Analysis of 4,700 Companies During Crises: Operational Efficiency and Right Investments Are Key
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New normal." "We're not going back." "A new way of functioning."
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If you don't live on a deserted island, you must've read similar comments and predictions.
With all the coronavirus breakdown around the globe, crashing stocks, delayed supply chains, closed production plants, an economic recession – probably even a crisis – is a sure thing.
And the fundamental question is: What approach can you take to get through this?
A Study of 4,700 Companies Has Some Insights to Offer
In 2010, Harvard Business Review (HBR) published an analysis study of how companies were doing in crises, along with what strategies worked for them.
The analysts studied reactions of 4,700 public companies to three major global downturns: the 1980 crisis, the 1990 slowdown, and the 2000 dotcom bubble burst.
Looking at the companies' performance and decision-making three years before and three years after the recession, as well as during the recession years, the study goes much more into detail. Still, we'll focus on one major conclusion (while encouraging you to read the full Roaring Out of Recession analysis here).
Defensive vs. Offense. Or Both?
Based on their investment and cost-cutting strategy, the analyzed companies approached the recessions in three different ways.
The leaders of defense-focused companies made cuts in every area possible, be it employees, operations, or R&D, while also postponing investments and developments into new markets, verticals, or assets.
Aggressive companies tried to capture talent, unsatisfied customers, or various assets from the market by massively investing since everything was getting cheaper.
HBR identified nine potential defense/offense mixture strategies as a result of combining employee layoffs, improved operations, or both, with targeting new markets, buying new assets, or both.
So, did the combination of defensive and offensive strategy bring the post-recession success? Yes, and no – the mixture had to be done right, and we'll look into that.
Before jumping the gun, though, here are some numbers from the analysis:
- The defense-focused companies grew by 6% in sales and 4% in profits after the recession,
- The offense-focused businesses increased their sales by 8% and profits by 6%,
- The progressive companies' approach ended up with 13% and 12% growth.
(Of course, this doesn't mean that companies executing only defensive or only offensive strategy were not doing good after the recession. The data simply says that many of them were not able to either get to the pre-recession numbers or didn't do as good as their competition.)
The Remedy Combination? Operational Efficiency & Right Investments
What, then, should be the "magical" mixture of cutting costs and smart investments to come from the crisis stronger as a company? Here's what HBR has to say:
"These [progressive – editor's note] companies' defensive moves are selective. They cut costs mainly by improving operational efficiency rather than by slashing the number of employees relative to peers. However, their offensive moves are comprehensive. They develop new business opportunities by making significantly greater investments than their rivals do in R&D and marketing, and they invest in assets such as plants and machinery. Their post-recession growth in sales and earnings is the best among the groups in our study."
In other words:
- Companies that cut their operational costs in crisis will gain a valuable ability to maintain decreased costs also in better times.
- Increased spending in marketing and R&D "may produce only modest benefits during the recession but adds substantially to sales and profits afterward." (HBR)
- New markets and assets purchased for lower prices during the recession will set the companies ahead of their competitors later on.
True, for advice on making the right investment decisions, you should probably look somewhere else.
Yet, we might have something to say to the operational efficiency.
Process Mining as the First Step to Operational Efficiency
In his commentary Winter Is Coming—For The Economy And AI, Tom Davenport, a Forbes contributor, Professor at Babson College, and a Senior Advisor to Deloitte's Analytics and Cognitive practice, recently offered a perspective for the companies that decide to address the crisis with cutting operational costs:
“In a new round of process reengineering, companies could identify—with help from process mining—the end-to-end processes that need the most help, document and measure their current flows and performance, consider how various forms of AI might yield a better-performing process, and determine a new mix of human and machine-based tasks."
So, how can Process Mining help you reduce operational costs and redesign processes?
Here are few ideas:
- Thorough analysis and monitoring of your processes and their overall performance,
- Identification of the right candidates for task automation,
- Insights for your process reengineering initiatives and process simulations before going live.
Free Business Process Reengineering Guide for You
Whether you are trying to keep up with the increased demand or, on the other hand, you are struggling to find the demand, you need to react fast and be flexible. Why?
Because with expecting further costs to be cut, you should know where to cut. Once you let people go and just later realize your processes are stuck without those people, it might be late for the process analysis.
We'd be glad to support you in this endeavor and provide you with the best practices on how to get the most out of Process Mining in your situation.
That's why we've decided to provide you with our Business Process Reengineering (BPR) guide, offering a more in-depth look, as well as examples, into the steps companies can take to lead successful BPR initiatives.
You'll also learn why Process Minit comes as a necessary step to BPR and how to mitigate the process redesign risk through Process Simulation.
Or simply get in touch and we'll find the best solution for you.
How to run a successful BPR initiative?
Apply the 7 steps from our Business Process Reengineering guide and get inspired by real-life examples.