Duke Research Advantage

This is the second installment in a four-part series of postings by Duke Strategy Professors Will Mitchell and Richard Burton. Mitchell and Burton outline four principles for leading your business as an opportunity driven strategist in tough times, rather than falling into purely defensive positions that are destined to be overwhelmed by economic pressures.

PRINCIPLE 2. REINFORCE YOUR EXISTING ABILITY TO CREATE VALUE

You would not exist as a business if you were not offering some form of value to the market – whether manufactured goods, human services, or other valuable activities. Be absolutely clear about the sources of advantage that allow you to create value that your competitors do not match – know where you have cost advantages, where you have advantages based on differentiation, whether in fundamental quality or in delivery speed and reliability, and where you have advantages based on your ability to innovate. Then make sure that you protect and reinforce those advantages in value creation.

Principle 2 has three parts: Integrity, investment, and adaptability.

1. Integrity. Retain your integrity as a business – know your core principles and stay true to them. It is easy to fall into the temptation to cut corners when times are tough. We can all think of opportunities that will help us generate a bit more cash if we did something illegal, unethical, or simply out of keeping with our core principles. But bad practices that we use to survive typically turn around and bite us when the economy improves, either because the illegalities catch up or because the people we squeezed will remember. Moreover, cutting corners often contributes to failure in tough times rather than helping us survive, because those few who have money to buy our goods and services will look for alternatives if they recognize the lack of integrity.

2. Investment. Reinforcing your existing ability to create value requires investing money, time, and effort in your customers, people, and partners.

a. Invest in your customer relationships. Customers are always first in theory, but it is easy to take our eyes off the customer in good times because if we lose one customer, there is often another queued up to give us their money. When times get tough, you need to become devoted to your customers: know who they are, spend time with them, make sure you know what they need, where they are struggling, and how you can help. If they fail, you fail.

b. Invest in your people. It is too easy to squeeze our people when times get tight and, in turn, kill their motivation and ability to help us survive as a business. Let’s be honest with ourselves – many of us will lay people off in tough times, in order to keep our businesses alive. Do not hide information. Without the information, others will make up rumors which are invariably worse than reality. And, it builds confidence in your employees when they know you understand. Tough times double down the need to reinforce the value and respect that we have for those who remain. Demonstrating that value and respect starts with a respectful approach to job cuts. And then continues by constantly seeking energy and insights from those who remain.

c. Invest in your partners. Just as it is too easy to squeeze our staff in tough times, it is equally tempting to squeeze our partners, whether suppliers, distributors, complementary firms, or other external allies. But once we lose our partners’ willingness to help respond to challenges, we are dead. Make sure that you keep communication lines open with your partners, that you know what challenges they face, and help them respond effectively, so that they, in turn, can and will help you respond to your challenges.

Let’s be clear here about what we mean by investing in customers, people, and partners. Some of this investment may be cash – money needed to help customers and partners survive, and to help our people take advantage of valuable opportunities. But principle 1 (protect your cash flow), means that we need to limit cash investments to those that are value driven. More importantly, most of the investments will be of a more valuable commodity – your time and effort in engaging with key constituents, learning about their needs, and figuring out how you can work together even more effectively than you have in the past. Firms that invest their time and effort more effectively than their competitors will gain enormous survival advantages in tough times that, in turn, will pay off in new competitive advantages when times get better and growth opportunities abound.

3. Adaptability: Most of us face the reality that some traditional sources of our value lose value when times are tough. The customers who once valued high cost goods and services, for instance, may no longer be able to pay for them. Again, being honest, some of us will be so dependent on goods and services that no longer have value that we will go under. Most of us, though, have enough variation in the goods and services that we offer that we can shift our focus to those that remain valuable – or may even have become more valuable – as the economy tightens.

Now, “adapt” is one of those things that is easy to say. But, in practice, achieving adaptability means that we need to be absolutely demanding about shifting people and money from traditional activities to more valuable activities. At this point in the life of your business, traditional capital budgeting models – as in, “we always get X% of the budget” – need to go out the window. Instead, both financial capital and human capital need to go where the market is now, not where history was.

You will undoubtedly face some resistance in deemphasizing or shutting down some business activities – perhaps even high profile business lines – as people hold out hope that things are just about to get better. But you need to articulate clearly why you see the need to shift and why people can achieve new opportunities if they contribute to the shift. Once you articulate the value story – and why the refocused value is central to survival of both the business and careers within the business – most people will be excited about engaging. Fortunately, those who are not excited will have lots of opportunities to leave the business at this point.

Going back to the beginning, cash flow planning gives you a foundational for adaptability. Predictability permits you to include some cash and better access to credit for these adaptability investments.