When Times are Tight

Wednesday, August 1, 2012 - 12:22

Many Australian businesses will have to change their game plan if they are to survive a slow-growth domestic and global environment, says Leon Gettler

Australian managers are entering virtually uncharted waters. The prospect of prolonged low growth and possibility of a global recession are creating new challenges. Most of today's managers are downturn novices. Few managers have had to guide their operations through a low-growth environment.

Apart from a brief period during the recession of the early 1990s, and stagflation of the late '70s and early '80s, managers have had a good run. The past 20 years leading to the financial crisis was a bubble. It was a win-win world where the constraints on capital were masked by free credit, deregulated global markets and bigger markets with the rise of the internet consumer. It was a system that was blind to the signs of a crisis that first emerged in late 2007 and could intensify with the United States and most of Europe dealing with high levels of bank and sovereign debt. The collaboration emerging in Europe, led by Germany, may avert a meltdown but it will require intense fiscal restraint for years.

Australia was the envy of the global economy after avoiding a recession created by the global financial crisis. It came at a price with a large increase in levels of government debt and almost certainly would not have succeeded, but for the strength of the mining and resources sector. However, our economy faces a triple whammy of downturns in Europe, United States and China.

The Reserve Bank has cut interest rates by 1.25 per cent since November last year, but it has had no impact on public spending because people are worried about their jobs. The consumer concern may be overblown, but as long as it remains, the growth in the domestic sector of the economy, which is the major driver of employment, will remain subdued.

The latest Dun & Bradstreet business expectations survey shows Australian enterprises expect lower profits in the September quarter. A survey from The Boston Consulting Group showed Australians were among the most worried and financially insecure in the developed world and planned further cutbacks in their discretionary spending. Nearly half - or 47 per cent - of Australian respondents said they felt financially insecure. This was on par with the US, which has almost double Australia's unemployment rate, and greater than Europe, including France, Germany and the devastated economy of Spain.

For Australia, the largest concern is whether the economic situation becomes a contagion that affects China and India which are crucial to growth in the Asian region. Robin Low, a partner in the risk and control team at PricewaterhouseCoopers, says Australian managers should learn from their counterparts in the US, United Kingdom, Europe and particularly Japan where managers have been working in an environment mired in deflation since 1999, a period known as the lost decade.

"There are lessons and discussions happening globally,'' Low says.

"The slight difference in Australia is that we didn't feel the GFC to the same extent as the US and UK and maybe the sense of a second wave is hitting us harder whereas they have built in this resilience a little earlier."

She says managers need to think about how they want the business to emerge out of this low-growth period. We are, after all, in a cycle.

"There is a need for leadership to be thinking about the longer term and what they want the business to look like when they come out this time,'' she says.

"There are some companies that will come out of this much stronger than they came in. Those will be the ones that see the opportunity and start to rethink the way they solve some of those problems.

"Maybe it might be about how they use new technology. Or maybe it might be how they partner or team up with another business to do things differently so they come up with a solution that's better than the one they have.

"It's asking what your business model will look like a few years out, what might be different, what might be the different ways of going to market, what your people will be like."

She says having a strategy keeps staff focused through the upheaval.

"It is important to have a strategy that people believe in and commit to. It's an opportunity to take the long-term view and see what your target business is and what you can do differently."

Low growth will, in the short-term, require managers to examine pricing structures with the risk of shrinking markets and fewer customers. This will be just the beginning as companies re-think strategies in areas such as cost control, marketing, product range and new technology. It could lead to a period of intense creativity for many organisations, but inevitably it will result in winners and losers.

John Downes, a consultant who runs the company Acorro, says in a low- growth environment businesses have to be clear about their priorities. He says they can be innovators or premium service providers or low-cost providers but not "all three simultaneously".

"It is a conundrum and there has to be a real focus for the next five years by businesses consciously choosing what their market niche is and whether their current market niche is large enough to support them. If they are going to change niche, they have to look at whether it will be business nourishing or permanently brand-damaging," Downes says.

"These are difficult questions and will require a great deal of management focus.

