The economic crisis continues to hamper companies worldwide. Customers — both consumers and corporations — fear the future and are reluctant to buy, and have increased their savings instead. So, cost reductions alone don’t guarantee that a company will survive, Hermann Simon notes in his latest book, How to Beat the Crisis: 33 Quick Solutions for Your Company. Simon is chairman of the consulting firm Simon-Kucher & Partners. Before joining the firm in 1995 he was a professor of marketing and corporate management at the University of Mainz and Bielefeld University in Germany, as well as a visiting professor at numerous universities worldwide.
An expert in strategy, marketing and pricing, Simon has written some 30 books. In an interview with Universia Knowledge@Wharton, he explains that those who understand the changes in customer demand and react with speed and enthusiasm will emerge stronger than ever from the crisis. He proposes 33 quick solutions to current challenges. “They won’t save the world from the crisis, but I am certain they will limit the damage,” he says. “And this can make the difference between whether a company survives or dies.”
An edited transcript of the conversation follows.
Universia Knowledge@Wharton: In your latest book, you say that this crisis is one of sales, not costs, because consumers have changed their behavior. Generally speaking, how has the consumer changed? Should managers focus first on studying how demands made by customers and consumers in their industry have changed?
Hermann Simon: Indeed, this crisis has been — and continues to be — a sales crisis. Customers feel uncertain about the future and they are saving their money rather than spending it. Even freer-spending American consumers have increased their savings rate and are spending less. Fear of the future continues to strongly influence consumer behavior. It will take several years to restore consumer confidence. We observe an unfavorable change in price elasticity, meaning that price cuts and promotions have become less effective in moving products. At the same time, hard values and benefits gain in importance. Things nice to have, such as image, brand, etc., count less during the crisis and its aftermath. Financing has become a bottleneck both for consumers and businesses. Banks are no longer providing generous financing for consumer purchases or companies. This limits purchasing power. It is also a strong impediment to international business, where vendors usually require so-called credit insurance to cover the risk of not getting paid by a foreign customer.
Managers must understand the causes of these changes and how long they are going to last. Only if the causes of these changes in customer behavior are well understood can a company find the right measures to cope with these changes. A good case is a promotional offer by Hyundai, the Korean car company, in the United States. Hyundai understood that people are reluctant to buy or lease a new car because they are afraid of losing their job. So it offered a so-called assurance program, through which Hyundai took the car back if a customer lost his or her job within a year. The program was a smashing success. Hyundai’s market share increased from 3.1% in 2008 to 4.3% in 2009. Units sold increased by 27%. Hyundai was the only car company with positive sales growth in 2009.
This approach is perfectly valid for Spain, where consumers have discovered and continue to discover low-cost offers in areas such as tourism, hospitality and, more important, daily purchases and groceries, leading to significant increases in the market share of those products that carry house brands. With respect to the savings rate, Spaniards have only just “learned” during the current crisis not to spend all of their available income after servicing their mortgages. In a recent study by BBVA, the intention to save has gone up 13 points from 56% (in 2008) to 69% (in 2010) of all Spaniards. In earlier years, Spanish consumers hadn’t really been known for either being smart shoppers or for saving much of their money.
UK@W: What other assessments or diagnoses should be carried out before setting up an action plan within the company?
Hermann Simon: First and foremost, a company should avoid big mistakes. In good times, such mistakes may be forgiven, but during and after the crisis, they can be fatal. Among the most dangerous mistakes are lax liquidity management — cash is king during the crisis — taking hasty action without understanding the situation, and massive price cuts. In spite of the pressure, a careful evaluation of actions is required. Of the 33 quick solutions I suggest in the book, not all of them are suitable for each company, situation and industry. The most important criteria are effect on sales (and thus on employment), speed of implementation, profit contribution and — don’t forget — risks. Due to the pressures of time, quick methods for analysis and decision are required, and I describe such methods in detail in the book.
UK@W: Faced with a collapse in profits due to the lack of consumer confidence, companies have no choice but to cut costs. What are your recommendations for companies concerning how to reduce costs without damaging the company in the long term? Do you think it is a good time to implement in-sourcing policies?
Hermann Simon: Cost-cutting has to be the top priority in the crisis. The key is to lower costs intelligently and flexibly, thus minimizing negative long-term repercussions. Economizing and boosting productivity are ongoing management responsibilities. The severity of the crisis and its aftermath makes these tasks even more important, and the necessary cost cuts significantly exceed previous proportions. Many companies will continue to be unable to avoid radical measures such as mass layoffs and factory closures. A trivial point, but one that should still be mentioned and kept in mind: steep cost curves — that is, high variable unit costs — are advantageous in the crisis. High fixed costs, on the other hand, can be fatal.
Instead of cutting labor costs by tackling just one cost driver — for example, through layoffs — employers should combine as many cost drivers as possible into a flexible model. This enables savings that are not only more socially acceptable, but also less harmful in the long term from a strategic perspective. This type of flexible approach requires that employers, employees and unions be willing to cooperate undogmatically. Companies must take care not to save in the wrong places. The lawnmower method may be effective with regard to implementation, but the risk of doing away with valuable activities is high. Selective approaches are superior, even during a crisis. Balancing short-term savings and long-term effects always remains difficult. It is generally inadvisable to cut back on expenditures that have a quick and quantifiable positive impact on sales and profits.
