Strategy prescriptions often focus on establishing, improving or expanding a business.
But when the weather gets rough and the road gets so bumpy that the cart of business
appears to turn turtle, these prescriptions fail. Jim Collins in How the Mighty Fail describes that the corporate demise happens in five steps. In the beginning, there is a lot of hubris, or dangerous levels of pride, over-confidence and arrogance, coming out of previous successes. This is followed with efforts to perpetuate legacy and doing more of what the company is used to. The problem only gets worse as leaders and management, wedded as they were with the old, get dismissive of the risks. They take desperate survival measures which rarely succeed and end in irrelevance or death. This framework is useful in understanding strategies for difficult times.
First, what is a difficult time? The performance number, a lagging indicator, is not a reliable tool of difficulty. In a rapidly changing business
or economic cycle, difficulty could manifest in various forms. Liquidity strains are often the first of them. Liquidity risk diagnosis and simultaneous action is the strategic hygiene that companies must rely upon to sniff difficulty. The problems of Indian banks could be a case in point. Liquidity problems generally come cascading. The difficult times in infrastructure loans, especially power, iron and steel, real estate and their inability to service liabilities, stricter NPA and other regulatory norms and Operational risk incidents have all come together to intensify the turbulence and liquidity in banks.
Peter Drucker suggests that in difficult times, the markets value liquidity more than earnings. Cashflow, therefore, shall be the primary indicator of problems to come. The additional capital prescribed in the financial sector is aimed at protecting the liquidity to meet obligations, which become scarce or shorter in maturity in difficult times. Living wills and recovery and resolution plans are frameworks, which have to be frequently revised when the difficulty is on.
The second strategy is not to stop long-range future-proofing initiatives. When liquidity and markets are difficult, companies ‘stick to one’s knitting’. This approach could be disastrous and result in lost opportunity. Xerox perished for this very reason. Banks, today may be prodded not to invest in new technology, new businesses or new markets. However, innovation in difficult times is generally cheap. Survival and catching up innovation often leads to faster time to market and rekindles animal spirit in teams.
The third strategy is a relentless pursuit of productivity. Job losses, low morale, dated technology, legacy processes; all contribute to productivity losses. Frederick Taylor’s innovations in factories in 1875 established that productivity seldom means harder and more tedious work. Smartness of processing, assembly line efficiencies, robotics, intelligent automation, employee empowerment and tooling are the key. Productivity is spurred by small, localised innovations. Measurement and management of efficiencies of capital, physical assets, time and knowledge are critical at difficult times.