The Global Financial Crisis of 2007 and the resulting recession in a host of economies worldwide caught many businesses off guard. The impact was so bad that quite a number of businesses were forced to shut down, abandon some capital expenditure projects, withdraw operations from certain geographical locations hard hit by the crisis and lay off employees. Prior to the recession, risk management was not regarded by many as a driver of organisational value, and some still make the same mistake even now. However, the aftermath of the recession proved otherwise. It showed how proper risk management can create and help preserve organisational value.
In today’s volatile business environment, uncertainty has become the norm. When economic catastrophic events hit, they hit without warning. However, by implementing proper risk control measures within the organisation, the impact can be reduced. Globalisation and technological advancements still present both opportunities and threats to the business.
Opportunities in the the form of access to new markets, sectors, channels of distribution, customers and products. Threats in the form of political risk, financial risk due to currency fluctuations, operational risks; inflexible suppliers, customer and employee defection and etc. But, to remain competitive, organisations need not only focus on the downside of risk, but also the upside of it. They need to perform a cost-benefit analysis and weigh the opportunity costs of their decisions before embarking on any project. Any strategic choice has its potential reward and, if it fails, potential costs.
Research has shown that, during times of economic hardships, customers become more risk averse and cautious than normal. Fear of the unknown makes them cut on their spending and this has a negative bearing on businesses which are already trying to survive and weather the storm. It is a fact that businesses need to sell more to make profits. If they don’t sell, they don’t make money.
In order to survive in a harsh economic environment, managers need to:
# Understand today’s market and its new behaviours: This involves identifying the changes in the present market and examining these changes closely for new insights. For example, by conducting a thorough analysis of the micro-economic and macro-economic trends in today’s climate, the organisation is able to identify those customers, sectors, segments or products and services at risk to the organisation.
Studying periods of previous economic decline is also key to identifying early indicators or warnings of trend changes. An analysis and understanding of key competitors is also key to identifying their vulnerabilities, which the organisation can then take advantage of. Thus a sign in one channel may be an early warning of change elsewhere.
# Challenge existing assumptions: In times of uncertainty, managers are not sure of which customers are going to stay or which ones are going to leave. As a result, there is the need to identify the essential accounts. This can be achieved by ranking customers or suppliers in terms of size, profitability, strategic importance and loyalty. This helps identify those areas of your business which will be able to remain resilient and also which customers need to be retained. Some of the questions that managers need to be asking include: Based on our market knowledge, macro-economic and micro-economic forecasts, are our products and services competitive enough to retain loyal customers? What is our selling point? If we lose customer X, how will this affect the overall business revenue? If our customers defect, where else can they buy the product or service from?
# Develop new strategies for new circumstances: Having challenged the existing assumptions and agreed that change is needed, there is need to alter the product and services range. This might involve simplifying the product range, altering the features, quality, pricing and distribution. To avoid customers defecting to your competitiors, it is essential that there is increased communication with your customers. This helps restore confidence in your business. They need to be reminded of the good news relative to the past.
The same applies in trying to avoid your employees defecting to your competitors. Their abilities, level of understanding, morale and motivation create organisational competencies. Thus they should be reminded, other than financial, of the non-financial benefits of working with your organisation such as, certainty, career enhancement, development experiences, challenges and recognition. Managers need to ensure that there is a dialog between management and employees, as opposed to one way communication. This ensures that employees concerns are heard and dealt with thereby reducing the risk of employee turnover.
As times of harsh economic conditions are not meant to last forever, managers need to have a strategy in place for the upturn. They should be able to identify early indicators of better times to come. This will help craft strategies necessary to win back lost business and customers.
Remember, managing risks during periods of harsh economic realities helps build a better business all round. Change is an opportunity, every time the economy changes pace, opportunities arise for new products and strategies.