3 Guiding Principles To Steer Your Business Through A Cost of Living Crisis
This is the fourth in a 5-part series I am writing in August to help female founders lead their business confidently through the cost-of-living crisis and economic recession. In this article, we’re going to explore three guiding principles which will give you the confidence to lead your business through the next few months: Recognise, Reassess and Respond.
But first, in case you’ve not come across my business consultancy before, a very warm welcome and quick introduction. I’m Denyse a former CEO. I successfully led that company through the 2008 economic recession. As I formulated a roadmap to navigate the crisis, I noticed that businesses took one of two approaches. They either managed their way out of it or led their way out of it.
Those which led mastered the delicate balance between cost-cutting to survive today’s crisis and investment to grow tomorrow. They adopted a strategic approach based on the three guiding principles of Recognise, Reassess and Respond.
Let’s start with the first of these guiding principles, Recognise.
1. Recognise
Leading a business successfully through any difficult situation, whether that’s the pandemic or an economic downturn, always starts with an acknowledgement of our circumstances. This should be obvious, but for some it’s counterintuitive. For a lot of people, acknowledging their circumstances is frightening. The more worrisome the situation, the more they try to ignore what’s happening around them.
As Margaret Heffernan, a former CEO of several multimedia companies, explains in her book Wilful Blindness: Why We Ignore the Obvious At Our Peril, we turn a blind eye to a problem in order to reduce anxiety and feel safe. At a basic level, this selective vision helps us remain engaged and optimistic day to day.
But wilful blindness has never helped anyone successfully navigate a problem, especially one as serious as the developing economic crisis. By denying the reality of the situation, it means we don’t have the full picture. This means that the solutions we come up with may not be sufficient or bold enough for the task. (This partially explains why the response to date of the government to the cost-of-living crisis has been so woefully inadequate).
The Stockdale Paradox helps to explain why companies which recognise the challenges and face them head on fare better in a crisis.
The Stockdale Paradox
Admiral James Stockdale was on a bombing run over North Vietnam on September 9, 1965, when his plane was hammered by enemy fire. He was forced to eject and captured.
He spent years in the infamous Hanoi Hilton. Stockdale was tortured more than fifteen times and spent four years in solitary confinement. He spent another two in leg irons. He even tried to commit suicide with broken glass to prevent his captors from using him for propaganda. Amazingly, he survived it all. He was finally released on February 12, 1973, after seven years, five months, and four days as a prisoner of war.
Years later, Jim Collins, author of Good to Great, asked him how he survived. Stockdale said, “I never doubted not only that we would get out, but also that I would prevail in the end. ” He wasn’t talking about optimism. In fact, Stockdale considered optimism to be a liability. Stockdale said the people that didn’t survive were the ones who let wishful thinking determine their actions instead of frank realism. Stockdale said, “You must never confuse faith that you will prevail in the end . . . with the discipline to confront the most brutal facts of your current reality, whatever they may be.”
After processing Stockdale’s story, Collins and his research team realized that companies which survive times of crisis were like Stockdale. They recognized the challenges and faced them head on - all while believing they’d figure it out and make it to the other side.
So, what challenges do we business leaders need to recognise at this moment? This leads us to our second guiding principle: reassess.
2. Reassess
Once we’ve recognised and accepted the problem, the next step is to reassess our position relative to the problem. In this case, the problem we’re trying to solve is how we’re going to lead our business successfully through the coming economic turbulence. This starts with a thorough accounting of your business's financial health and current business performance.
This is something you can do with your business advisor. Incidentally, in addition to one-to-one business consulting, I can deliver a strategic planning session for you and your business. Or if you’re strapped for time and don’t have the resources to do it yourself, I can carry out a business review for you and prepare a done-for-you roadmap.
Review Your Business Plan/ Strategic Plan
The first step in assessing your business performance is to review your business plan, including your financial statements, to get a full picture of what is happening within your business. Reviewing and updating the SWOT and PESTLE analysis sections of your business plan and conducting a financial analysis will help you to understand the critical issues affecting your business and prepare a response accordingly.
Review Your SWOT Analysis
A SWOT analysis is a management tool that can help you develop business strategies by:
Building on strengths (S)
Minimising weaknesses (W)
Seizing opportunities (O)
Counteracting threats (T).
SWOT assessments help organisations understand their current state, determine where to go next, and inform the strategic actions needed to achieve their desired future. A good SWOT will help you and your team to answer the three critical questions which should inform your action plan.
How to succeed, and why? A SWOT helps you understand what you’re good at and what you need to work on. Identifying your strengths and weaknesses, paired with market opportunities, creates the foundation for what your company needs to work on or capitalize on in order to achieve success.
What growth opportunities exist, and why? Completing your SWOT analysis helps to identify potential growth opportunities.
How to serve your customers better, and why? One of the outputs of your SWOT is identifying ways you can serve your customers better. Whether it’s growing a strength, assessing one of your customer-facing weaknesses, or seizing a new opportunity, it’s imperative you consider how you can best serve your customers.
