LEAD STORY: Recession Island – Rules of Engagement

Thousands of New Zealand managers have found themselves stranded in the most brutal trading environment for decades. For many, it’s battle for survival in uncharted territory. The economic climate could hardly be worse. Treasury is forecasting two years of next-to-no growth, rising unemployment and weakening of trading partners’ growth and commodity prices. Yet amidst the dangers there are opportunities to outwit, outplay and outlast your competitors. Managers will have to confront the challenges of new market while battling the elements and each other. They must learn to adapt if they are to win this life-changing contest. Welcome to Survivor: Recession Island.
Unlike the TV series, however, this is no game and there is no immunity. No-one knows how long we will be trapped in this recession, but with consumer spending, business confidence, the stock market and house prices all falling, it’s not expected to end any time soon. The decisions you make in the coming months, and the people they affect, will be all too real. Some businesses won’t make it. So what are the key challenges you’ll face and what do you have to do to win? How do you survive, or even thrive, on Recession Island?

Customers: The Game of Love and Commitment
Even with ill winds blowing through the economy, George Adams describes himself as an optimist. As the New Zealand head of one of the world’s biggest brands, Coca-Cola, you could say he can afford to be. But when major companies from Lehman Brothers to Chrysler are being ruined by this recession, no firm can afford complacency. So Adams is watching consumer behaviour more closely than ever. Customer service has always been one of the four top metrics at Coca-Cola. Now, Adams says, it’s “what success looks like”.
Everywhere he goes, Adams sees consumers “trading down” and cutting back. “People aren’t going to Valentines for breakfast, they’re going to McDonald’s instead,” he notes.
Some companies are responding with bargain lines; The Warehouse is opening 15 new stores. But how do you respond to this changing demand if you sell premium product, such as Coca-Cola (as opposed to bargain brand soft drinks). One initiative the company has taken is to launch multi-pack of Schweppes cans; discount for bulk, more spend in single purchase. Simple repackaging is both meeting customer demand and maintaining revenue.
It’s an example of understanding your customer intimately and, as with any healthy relationship, intimacy is crucial. So if you want to survive 2009, give them the time, attention, and understanding they deserve.
“The first thing to do for your customers is just love them,” says Ross Verry, general manager of corporate banking at ANZ
National, which handles private firms worth $20 million-$150 million. “You’ve got to protect your revenue line.” And it had better be love at first sight, because in tough times customers won’t give you second chance.
The good news in this recession, Verry says, is that corporate balance sheets are “by and large in much better shape than 10 years ago, and certainly 20 years ago”. The competitors in this series of Recession Island, in other words, are fitter. The bad news is that household balance sheets are much worse. Your customers are carrying much more debt, and whereas “businesses can dump inventory, sell assets, lay-off staff and so on, there’s really only one thing households can do, and that’s cut spending”.
Verry reckons that as households spend less, they’re thinking harder about what they buy. Even more than price, they’re shopping for value, choosing brands they trust. The question is, did you spend the good years developing brand loyalty?
And if you don’t have the strongest brand in your market? You’ve just got to love your customer that much more, says Business New Zealand chief executive Phil O’Reilly.
“If you didn’t ring your six best customers last week, do it now. Or better, go meet them, sympathise with them, and see if you can assist. Get off your arse, don’t just leave it to your sales staff… If your customers see you as part of the solution not part of the problem, they’re more likely to pay you and stay with you.”
Whether you have lunch with your customers or your staff serve them over counter, perhaps you can get to know them better by asking more questions at point of contact. You might already have more information about them than you realise. Loyalty cards and reward programmes provide huge amounts of data; mine them well and offer customers more targeted deals.
It’s worth the effort because keeping existing customers is almost always cheaper than seducing new ones. But tough times call for tough love. Ask which customers give you the best margins, which are the most demanding, and which aren’t loving you back.
“Look to see whether you have any marginal customers, ones who are late paying and difficult to service,” says O’Reilly. “You might ditch some of them. Concentrate on your great customers, those with capacity to grow or those who have stayed with you for long time.”

Costs: The Delicate Cutting Game
When Planhorse CEO Bob Fenwick saw the recession coming back in August, he did what any smart CEO would do. He looked long and hard at his costs. Planhorse sells storage trolleys, clamps and brackets for blueprints, architectural plans and the like in around 60 countries, and uses lot of steel and aluminium. The recession has hit commodity producers hard and with the price of steel falling 30 percent in the three months to the end of 2008, Fenwick took the opportunity to ring his suppliers and say, “please requote me”. The result? 16 to 24 percent saving on his raw materials bill. Given the slide in sales he’s expecting this year, those renegotiations mean fair amount of wriggle room to cut prices while maintaining his margins.
A recession’s good time to renegotiate with suppliers – like you they’ll be bending over backwards for their customers. Just tread gently. As Darrell Rigby, partner at management consultants Bain & Company, has argued in the Harvard Business Review, downturns don’t last forever, so it’s better to “make friends with others who are trapped in the foxhole” than to exploit them.
Based on survey of 377 Fortune 500 companies, Rigby wrote, “[Smart managers] know that forcing relatively small price cut (which will be remembered when the tables are turned) on suppliers is typically far less valuable than working with them to eliminate duplicate operations, improve forecasts, reduce inventories, and improve cycle times.”
If you’re planning on wielding the knife closer to home, stop. Think. Get creative. Aggressive cost management may be inevitable, but some competitors on Recession Island panic, demanding across-the-board cuts. That’s dumb; targeting is wiser. Cut from underperforming parts of your business and from parts that aren’t core. Westpac chief economist Brendan O’Donovan advises managers to look hardest at fixed costs.
“It only takes couple of orders to fall through and you’re in trouble and globally, forward orders are dropping away. So keep as many variable costs in your production as possible,” he says.
Travel, IT, training and delaying projects are some of the cost-cutting measures being dished out by the CEOs spoken to for this story. Cutting staff, they agree, is the last resort. And never, never cut quality. George Adams has series of contingency plans ready to go, depending on how bad it gets. “They’re basically about cost. How do we move away from some discretionary spending to core spending? What things are deferrable? We don’t pull money from the frontline, sales or manufacturing. And we don’t look at making people redundant.”
Indeed, your staff may have some great money-saving ideas. BusinessWeek recently reported that Best Buy staff offered over 900 suggestions in just three weeks when managers set up an online survey to solicit cost-cutting ideas.
For all the talk of cuts, your first question

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