Cost-cutting is the most common tool for tackling the crisis, not least because it is ostensibly under companies’ control — unlike market measures, in which customers also have a say. However, even on the cost side, control is not complete. Cutbacks always affect people, be it employees or suppliers. That’s why it is important not to go too far; otherwise the reactions on the other side could be disastrous.
UK@W: You offer 33 quick solutions, and you divide them into subsets: those that help change customer needs; those that are for sales and the sales force; those that manage offers and prices; and those that are for service-oriented companies. Which moves do you consider most crucial in each of these areas?
Hermann Simon: First, I advise avoiding the most frequent and most dangerous mistake, which is to cut prices prematurely and too strongly. Companies do this to stabilize sales volume and employment. But during a crisis, it doesn’t work and turns into a vain hope. The reason is that consumers react less to price cuts, as outlined above. In addition, there is one big danger: competitive reaction. In the worst case, prices are down and sales volumes remain low.
Last year, the European Pricing Study 2009 (by Simon-Kucher & Partners and eight leading European business schools) confirmed that 52% of all participating companies claimed to be in a price war. For Spain this figure was even higher, 63%. Even in markets that were considered inelastic, companies slashed prices. Recent figures from Spanish companies — for example, the tourism and retailing sectors — show that these activities helped contaminate company results and profits much more than mere volume cutbacks would have.
Instead of cutting prices, companies should reduce volume and capacity. The French Champagne producers have done this with great success. This is the most important action on the supply and price side. With regard to customer behavior, you have to deal with the increased fears and risk perception of your customers. Extended guarantees like the one given by Hyundai are an effective means to overcome fear of buying. This can include success-dependent fees, barter trade, or totally new business models where the vendor takes on a higher part of the business risk. On the sales side, you should increase the performance of your sales force. Special incentives are an effective way to achieve this. Also, if you have direct sales, try to strengthen them. During a crisis, direct sales are invaluable. Services offer a lot of potential because they have typically been neglected in boom times. Extend your value chain through enhanced service offerings, change from product to systems provider, or shift your focus from the original market to the aftermarket. BMW has done the latter with great success.
As Simon notes in his book, “Because its revenues dropped, [BMW] tried to attract more owners of antique cars to its repair shops even by [such measures as] offering them rebuilt auto parts that were cheaper than the original parts.” He adds that companies should consider charging for services that they have provided free of charge in the past.
UK@W: What are the components in the process of implementing these moves? Should companies be working with external consultants at this stage?
Hermann Simon: The first step is that you have to decide, “What exactly should be done?” Then you have to determine the extent by asking, “How much?” The next step involves internal implementations of the action; for example, the transfer of employees from non-sales functions to the sales force. How you communicate the action is another important part of the implementation process that can strongly affect its effectiveness. Furthermore, it is necessary to estimate an action’s impact on sales, margins, revenue, costs, profits and liquidity in quantitative terms. And also the speed of the impact: “How soon will the impact be felt?” Ultimately, continuous monitoring is advisable.
Outside consultants can add value to the tasks thanks, first of all, to their experience with other companies and other industries that faced similar challenges and have acted prior to a specific company. (What worked, what didn’t? Why? What is transferable to this specific company?) Also, consultants bring a working methodology and systematic, rigid approaches to analyzing the specific situation, drawing the right conclusions, and suggesting appropriate measures. Some companies, doing this on their own, suffer from the so-called not seeing the forest through the trees syndrome, or are simply not capable of doing this properly while managing the daily business.
UK@W: What role does time-to-action play in the implementation of a plan and what impact does it have within a company? And why? In Spanish-speaking countries there is a saying: “Dress slowly because you are in a hurry.” Can too much speed work against the crucial decisions that companies should be taking during the crisis? How can you avoid this?
Hermann Simon: In recent months, I have talked to numerous companies about the crisis and how they’ve coped with it. The clearest insight from these discussions is that those companies that reacted quickly fared much better than those that waited. It is definitely good advice to take time to think, to decide, and then to implement with consideration. But in situations involving danger and abrupt changes, you have to decide and act fast. Spontaneous actions, of course, carry a high risk potential. Therefore, a compromise should be found. In the book, I suggest a decision process that is adjusted to the crisis, some simple evaluation and decision tools. I think they will help avoid severe mistakes while at the same time guaranteeing sufficient speed. And we shouldn’t ignore a new phenomenon, especially for the recovery. More and more often, we are competing against the Chinese, whose biggest strength is speed. It’s amazing what the Chinese achieve in a very short time. We must not risk being left behind.
UK@W: Finally, what do you think about the increase in the value-added tax from 16% to 18% that took place recently in Spain, and the fact that other countries are considering doing the same thing?
Hermann Simon: Of course, budget deficits are a very serious issue. And tax increases are a temptation. I am a strong supporter of consolidating budgets and reducing public debt. But this must be mostly — or almost exclusively — achieved through cutting spending. One of the more important and lasting effects of the crisis will be that the social-welfare state is cut back to a structure that can be financed on a sustainable basis. This will require much higher spending cuts than currently envisaged or enacted. No state, no organization can permanently spend more money than it takes in.
The planned tax increases add little to the solution of this fundamental problem. Tax increases are likely to impede the recovery. And I doubt that they will actually lead to higher governmental revenues. The adverse effect on demand and economic activity is likely to counteract the higher tax rates.