Think - AT LONDON BUSINESS SCHOOL

Strategy for when the going gets tough

Avoid kneejerk cost-cutting and streamlining. Instead, try out new ideas

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There is no doubt that the most common strategic mistake firms make in prosperous times is to lose focus. Such firms seem unable to resist moving into adjacent business areas where various employees proclaim they can also make the company some good money. As a result, however, firms spread themselves too thin.

Now these are hardly prosperous days. The corona pandemic has led to exceptionally lean times in many industries, with the survival of many firms under serious threat.

But in lean times, organisations often suffer from something very different; what we call ‘threat-rigidity effects’. When under threat, facing declining demand and revenues, firms are inclined to cut costs, become more centralised and hierarchical, and focus more narrowly and firmly on the one thing they do well – their core product or service – in an effort to weather the storm.

Paradoxically, firms should consider doing the exact opposite of these two knee-jerk behaviours. Of course, they should focus during prosperous times, but they should also explore new sources of potential revenue when times are lean by experimenting with bottom-up processes to let employees generate ideas and innovations.

 

Generate new ideas

Take the example of London-based Softrain (an alias). Until 2008, the company provided custom-made software for all sorts of logistics systems, which they offered in combination with personnel training. Unfortunately, almost all their customers were automotive companies, such as General Motors and Ford, which were hard hit by the economic crisis. Softrain’s CEO immediately resorted to the usual round of cost-cutting and layoffs.

After a while, though, when they had cut just about all there was to cut, the CEO decided to try something different. He initiated a process for all employees to start generating ideas for potential new sources of revenue. They all participated enthusiastically (partly because it was not like they had anything better to do). Most ideas they generated were rubbish; some ideas were so-so, but a few were really good. One of the ideas brought them a substantial new source of revenue.

"When under threat, firms are inclined to become more centralised and hierarchical"

One team had noticed that one particular business unit among their automotive customers was doing rather well during the crisis – the unit providing spare parts. That’s logical: in a downturn, when people stop buying new cars, more people need to have their current model repaired, which implies ample demand for spare parts.

This team therefore proposed an inventory control product specifically aimed at the spare parts units of automotive companies. It worked. It proved so popular, in fact, that it provided the company with a much-needed additional and significant source of revenue. It kept them alive and even allowed them to make a profit during the crisis.

This is the opposite of the usual ‘threat-rigidity effects’ — rather than focusing and becoming more narrow and top-down, Softrain broadened, organised bottom-up processes and tried something new. That is a brave thing to do during a crisis because it feels like spending money rather than saving it. But finding the ‘spare parts division’ among your customers might just see you through the dire straits we’re in.

 

"Firms should explore new sources of potential revenue by experimenting with bottom-up processes"

That is not all: crises are often triggers of long-lasting innovation. Research by Shaun Larcom and others published by Oxford University showed that a London Underground tube strike triggered innovation: about one in 20 commuters, forced to explore new routes, discovered more efficient ways to get to work, which they stuck with when the strike ended.

Similarly, you might want to consider whether the current severe circumstances can be a stimulus for you to experiment and find even better ways to address the needs of your customers. If you’re lucky, they might help you discover a whole new set of services or customers.

Experimentation during crisis, when the going gets tough, is not for the faint-hearted. But in business, as in life, necessity is the mother of all invention – you just need to be brave and embrace it.

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