No doubt that the sky has just fallen. We are going to experience a sharp recession, which I hope will be a V-shape, not an L-shape recession. Bottom line is that we must do everything we can to mitigate this short-term crisis.
Over the past week, consultants have written extensively about how to maneuver this crisis and how to manage the business short-term. When the dust settles, there are many things that manufacturers will learn. I do believe this is a significant structural break and some of our operating models may change for the long-term.
I often say that the best defense is an offense. I also often say that a crisis offers an opportunity to reset the business and to raise the internal sense of urgency to make the changes that were not possible to make when times were great.
So I am inviting you to consider the following 8 points as part of the reset opportunity:
1. Rethink supply chain dependencies: There are limits to globalization. This was a warning shot. We need to focus on supply chain resilience and establish a more robust network of strategic suppliers. Bottom line, manufacturers might consider reshoring or near-shorting critical parts and equipment. The reliance on Asian supply base is not sustainable.
2. Embrace omni-channel strategies: Many manufacturers have already prepared their e-commerce strategies. Most, though, delegate this activity to their distributors. Get your website cart ready and get ready to activate the cart functionality. You cannot just rely on your distributors to conduct touchless interactions. You must be ready to be in control of your e-commerce future.
3. Think D2C model: Along the same line, there are massive investments made in direct-to-consumer business model. Selling direct online and establishing a D2C model are not the same as selling on an e-commerce platform. A D2C business is set to a sustainable part or a business or a separate entity all together. It is not an opportunistic change to address a portion of the business through a web site or a marketplace. D2C means a radical change in marketing, supply chains, and other support activities.
4. Launch usage-based and subscription-based business models: If you are selling equipment or solutions requiring customer’s CapEx, accelerate the development of consumption-based pricing offers to ease the reliance on CaPex. Now is the good time to take leadership in your market as long as your cash situation allows for it.
5. Refocus on profitable growth and cash flow: Over the past few years, we have enjoyed healthy growth and a boom in the stock market. That had to end at some point. As the economy resets over the next quarter or two, refocus your strategy away from unsustainable growth and more on profitable growth. That means making priorities in allocating cash to attractive opportunities and focusing on differentiated innovation development.
6. Discontinue cash-draining activities: Right now, everyone is focusing on cash flow protection to pass this storm. It is an amazing opportunity to revisit cash-draining activities. It is a great time to discontinue pet projects, consulting projects that bring little short-term impact, re-allocating R&D project to support supply chains and short-term demands, and programs that distract the organization’s attention on the core. By doing this, you can also reduce the amount of unnecessary complexity that might slow down the organizational bandwidth.
7. Revisit and reset business rules: When things are going great, the focus is on growth and profit. This is great time to reset your business rules and kill the high cost-drivers in your cost-to-serve analysis. Maybe you can change your delivery conditions. Or you could consider cancelling allowances or legacy favors that were in place for many years. The focus here is to optimize costs and protect cash flow again.
8. Scratch your asset plan and start over: This crisis is for sure challenging all the strategic assumptions. At least if the case for the next 12 to 18 months. As CAPEX budgets shrink, your short-term focus should be on critical maintenance needs and supporting short term recovery. It is undeniable that your long-range asset investment plans are going to be challenged. This is a turning point, and leaders are going to think twice about large CAPEX investments.
This crisis is not a demand crisis or an economic crisis. It is a surprising turn of events that could not be anticipated. It is for sure a wake-up call for all manufacturing companies, and I believe it will change our mindset for time to come. We need to refocus our attention pm cash and profitable growth. This test of our readiness level must challenge the status quo.
We just got seriously disrupted. Make the necessary preparation for the next crisis and avoid going to back to the old routine. Change is the only constant!
Stephan M. Liozu, Ph.D. is chief value officer at Thales Group and founder of Value Innoruption Advisors, a consulting boutique specializing in value-based pricing, digital pricing, and industrial pricing. He is the author of nine pricing books and is a frequent keynote speaker at industrial and digital conferences.