As companies plan their budgets for the coming year, many are wondering when the Covid-19’s downturn is nearing an end or if they will have to deal with more fundamental changes. The recovery that now appears to be underway will most likely be gradual. As a result, many sectors, including airlines, telecommunications, and power generation, may postpone hiring new employees, and may even postpone purchasing new capital equipment for some time.
Even if they do, profit growth in the double digits seen in the late 1990s appears unlikely to resume. Is this a sign of a larger fundamental shift? Some people believe so. Much of the growth in the 1990s was bought through acquisitions, foreign expansion, and price rises. Beyond the gleaming figures, businesses have begun to hit “growth limits”: customers just do not want another refrigerator, hamburger, or bank account. Markets are oversupplied, and investment is at a standstill.
Making Use of Hardship
The majority of people aspire to the same level of living as the wealthy, which ensures a high level of demand. However, gaining market share does not become any easier. As imbalances in rich-world economies are unwound, demand will grow in fits and starts. Some markets, such as advertising, have been significantly impacted by technological progress, with more tailored ways to reach an audience pushing agencies to adjust their approach. A new concern has emerged: managers must learn to deal with the likelihood of price declines. For the vast majority, this is a completely new experience, formerly limited to a few rapidly changing industries such as telecommunications and computers. Cars, food, clothing, and a variety of other services are all on the decline in many significant marketplaces right now.
What should managers do when “growth is not an option?” Part of the solution is to recognize that adversity creates possibilities. It becomes more straightforward to shut down unused capacity and cancel risky ventures. When IT executives have overspent, now is the time to demand results. And a downturn could be an opportunity for the powerful to acquire their weaker competitors.
It’s also an opportunity to re-evaluate potential savings. In the last decade, many organizations have polished their manufacturing procedures to the point where there are little more cost savings to be obtained. However, there are still opportunities for cost savings in less visible areas of the organization, such as the 10% or more that can occasionally be extracted from logistics. Refining the distribution of parts down the supply chain from suppliers to end users allows businesses to maintain inventory to a minimum, which is more important than ever when costs are falling.
Above all, if businesses are ready to invest a little rather than just slash costs, tough times provide an opportunity to make structural adjustments that are necessary for survival. Consider Boeing as an example. Following September 11th, the aircraft manufacturer switched to a moving assembly line and lean manufacturing techniques borrowed from the automobile industry, but it also poured money into new investments such as installing high-speed satellite links in passenger planes and establishing a new air-traffic-management business.
Learning to deal with dropping pricing could be the most difficult task of all. Nonetheless, the Victorians were successful. They coped with dropping prices during the golden years of late-nineteenth-century invention and prosperity by depending on competition based on quality and good service. They created brands—and used them as a guarantee of excellence rather than merely a high price—and they discovered ways to make customers feel truly special. Their great-grandchildren will have to learn to do the same.