We’re in a terrible global recession. Some businesses will contract and/or abandon markets. Others may go out of business. However, companies with smart management teams will use these troubled times to improve their market position. For them this recession will have a silver lining.

Big changes, big opportunities

All companies are thinking “defense” in the short term to increase their staying power, but unlike their less astute competitors, savvy companies are also thinking “offense” because they understand that with great change (and pain) comes great opportunity. This spells bad news for those who sit by the sidelines simply waiting to see what happens.

In all recessions, demand for products and services declines across the board. But what’s different about this one is not only the severity of the decline but the fundamental shift in buying patterns that are expected to result from it. Nowhere is this more apparent than in autos and housing where gas guzzlers and oversized homes will likely fall permanently out of favor. But these are only two of the many industries that will be affected by a moderation of overconsumption and a new focus on saving, not to mention a shift to green products and cleaner, more sustainable energy sources.

None of us, of course, has any way of knowing when the US economy will recover and exactly what it will look like when it does. But every company can study its markets and formulate new strategies to capitalize on the changes as they unfold.

Short term decisions with long term impact

When demand falls dramatically, playing defense quickly and effectively is the first step in building a strong future (See December 2008 Summit article, Survive and Thrive in a Recession). But the tricky part is knowing which tactical survival decisions have long term implications and which do not and then, to the extent possible, delaying decisions with long term consequences until a clearer long term picture can be formulated.

Examples of tactics with little to no long term impact include reducing receivables and negotiating extended terms with suppliers and creditors. They help protect cash and create breathing room but have no impact on future strategic direction. They are strategy neutral.

Other cash conserving tactics such as selling assets, closing operations, letting people go and reducing research typically have a strategic impact. Say for example that you’re a home builder and you decide that your best long term strategy is to focus on smaller, less expensive homes. If to raise cash you’ve already sold off your small lots and kept the big ones, then you’ve undermined your long term strategy. If only you’d known!

The better approach is to start with survival decisions that have minimal long term implications and immediately undertake a strategic review to gain whatever insights you can to inform your spending and investment decisions going forward.

Market Research – Just Do It

If you’re going to update your strategy then you might as well do it right, which requires that you conduct a fair amount of market research. Most businesses don’t do enough market research because it’s hard to do, it’s never perfect and it’s never entirely complete especially with the world changing so quickly. But you can’t build sustained competitive advantage without it. Good information begets good game plans or, put another way: get the facts … before the facts get you. There’s another important consideration. Market data is a matter of effort. A company may not be the market leader or have the best balance sheet or even the most experienced management team, but it can outwork the competition in key areas. Market research is one of those areas.

External Market Scan

In times like these it’s especially important to examine the external factors that affect your industry and the markets you address (or could address). As some of you know, a useful framework for this is called PESTEL. It stands for political, economic, societal, technological, environmental and legal. Get as much information as you can in each of these categories, discuss them and then draw some conclusions about the implications for your company, your current markets and any new markets you’re considering.

Then look at your customers, suppliers and competitors. You can learn a lot about them through secondary sources like industry journals, research reports, web sites and marketing materials. In addition, you can approach them directly. Your customers will gladly tell you about their current and anticipated needs. Many will also tell you what they know about your competitors. Your suppliers have a vested interest in your success and some can provide you with useful information about the markets you serve or that you could potentially expand into. Your competitors, on the other hand, are not going to invite you in to tell you all their secrets but they will talk to you at conferences and trade shows. Furthermore, their “alumni” will sometimes share information with you - although one should be careful not to solicit or receive proprietary information subject to confidentiality agreements. It’s not right, and it’s not worth it.

A Word About Market Share

Market share deserves a lot more attention than it usually gets. Here’s one reason: Market share tells you how you’re really doing. Have you ever flown in a small airplane where you could see the instrument panel? If so, did you notice how sometimes when it looks and feels like the plane is going up the instruments tell you that it’s actually going down? It’s the same with revenues and profits. For example, you may think your sales are growing nicely at 7% a year, but if most of your competitors are growing at 10% then you’re actually falling behind.

The other reason is that there is an inherent advantage in being a market share leader. We understand this intuitively because we assume that the biggest players have distribution, branding and cost advantages over the others. And if you’ve read Straight from the Gut or other Jack Welch books you’ll recall that for a long time he insisted that GE companies be number one or two in their markets or the managers were to “fix, sell, or close”. Well our intuition has been supported empirically by Mark Gottfredson and Steve Schaubert from Bain & co. who recently published The Breakthrough Imperative. They studied thousands of companies and found that the biggest players have an important competitive cost advantage not just from economies of scale but from being farther along what the authors refer to as the Experience Curve.

These companies have learned how to work smarter and more cost effectively because they’ve done more of it. Over time they continue to get stronger and even more profitable (all other things being equal) as they reinvest the extra margin to further lower costs and boost sales. There’s much more to be said about this book and the power of market share which I can’t properly address in this short article, but I hope my comments motivate you to estimate your relative market share and to consider the strategic implications of your findings.

Internal Scan

Although you know a lot about your own business there is typically much you can learn if you dig deeper. Take a careful and objective look at your people, processes, products, services, intellectual property, etc. As you do this I recommend you get acquainted with the works of Chris Zook including his most recent book Unstoppable and his previous books Profit from the Core and Beyond the Core. Zook explains that a company’s lowest risk alternative for meeting the changing demands of a fast moving market is to uncover its oft-hidden core strengths. He groups them into three categories: platforms, customer assets, and capabilities. Finding your core is not always easy, but the tools Zook provides can help.

Strategy - Pulling it all together

After you’ve performed both your external and internal analyses it’s time to synthesize the data and select your strategy. First, consider markets and products where you have core capabilities, strong market share and room to expand. This is a good place to dedicate resources. At the same time consider using new technology or an acquisition to accelerate growth. If you have good market share and core capabilities but little room for expansion then consider redefining the market to include adjacent markets - even if it moves you into an overall smaller market share position. From there you can use your existing market position as a beachhead from which to take on the adjacent market opportunity. (For more on using market beachheads as a springboard read Geoffrey Moore’s book Crossing the Chasm.) If you have average capabilities and little market share you might want to think about moving out of that market and rededicating your resources.

Whatever you decide, keep in mind that a strategy is a hypothesis. It’s a theory you have about how to win market share profitably and on a sustained basis. You can’t count on it to work perfectly. There may be fast-moving market factors that you haven’t anticipated or you might have difficulty fully executing the strategy from an internal perspective. That’s why it’s best to measure the various cause and effect components of a strategy using a process like the Balanced Scorecard.

With your new strategy in hand you’re in a position to generate a new sales forecast and budget for this year and high level projections for the next few years. Depending on the business you’re in, it’s usually the case that if you do your research and process it properly you’ll discover hidden opportunities to grow profits and the value of your business well beyond your current expectations.

Closing

I hope these concepts, suggestions and book references have been helpful and that you’ll think more strategically even, and perhaps especially, now. The long term view is vital for success under all economic circumstances. As Harvard University’s Dr. Edward Banfield discovered conclusively after many years of research, the characteristic that distinguishes successful people is their ability to apply long term (strategic) perspective to short term (tactical) decisions - all of the time and under all circumstances.

Although we find ourselves in a deep recession, we will eventually emerge from it. When we do, the smart companies that do the research and update their strategy will recover sooner and faster. And in looking back years from now they’ll remember these times as both bad - and good.