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04 Nov 2019

Can a stagnation and recession be used as a business advantage?

Thoughts

The business world seems to agree. We are on our way into – or are already somewhat facing – a stagnated economy and will eventually end up in a recession. Recent statements and research from, amongst others, European Investment Bank, Svenskt Näringsliv, Konjunkturinstitutet and large Swedish multinational companies all point in this direction.

How fast and severe the situation will become is closely linked to, amongst others, the trade war between US and China, the outcome of Brexit and the content of the possible agreement between UK and the European Union. The level of infrastructure investments in each market will also have an influence.

Harder to streamline cost or release working capital

One thing to be sure of is, that with a recession, it will become even harder to streamline cost or to release working capital. This is mainly connected to three variables:

  1. Demand goes down
  2. Cost of capital increases
  3. Access to capital decreases
Swedish (exporting) companies needs to monitor efficiency

Continuous improvement is another important factor for success. At this very moment the Swedish currency is weak compared to important trade currencies such as EUR and USD. Currently, Swedish centric (read: not multinational companies trading already in EUR and USD to a large extent) companies are boosted by a weak SEK and improvement initiatives are not as high up on the agenda. But when the important trade currencies follow their Swedish cousin down, these companies will wake up to a stark reality. Only those who continually focus on improvement will be properly geared for the bad times to come.

Is the glass half-full or half-empty!? The choice is yours.

The effect a stagnation or recession will have on companies is largely decided by the approach they decide to take. Research has shown that companies allowing creativity and aggressiveness more often gain a lot of competitiveness during a recession, as opposed to companies that try to cut cost in general, reduce the overall headcount or put their whole strategy on hold.

To illustrate this, please think about the following expressions:

“When it is uphill, do you then pull the brakes or increase the power?”

“When it is windy out on the ocean, do you then take cover, or do you set sails?”

Act now – before it becomes critical

As we now see the signs of a stagnation and a recession, it is now that companies should act. Do not wait! Before things become truly critical it is possible to make smarter and profound moves that, in addition, will give much better and more positive effect.

To have the means to be aggressive in a stagnation or a recession, companies must
  • Optimize cost and margins
  • Secure access to capital
Optimize the relevant costs

To optimize cost does not only mean to decrease cost which is the first natural thought. It is more important to optimize the relevant cost. It can even be the perfect move to increase certain cost if it is linked to a product that meet the future market demand. If the increase in cost will result in an even higher sales price it will of course also lead to an increased margin.

Determine which costs to eliminate, reduce & increase with the goal to improve profitability and growth.
Decreased headcount – not the only solution

Often your organizational and personnel cost is your largest cost point. If proactive actions are taken, companies can have the time to adopt the organization to future demands. The headcount can of course be decreased in general, but it might be smarter to instead of just cutting cost, investigate how i.e. digitalization and RPA-solutions can replace certain processes, how to invest in new and even younger competence etc.

The Ericsson example: Redundancy packages to attract younger people

As an example of proactiveness, Ericsson, the telecom equipment maker, offered a voluntary redundancy package for up to 1000 of its Sweden-based employees between the ages of 35 and 50 years old in order to attract younger people from university. The whole idea was boosting the competence within their newly established multimedia division.

“To have the means to be aggressive in a stagnation or a recession, companies must optimize cost and margins, and secure access to capital.”

Production-oriented companies needs to act even faster

Furthermore, large and more production-oriented companies tend to identify and be affected by, a stagnation or recession faster than small and/or service-oriented companies. As a result, they need to act at an even earlier stage. To protect themselves they need to build an agile company that has a good mix of products in the portfolio, that are active in different geographical markets and finally approach different target customer groups.

Conclusion: The checklist to be well-prepared

To conclude, the following main advice can be given to stand well-prepared in a stagnation and recession:

  • Be proactive and aggressive as opposed to reduce, put on hold and be defensive.
  • Make sure to optimize cost and working capital well in time to have the means to gain competitiveness during the stagnation and recession.
  • Never stop the journey of continuous improvement in order to maintain at the top of your industry.
More to come

Capacent has performed successful cost optimization and working capital projects across industries since the 1990’s. Also, watch out soon on LinkedIn and our homepage for an article more focused on working capital and its link to a stagnation/recession.

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