many states, where government is the biggest employer and economic spender, will be significant in the coming months.

The natural reaction of many businesses to the new economic challenge is to focus on the pursuit of efficiency and the control of cost. After all, if revenue projections are uncertain, the control of cost to maintain decent profit will be critical. The danger, however, is that what seemingly started as a tactical response to short-term environmental challenge can assume a life of its own, consume the psyche of the organization and become the strategy of the business. Strategy is the art of long view. This economic slowdown will probably last two to three years. A going concern must, however, have a view beyond three years even in an unpredictable emerging economy like Nigeria. While cost management and control, essentially the pursuit of operational excellence will be critical, building the capability to compete and deliver unique propositions to customers is a ball that must not be dropped. It takes nine months to have a baby. If firms abandon or

postpone their strategic initiatives at this time till after the economic slowdown, they will probably not have the unique capability to exploit the new opportunities which will be re-presented to business at the economic turn to a new cycle of growth in the next two or three years. In essence, the choices that they make now, how they delicately balance cost management and strategic pursuit, will determine if they will be champions in the next economic turn.

This delicate balance might, however, be tough for some firms, especially those who are vulnerable today because they have previously not built unique capabilities to compete and render differentiated services to their customers. Such firms will be most affected by the coming price wars because the commodity nature of their offerings provides little resilience to aggressive competition dictated by the contraction of markets or its slowdown. Such firms will have to battle for survival, to have today and think of tomorrow only if they survive to get there. The lesson for other firms, however, is that to avoid the situations described above, they must never lose sight of building unique advantages and capabilities to deliver unique and differentiated products and services. Ultimately, even in an economic downturn, previously built unique capabilities may be the greatest buffer to the kind of market shocks that we are about to witness. A theme that runs

through many of our previous essays on firm strategy is that operational excellence is not strategy. That it is critical for firms to recognize this, and not to substitute the pursuit of organizational effectiveness for strategy, which is the art of building unique capabilities to deliver unique products and services to customers.

How should the delicate balance of cost management and strategic pursuit be managed at these times? The first thing is to dimension the organization to determine what is core to its advantage today and its competitiveness tomorrow. All others outside that core can be classified as “nice to have” where outsourcing or other options could be pursued. Secondly, the organization must strive to deliver strategy effectively. In essence, it must do the unique things that it has elected to do to be different effectively at optimal cost. While operational excellence is not a substitute for strategy, it is a critical complement to deliver and execute strategy. Business opportunities are time-bound and exist typically as strategic windows, which draw and eventually close. The timely pursuit and delivery of strategic initiatives, the execution of programmes, the translation of strategy to real market advantage and business revenue are critical to these times.

Thirdly, organizations must determine the minimum investment intensity or capability maintenance investment levels necessary to maintain its long-term competitiveness. Investments below these levels are likely to be a waste and the firm, if it cannot maintain this minimum investment intensity, should consider exiting such business and generate cash and resources to keep investments above the minimum intensity required in other businesses.

A discussion on recession and strategy cannot be complete without the subject of leadership. In normal times, organizations need strong leadership. In periods of economic downturn, leadership is even more critical as organizations battle for survival. Recession represents a crisis to organizations. It is like war. Like nations at war that need strong inspirational leadership, organizations need the strongest of inspirational leadership in recessions. The heart and soul of the people must be engaged to win and pull through the difficult times. Leaders must make this happen. They must lead with the highest level of integrity and be a force of example of hard work and sacrifice to the organization rank and file. A good army has generals, colonels, majors and lieutenants. War is never won by competent generals and incompetent lieutenants. In recession times, leaders must invest heavily in leadership competency development several levels below them. Every

leader must be trained on how they can engage the heart and soul of people in their unit in alignment with the transformational battle plan of the organization, its tactical trade-offs and its strategic choices. And because resources are very scarce in this period, leadership training must be linked clearly with financial literacy. Every leader must understand how value is created or destroyed in the organization. Cost rationalization and resource optimization will therefore not just be a decree from the top but something that is understood by those who need to execute it. Stronger financial literacy in the leadership cadre will also build a new behaviour where leaders align their resources more strongly around value-creating activities that support institutional sustainability.

In conclusion, times like this do not make strategy irrelevant. Firms must keep their long view, recognizing that the economy moves in cycles and that this recession shall turn upwards in the coming years. While they do cost management today, they must do so without damaging their long-term capability to compete and take advantage of the next economic upturn. The clever balance of cost management and control with the dogged pursuit of strategic initiatives for long-term competitiveness is the art that firms will need at these times.

POSTSCRIPT: This essay was first published in 2009 under the title ‘Recession: It is not the time to abandon strategy’. Year 2015 with the challenges of currency depreciation, falling oil prices and significant demand contraction shares contextual economic similarities with 2009 for businesses in Nigeria. Lessons from the period with regard to the evolution of industry structures and firm competitiveness will be very useful for business organizations in pulling through the coming challenges.

Olu Akanmu