How to rebound when your sector takes a hit: Part one

Crises can change our perception of uncertainty and volatility, and in the case of COVID-19 our research here at IMD has shown that it drastically changed our view of risks. Executives now take the possibility of things like supply chain disruptions far more seriously than they previously did. When you perceive risks and disruptions as real and likely threats, it shapes our strategy and how we prepare for the future.

We should never forget that the essence of strategy is about asking the right questions.

Hence, we need to structure our decision-making process in a way that we minimize potentially bad outcomes when a crisis manifests itself. There are four key steps to strategize through a crisis:

1. Prepare ahead for hard times.
2. Understand the environment around you. One of the fundamental notions of strategy is that we need to fully comprehend what is around us.
3. Stay flexible and be ready to make changes. How do you enable flexibility in your organization so you can rebound when your sector takes a hit?
4. When the crisis hits, focus on your strategic priority.

In this series of brain circuits, we will look at each step individually. In Part 1, we’ll examine how to prepare ahead for hard times.

The key is to build a buffer against hard times. You can do this in a variety of ways:

Fixed costs: Is your company efficient on its cost structure? You need to evaluate your operational efficiency and discern whether you can take actions that will better optimize your costs.

Cash reserves: This can make a critical difference when your sector is hit. If you don’t have enough cash reserves for hard times, you need to plan to change that. Strong cash reserves go beyond simply keeping you afloat if you are struggling – if you do have enough cash, it can turn into an opportunity to acquire competitors that end up in a worse situation. The perfect example of this during the pandemic was Microsoft’s acquisition of the gaming company ZeniMax, its third largest acquisition in history.

Intangible resources: Do you have scarce resources that convey a true competitive advantage to you? This may become particularly valuable in times of crisis.

Diversified revenue streams: This is a big issue because during the pandemic many companies found themselves with revenue streams that lacked sufficient diversity, so when their sector was hit they lost critical revenue streams and did not have options.

Geographic footprint: Is your value chain resilient and balanced? Are you diversified from a geographic standpoint?

Engaged stakeholders: Are your critical stakeholders adequately involved? Are you listening to them? Failing to do so can turn into very unsuccessful bets when we look at the strategic options that we take.