"The reality is some businesses are not going to survive and if the strategy is fundamentally flawed we have to revisit it. This is absolutely a time where we don't have a lot of growth in the economy to challenge whether or not we are in the right niche, whether that niche is sufficient to support and what is driving us to change that niche if we feel we are in the wrong one."

Downes says the key strategy should be to challenge existing business operations and seek opportunities to strengthen links.

"What that really means is we won't get the best deal and value from our suppliers unless we are more tightly coupled to them and share our production forecasts. We have to be prepared to be intelligent and collaborative around procurement practices and contracts with customers.

"We need to be close to them and their requirements and their expectations. We have to make a really conscious decision about who we partner with, what risks we introduce into the business.

"Service is still a fundamental criteria and the success premise for any business dealing with customers."

For some businesses, layoffs will be inevitable, but Downes says they need to be managed carefully. And some companies are being extra careful with layoffs. When Queensland-based medical device manufacturer Cook Medical was restructuring, it spent 18 months retraining staff, paying for any training they wanted and offered them other positions in the company. Staff, including the ones who weren't targeted, appreciated that.

Downes says the traditional mass sackings on a Friday afternoon are not the answer in an economy where there is a skills shortage, where mining companies are recruiting talent and where a company's brand and reputation is critical.

"We are asking our staff to do more with less and there is no sign of let-up in the foreseeable three to four years and what that means is we need to make sure our relationships with our staff actually are as strong and as authentic as possible.

"For that to occur well, and all lay- offs suck, the reality is it has to be done in a dignified manner, regardless of what the cause is.

"It has to be transparent and it should be done with dignity. The organisation should use its networks to look for other employers to employ the people it is letting go. Things like pink slips on Fridays are unacceptable, unconscionable and brand-destroying."

Management consultant Kevin Dwyer, who runs The Change Factory, suggests a first step for managers is to separate their good from bad costs. He says if you want to grow the business, you don't cut sales and marketing or training.

"But you scrap discretionary spending, such as the corporate box at the football," Dwyer says.

He concedes the process can be difficult and sensitive.

"It requires a lot of thinking to work out what the hell those costs are,'' Dwyer says. "You can do all the theoretical thinking but until you have seen what makes your business tick and what comprises your profit margin, then your theoretical constructs are quite often wrong.

"If I was in a sales environment, there are people out there selling to your key customers. Keeping that relationship going would be a good cost. But sales people filling in lots of paperwork back behind the scenes and doing some analysis to think about something is a bad cost."

Dwyer says managers should be watching their competitors carefully - because they will also be struggling.

"If you stay close to your competitors and understand what your competitors are doing and if they are, in fact, decreasing advertising and decreasing marketing efforts, then you can stand out by ramping up yours and maintaining it at the level it used to be."

A good example of that was Bakers Delight which enjoyed steady growth and healthy sales during the GFC.

It stepped up its marketing and advertising. With a proportion of its turnover going into marketing, its profile increased during the downturn. While other retailers were closing down, Bakers Delight was opening new stores.

The company expected a global sales turnover of $587 million in 2011-12, an improvement of $571 million on the previous year.

Struggle street: sectors vulnerable to low growth

Housing and construction: Housing is already struggling. Building approvals have plunged to their lowest level since the global financial crisis. According to the Australian Bureau of Statistics, 10,330 building approvals were granted in April, down 24.1 per cent from a year ago. Nationwide, it was the lowest number of houses approved since January 2009 when the country was feeling the impact of the global financial crisis. The renovation business is also feeling the pinch.

Hospitality: Restaurants and hotels are expected to struggle. According to IBIS World, the sector is expected to grow by only 2.3 per cent in the next 12 months. They are also facing significant increases in utilities and other fixed business costs.

Tourism: Hit hard by a strong Australian dollar, it will also be affected by international downturns while fewer Australians are spending on holidays and those who do head overseas.

Aviation: When Qantas announced in June this year its profits would dive by up to 90 per cent, it was a sign of how badly the aviation sector had been faring. Qantas is a yardstick of Australian aviation and its competitors, Virgin and Tiger, are also struggling. Jet fuel prices may be stabilising, but expect business to be more reluctant to spend on travel and increase the use of video conferencing. Qantas has been hit hard by sagging demand because of the European crisis and strong Aussie dollar.