Sales are down. Profits are below budget. Margins are being squeezed. “But why?” you ask and in return you hear, “It’s the downturn,” “Its … these markets” or even “It’s the recession.” Are you hearing this from your divisional heads or business unit leaders? How do you know weak business performance is really due to the market downturn? How do you know the market downturn is not being used as an excuse for poor management?
It goes without saying that many businesses are facing tighter markets and contracted spending by their clients.
But does this mean that managers are helpless to limit the financial impact or mitigate the impact entirely?
By taking a closer look at business performance during these challenging times, executives can find answers to these questions. Once the true cause of the poor performance is determined, only then can businesses develop strategies to address this performance.
Let’s take a closer look – here are the three most common explanations given for why sales and profits from a particular client would be down:
- The client is buying less from us – the basic argument is that markets are so tough that the client needs less of the product and therefore is buying lower volumes.
- The client demands a lower price – the client still requires the product, but due to his financial constraints, demands a lower price.
- The client is no longer buying from us – this client is in such dire straits that it has stopped buying from us altogether.
We have all heard these explanations, but are they always valid? What is going on when a client reduces volumes with you?
It is very plausible that the client’s demand for your product has indeed reduced because he isn’t selling any of his products. For example, if your company is supplying components for new cars, demand has indeed dropped due to the slump in the manufacture and sales of new cars.
But there are many industries where client demand hasn’t changed and, in fact, the client has used the opportunity of the downturn to change or diversify suppliers. Clients often switch suppliers for combinations of pricing, quality and service.
Could any of these reasons be at play?
Demand for essential and critical services such as insurance or health and safety related products has held up well during the slowdown, so if you’re in these industries, for example, and you’re seeing lower volumes sold, it's more likely that your client is switching to a competitor and nothing to do with the state of the markets.
What about clients who demand lower prices?
This is completely understandable during tough financial periods, but be clear on what the client is saying – does he really want the same volumes of the same quality product and the same service levels for a lower price? Or are there ways that you could deliver less for this lower price, thus sharing the burden and maintaining your margins?
Could you service his equipment less frequently for the lower price? Or could you maintain prices, but increase the level of service to reduce his need to replace equipment thus maintaining your revenue during this tough period, but reduce your clients overall spend?
If he insists on a lower unit price can you get him to buy in greater bulk or to change his product mix to maintain your total sales?
Then there is the client who is not just reducing volumes, but not buying from you at all. If this client has gone out of business then sure, it’s understandable.
But what about if he is still in business, but just not buying your product anymore or, as is often the case, he has completely switched to a competitor?
If it is the latter you’d want to understand the reasons for the switch – again, is it quality, price, service or some combination and why is it that a competitor is able to meet these requirements when we can’t? If it’s the former reason then has he possibly switched to a substitute?
If he really is desperate and cannot afford to buy the product at all then can you offer him payment terms that might assist?
Offering a client a similar product at a lower price point often helps, or indeed you could offer the substitute if you supply it.
How do you know the market downturn is not being used as an excuse for poor management?
During periods of market tightness many organisational inefficiencies or inadequacies are exposed. The high cost producers see their margins eroded.
Those offering poor service see massive client defections. All the market has done is highlight pre-existing weaknesses in the business, which if gone unaddressed, will continue beyond the market slowdown. Many companies are said never to recover from market slowdowns, this is mainly because they were weak businesses even before the slowdown.
I am certainly not suggesting that all managers are faking the impact of the market downturn on their businesses. What I am suggesting is that executives need to understand the real, direct and specific impact of the market downturn on their businesses before crudely accepting ‘market conditions’ as explanations for what might be ineffective management.
Its all too easy in times like these to blame poor results on the markets; astute executives must distinguish between market impacts and poor or weak management and guide managers to thinking smartly about clawing back lost sales or profits.
Athol Williams serves as independent non-executive director on the boards of numerous private companies and serves on the Advisory Board of the Centre for Entrepreneurship at the Wits Business School.