In Times of Strife

I sit composing this blog under lockdown due to Covid 19.  Like millions of others, I am stuck at home, only allowed out for daily exercise or to buy essentials.  At my local supermarket, only 10 people are allowed on the store at any one time and the queue of people, standing two metres apart, stretches right around the car park.  At my local pharmacy, it takes forty five minutes to collect a prescription.  Restaurants, leisure centres and thousands of ‘non-essential businesses are closed.  It is likely these restrictions are going to last weeks and even when the strictest restrictions are lifted, the virus will have an effect on our lives for the next year.

The economic effects of the pandemic are likely to last far longer than the outbreak.  Some economists have calculated the economic fall out of Covid 19 will last a decade.  Governments are printing billions upon billions of currency in an attempt to shore up their economies.  Previous plans for extensive infrastructure spending and tax breaks will likely have to be shelved.

Covid 19 will lead to a recession and in the UK that recession may be deep and lengthy.  Economic growth in the UK since the 2106 EU referendum has been slow. Productivity has fallen off a cliff.  In the 3 months to March, the UK economy was stagnant with zero growth. Add the effects of the pandemic on the economy and the economy declines. Add the economic effects of Brexit and that decline spirals downwards. If we only agree the type of deal favoured by Boris Johnson, the calculated effect on UK GDP growth is between 6.8% and 7.6%.  A no deal scenario would have a larger negative effect.  For comparison the equivalent effect of the 2008 crash was 1.3%.

A mix of pandemic, a flatlining economy and Brexit could easily result in a depression.  The only comparable downturn would be the economic stagnation of the 1890s: and Britain no longer has an empire to soften the blow.

Niccolo Machiavelli, in The Prince, says of a recession: “Luck decides half of what we do; the other half is more or less up to us”.

He then talks of how to survive a shock or emergency.  Machiavelli was writing during the Italian renaissance.  Italy was not one country but a group of independent city states. Wars and conflicts between these city states were common.  It was a time to trust no one. Even in your own court, rivals to your throne could be found in your own household. Family conflicts exploded into assassinations and coup d’états.  This was a time when a ruler could gain power one day and lose it the next.

Machiavelli compares emergencies like Covid 19 to a river in spate. A raging torrent which destroys everything in its path.  Such torrents are common in Northern Italy in the Autumn and spring as water sheds off the Alps down narrow valleys.  He states that with such torrents the initial reaction of the majority is to run for high ground and safety.

Machiavelli states that good leaders will prepare for such torrents.  They will build banks and dykes to control the flood when river levels were low.  So he advises repairing the roof whilst the sun shines.  It could be argued that the UK governments policy of austerity has done exactly the opposite.  That is why we now see an NHS with fewer beds, high staff vacancies, a lack of appropriate PPE and too few ventilators.

In his writings, Machiavelli despairs of the ability of the Italian states to withstand turmoil and invasion. He argues that they are only strong and able to withstand such shocks if they are united with common purpose.  So the UK is facing a massive economic shock just as it isolates itself from its nearest markets and neighbours.  And the UK government isn’t helping matters by ignoring joint ventures such as the EU plan to collaborate on the purchase and supply of medical equipment (a plan which both Norway and Switzerland were happy to join).

So a deep and destructive recession is likely: but don’t panic.  Don’t simply use this time to fight fires and short-term problems.  Yes, ensure your business survives the initial economic shock but also plan for the longer-term.

Do not become infected with ‘Anorexia Industrialosa’ (a term invented by Andrew Lorenz).  This is an excessive desire for a business to become leaner and fitter.  This excessive desire can lead to emaciation and death of a company.  Cost cutting leads to poor customer service and excessively limited offers.  Which in turn is rejected by customers.  Earnings suffer and so you cut again leading to even more limited offers and even worse service.  A downward spiral accelerates.

And closing outlets and factories to try and maintain margins can also be a serious error.  You may end up concentrating fixed costs on fewer outlets damaging your ability to maintain margins and making your business unviable.

In modern markets the businesses that do best are those which maintain the interest of their customers and which maintain their customer focus. Excessively reducing your market offer and damaging your customer service is directly against this goal.

So in times of recession you need to put marketing centre stage.  Customer-focus is your prime strategy. You need to concentrate on segments and customers which fit your long-term goals.

Professor Malcolm Macdonald gives the following guidelines for operating during a recession:

  1. Customers are attracted by promises but retained through satisfaction.  If you cannot describe the value a product or service required in the mind of your consumers, you cannot deliver that value. So you need to understand your customers needs.
  2. Don’t try to cover too many market segments.  Focus on those segments that your organisation wants to lead in the long-term.
  3. Reduce your product portfolio but be careful in doing so.  Rid yourself of products which do not provide adequate customer value.  Recently Mars, the confectionery giant, did this reducing its portfolio to only brands it considered as market leaders.
  4. Look at your distribution network. Is it flabby.  Is it too big or too slow.  Are there better distribution methods out there.
  5. Improve the productivity of your promotional spend.  If you have a sales force examine their activities closely
  6. Reduce costs in the unproductive areas of your business.  Use value chain analysis.  Don’t incur costs for servicing unprofitable markets or customers.
  7. Identify your key customer accounts.  Don’t rely on your sales team to do this alone.  Assign senior managers to key accounts.
  8. Don’t let your sales force deal with big customers alone. There is a danger they will all receive maximum discounts in order to keep their business.  Large contracts need to be overseen by senior managers.
  9. Selectively attack competitors key accounts that are attractive to you. Don’t worry if you lose unprofitable customers to do so.
  10. Keep the heart of your business: Key products, key customers and key segments

Use this time of lockdown productively. It is a perfect opportunity to plan and prepare for what is to come in the long-term.

Don’t enter a vicious circle of:

  • cutting prices,
  • increasing volumes at low margins,
  • reducing specifications to maintain return on investment,
  •  losing sales
  •  and then cutting prices further

Enter a virtuous benign circle of:

  • Raise prices
  • Have lover volume of sales but at higher margins and revenue
  • Improve your products and promotion
  • Develop higher customer acceptance and therefore volume
  • Allowing for prices to rise again.