The Good Times
In early 2009 the media reported that some luxury car brands in Australia have suffered a 30-40% drop in sales over the previous few months. It is also common knowledge that more and more capital projects are still being delayed or cancelled. These are just two trends confirming that brakes are being applied to the economy. The financial earthquake has now triggered a tsunami that is beginning to hit the real economy. This is why many people are concerned about the consequences we are likely to see in the 2009/10.
I have no doubt that practically everyone will be adversely affected to a degree, but my view is that from a long term perspective, the current crisis is a good thing to have. Let me elaborate.
The key driver that slows down the economy is the decline in demand. In difficult times, two kinds of expenditure tend to shrink: on projects with long term payback and on irrational purchases. The latter is the main reason why the current crisis will benefit us in the long term. True, some good projects will be deferred, delaying their benefits, but there will be a major gain from the elimination of waste caused by irrational business decisions.
When a business is put under pressure, executives can no longer pour money into white elephants and get away with it. The boards and senior management are forced to become much more diligent in endorsing new and existing projects. The higher the pressure, the more frugal the decisions tend to become.
This is why, if your organisation supplies real value, you have an opportunity to increase your market share as a consequence of the current upheaval. On the contrary, if your products or services sell mainly because they stroke peoples egos, your sales will drop. The economic forces will shift the demand from you to those suppliers who provide solutions to real problems.
But, you may wonder, do people really make highly irrational decisions in good times? They do, but the reason we rarely hear about it is because the abundance of cash allows them to get away with it - in spite of extravagant spending, the business can still make profit. I call such organisations lucky, but as we all know luck sometimes runs out.
Let me give you some examples from my main area of interest retail systems. Every chain retailer needs a computer system to run their business. It is possible to implement a good, retailspecific package within six months and to get the payback in less than a year. One would expect that every retailer in Australia would want such a system, but they dont. Retailers still spend exorbitant amounts of money on big-name, generic systems, paying twenty times (!) more than they need to. The worse part is that they still cannot get acceptable results. It is like buying a printing press when what you really needed was just a book. Shareholders in such companies are simply short-changed.
Consider some specific examples, reported by the media. A publicly listed retail chain which operates 150 stores is Australia employs 25 people in their IT department. In contrast, another retailer who operates over 400 stores (in four countries) employs only four IT specialists. What makes the 400 store retailer different? They have a single, fully integrated, retail-specific system. They are saving $1.5 million (in perpetuity) on IT staff alone.
Another example: a well known chain of department stores spent $90 million on a head office retail management system. They could have gained similar outcomes for $5 million, had they not decided to buy something not-made-in- Australia and very expensive. It is a classic example of the old principle that if something is not well understood, the price becomes the main gauge of quality. The annualised cost of this extravaganza is about $6 million a year; $6 million of profit per year gone forever.
A similar financial accident happened two years ago in another retail vertical a chain of 150 hardware stores spent over $100 million on their systems. Had they chosen a different system, the same outcome could have been achieved for about Andrzej Gorecki 2 $10 million. Another permanently handicapped business, with concrete poured into the bottom line. The fact that such businesses had spare money at the time is no excuse. Shareholders surely would have preferred it if the cash had stayed in the business. It would have been very handy today.
The benefit of difficult economic times is that such irrational decisions are less likely to be made. The need to be prudent reduces the incidence of business decisions made without sufficient understanding.
Difficult economic times benefit both: the buyers and those providers whose products and services add real value. Those who sell hot air will suffer and, I dont hesitate to say: rightly so. We live in a small world of finite resources. It is becoming increasingly important that we treat these resources with respect to give and deliver real value for money.
If you have a good, value-adding business, take heart. You will experience some pain sailing through the stormy waters, but your market share will increase once the sun starts to shine again.
- Andrew Gorecki