Growth and Optimization
Why a Defensive Business Strategy May Be a False Economy Right Now
When faced with the crisis of the past year, your natural reaction was probably to be defensive. You may have cut costs, cut staff and generally reigned spending in so you could weather the storm.
Looking at the stats, we can see that you weren’t alone. Research from the ONS found that business investment in assets such as machinery, buildings and vehicles fell by a quarter in the three months to June 2020. “Excluding a technical quirk in 2005, this is by far the largest fall in business investment on record.” comments the ONS.
Yet as we start to emerge from the crisis, there’s plenty of evidence to suggest that a defensive strategy like this may not always be the right one.
Why an Offensive Strategy is the Way Forward
Recessions typically last about 12-18 months before there’s a longer upswing. What this means in practice is that cuts you make now may need to be unmade in six months’ time, especially when there are clear signs of a recovery on the way.
Looking at previous recessions, the businesses that went on the offensive in the downturn fared better on the other side. Research from Bain & Co shows us that businesses that were quick to react in the last recession grew at 17% compared to those that adopted a “wait and see” approach.
And research published in Harvard Business Review draws the stark conclusion: “The firms that increased investments during the recession showed improvement in return on equity, sales growth, and market values in the recovery phase. Companies that decreased investment showed deterioration on all three counts.”
Investment at any time is a driver of future productivity growth, so by investing now, you’re better equipped when the upswing happens.
Five Positive Offensive Actions for Right Now
When it comes to offensive moves, the researchers in Harvard Business Review suggest five strategies:
- Attracting ambitious employees who would thrive in a business keen to grow. Remember too that the new world of remote and hybrid working could have unlocked a much wider talent pool for you to tap into than before.
- Undertaking mergers and acquisitions while valuations may be lower and your rivals may be selling off divisions. Anecdotally, we know that this is already happening.
- Deploying new technologies while things are quieter so they have time to bed in. We know that UK companies embracing everything finance automation has to offer saw a 27% improvement in profitability over the past two years compared to static profitability for other businesses.
- Embracing product and customer service improvements. This will attract customers from competitors who may be cutting in these areas and seeing dissatisfied customers as a result.
- Locking in long-term financing deals while interest rates are at an historic low. This will keep repayments at the lowest possible level and free up cash to deploy elsewhere in the business.
The Intelligent Defensive Actions
In truth, while taking offensive action is important, defensive actions are likely needed too. However, your defensive actions should be around ‘putting your house in order’ by cutting excess costs, not by cutting the core services that will harm you in the short and longer terms.
Bain & Co suggests that now is the time to ensure the finances of the business are in the best possible shape. This typically includes conducting scenario planning, strengthening working capital, and looking for cost-saving opportunities.
It is also critical to streamline internal processes and procedures. This helps to maximise the time available for the productive strategic work that delivers tangible returns. For example, UK best-in-class companies using automated finance processes saw a 36% improvement in productivity over the past two years compared to static productivity for other businesses.
Resisting the Temptation to Cut
Cutting costs may be the instinctive action. However, businesses that resist temptation and take intelligent, strategic positive action put themselves in the strongest possible position.
If you’d like to understand more about what you should be doing now to put yourself in the best position for the recovery, download our white paper, 6 Strategies for Finance to Build Resilience through Digital Transformation.