Read: SWOT
Update Your PESTLE Analysis
PESTLE (or PESTEL) stands for Political, Economic, Sociological, Technological, Legal, and Environmental forces. A PESTLE analysis is a deeper dive into the opportunities and threats portion of a SWOT, looking at the different external forces that might impact an organization.
It is used as a framework to look outside the business to hypothesise what may happen in future and what areas would benefit from further exploration. Last month I wrote The Current Political and Economic Situation (July 2022) which will help you to update your PESTLE analysis.
Read: PESTLE analysis
Carry Out A Regular Financial Analysis
Best practice financial management involves planning and forecasting the financials based on the strategic goals of your business, and then regularly reviewing actual performance against your forecasts. This means reviewing your Profit & Loss report on a monthly basis and updating your cash flow forecast on a weekly basis. You’re looking for trends, such as declining sales or lower profit margins, that could have an impact on your business's financial performance and put your business at risk.
The key factors to consider when carrying out your financial analysis include:
Trends in cash flow (both positive and/ or negative), revenue and expenses.
Current sales of various products or services.
Level and turnover of stock.
Debtor and creditor days.
Debt, and how your business services debt.
Read: Five Financial Tips You Should Implement Straightaway
Review Your Risk Management Plan
A business risk management plan involves identifying, assessing and developing strategies to manage risks. It is an essential part of any business plan and will help you prepare for, and deal with, risk factors associated with an economic downturn. A simple business risk management plan can be created on a spreadsheet.
During an economic downturn, business risk management involves closely monitoring your business's performance, identifying any issues affecting it and putting in place strategies to reduce or address these issues. In most cases, the best way to monitor performance is to use your financial statements and forecasts.
By now, a roadmap will have started to emerge. This leads us to our third guiding principle: respond.
3. Respond
Identify Strategic Alternatives
Once you’ve collected the data and information above, you should have a good understanding of your strategic position as well as ideas about the final action: respond. What are your priorities as you see them now? Clarifying these will give you a set of strategic choices or options to choose from.
When you’re evaluating your strategic options, your aim should be to:
Use your strengths to take advantage of any opportunities you’ve identified.
Use your strengths to avoid threats.
Overcome weaknesses by taking advantage of opportunities.
Minimise weaknesses and either avoid or neutralise threats.
For example, if your business has a strong reputation (strength) and you’ve identified a gap in the market, you could leverage this by pursuing a market development strategy.
This is exactly what one of my clients did during the pandemic. She runs a popular local grocery store and café. She was very worried about the impact of the pandemic on her business, so she set up a weekly fruit and vegetable box delivery scheme. This compensated for the loss of sales from the closure of the café and was appreciated by the local community, especially those people who had to shield.
Once the box scheme was established, she offered speciality boxes for Sunday lunch, Valentine's Day, Easter, Christmas and so on. The speciality boxes proved popular with customers who did not want a regular weekly or fortnightly delivery.
This is a great example of a business using a strength to both neutralise a threat and create an opportunity.
Alternatively, if employee morale is a weakness and you’re struggling to recruit in the current tight labour market, the solution could be an improved employee benefits package.
This is how another client, a firm of accountants, solved their recruitment and retention problem. Their small team was exhausted because of the increased work generated by the pandemic and the stress of dealing with a higher than usual number of businesses in financial crisis. Due to labour shortages, recruiting new employees was proving difficult. We solved this problem by trialling a 4-day week and putting together a comprehensive package of employee benefits which made this a highly attractive company to work for.
Retool Your Marketing Plan
Once you’ve evaluated which strategic options are best for your business, the next thing on your list should be retool your marketing plans. Customers (and employees for that matter) do not want to see radio silence so what you shouldn't do is look for ways to slash your marketing spend. Your customers are almost certainly invested in your product or service, even if they have to cut back for now, and a “business as usual” approach will reinforce that you won’t be going anywhere.
Use this time to do some housekeeping, test different strategies, innovate and refine your approach. Because there's plenty of anecdotal evidence that the businesses which go all-in on marketing are in a stronger position to rebound as the economy moves back toward normalcy.
Read: Why You Should Invest In Your Business Today To Grow Tomorrow
Maintain Your Sales Pipeline
Building your sales pipeline doesn’t stop during a crisis but you may need to reset your expectations. Some of your prospects will want to wait and see what government help is forthcoming. Others will want to wait a while before committing to your product or service. Whatever their decision, it’s always a good use of your time to invest in the relationship.
Nurture the relationship and ride it out with them. The chances are, once they are ready to buy, they will be a more loyal customer because you stayed in touch, even when there was not an immediate opportunity to close a deal.
In Summary
Leading a business through a crisis is a delicate balance between cost-cutting to survive today’s crisis and investment to grow tomorrow. Those businesses which adopt a strategic approach based on the three guiding principles of Recognise, Reassess and Respond are best placed to succeed.
Whatever circumstances you find your business in, know that you’re not alone – and that I’m here to support you. An experienced and empathetic business advisor can make a massive difference to your business – as well as to your own sanity – so do consider getting in touch to book a friendly (and free) chat at any time. I’m always happy to talk you through how I could help. For examples of my work, check out my portfolio of case studies.