Most companies need to fundamentally recalibrate their approach to South Africa’s changing economic reality. To survive the downturn and emerge stronger from it, companies should take actions that enable them to both capture opportunities in the near term and achieve sustainable improvements that will help distance them from competitors over the medium and long term. Tactical shifts will not be enough.
We suggest that companies adopt a four-pronged turnaround plan that calls for a refocused strategy, smart cost cutting, strengthened core businesses, and a program for sustainable change. (See Exhibit 3.) Companies in South Africa can learn from the best practices of organizations that have successfully used economic downturns to achieve transformations in other emerging markets.
Reset strategy around core goals. It is particularly important during a downturn for a company to present a clear vision that employees can rally around and to focus on attaining the organization’s core purpose and goals. A crisis is generally not a good time to disperse energy and limited resources on experiments.
Companies should adhere to a strategy that will enable them to survive adverse times and then thrive when the economy recovers. It is also critical to ensure the loyalty of customers. So companies should focus on creating value for customers.
The Russian retailer X5 illustrates how focusing on its core purpose can enable a company to emerge from crisis as a clear winner. As Russia’s GDP growth steadily fell from 2012 through 2014, to the point of contracting in 2015, sales at X5’s stores declined and its competitors gained share. The company’s new stores were underperforming.
X5 concluded that it needed to focus more on its core goal of delivering the best customer experience in Russia’s dynamic retail food market. X5 reassessed the value proposition of each of its brands. It also set a goal that each store should either be the leader or second in its segment. After gaining a better understanding of its customers, X5 created a portfolio of store formats to serve different lifestyles. It focused on sourcing the highest-quality products and launched initiatives to inspire its employees and become more responsible corporate citizens.
The results of these efforts were impressive. In two years—in the depths of Russia’s economic crisis—X5 increased its revenue by 27.6%, its earnings before interest and taxes by around 60%, and total shareholder return to more than 40%. This compared with average industry TSR during the same period of only 9%.
Free up resources through smart cost cutting. To fund investments needed during a downturn and improve their customer offerings, companies need to free up financial resources. While it is tempting to accomplish this through massive downsizing, a better way is through smart cost cutting.
Lean initiatives that reduce waste and improve productivity are a good place to start. The downturn has exposed a major weakness in South Africa’s growth model: poor productivity growth. A full 73% of growth in South Africa’s gross value added (GDP plus subsidies, minus direct sales taxes) since 2001 can be attributed to growth in the number of people employed. Productivity over that period increased by only around 13%. This is in stark contrast to emerging markets such as South Korea, Turkey, and Russia, where productivity growth has been a major driver.
Implementing lean initiatives is difficult during an economic boom, when the overarching priority is to capture growth opportunities and create new jobs. A downturn is a good opportunity for companies to remove layers in the organization, reduce unnecessary overhead, and empower employees to make more decisions.
Retailer X5 funded its investments during Russia’s downturn in part through smart cost-cutting moves. By streamlining operations, X5’s service center reduced the time required to upload invoices from suppliers and have them recognized in the system from seven days to only six minutes, and it reduced the time required to process an invoice from an average of five working days to one. X5 also improved the efficiency of its transportation network. It introduced a mileage monitoring system that reduced rerouting by truck drivers—who were taking either unauthorized trips or routes that they mistakenly thought were better—from 20% to 4%. This move reduced fuel costs by 5% and payroll expenses per truck by 9%, even though drivers’ salaries rose by an average of 10% because of inflation. By better managing inventories through automation, X5 increased the turnover at its stores by 3% in one year.
An Indian industrial goods company likewise used an economic slowdown to streamline its operations and free up resources for needed investments. The company, which had struggled with low productivity, faced a crisis in 2013, when India’s economy had been stagnant for two years. The company reduced production bottlenecks in its plants and prioritized products with the highest sales potential. It slashed the time required to service orders from 45 days to 30 days by using overlapping production plants and cut lead times for raw materials by improving visibility and communication with suppliers. To reduce inventory, the company improved its production planning and transportation. On top of these initiatives, it shortened its planning cycle from one month to one week to increase flexibility within the supply chain. These efforts helped the company cut inventories by 20% and lead times on key products by over 70%.
Grow the core business. Companies in South Africa can put themselves in a strong position to win over the next three to five years by focusing more on their core businesses. Companies should identify strengths that differentiate them from competitors and make them impregnable. They should build on those strengths—either organically or through strategic acquisitions—to gain market share now and propel growth when the economy recovers. Many of these initiatives will require investment during the downturn. But companies that are best at strengthening their core businesses—and move quickly—will improve their outlook in the medium term.
At a time when South Africa’s economic challenges are likely to profoundly change the needs and preferences of consumers, it is especially important that companies keenly understand their customers. Insight into the shifting attitudes of particular customer segments can help companies improve their position in specific product segments and uncover opportunities for growth by introducing products that fulfill unmet needs.
An auto insurance company in Turkey succeeded with such a strategy during the slowdown of that country’s economy in 2012 and 2013, when it was also losing market share. The insurer broadened its product range to address unmet customer needs and focused more on retaining existing customers. It upgraded the quality of its data, for example, and improved the scripts used by its call center operators for casualty and collision insurance. As a result, the company boosted its share of nondealer car loan policies by 10 percentage points and increased customer retention by 25% in personal accident policies, its highest-volume segment.
Mergers and acquisitions, too, can enable companies to create value during South Africa’s downturn. The low stock valuations of some South African companies may open acquisition opportunities for those that can free up enough cash. It is important, however, that companies not use such acquisitions to enter into tangential businesses that cause them to lose focus. Instead, M&A should enhance growth in core businesses.
To grow its core business, X5 focuses on organic expansion. In 2014, the retailer opened nearly 900 new stores and increased sales per store by refurbishing nearly 500 others. On top of this, X5 has made strategic acquisitions in order to expand across Russia. That same year, it purchased 116 stores to expand its presence in the Samara region, where it saw strong growth potential.
Make change sustainable. For change to be successful and enduring, companies need to put in place the right team, culture, practices, and technologies. They also need committed and able leaders to serve as champions and resources, and talent at all levels to execute initiatives. The HR team should act as a turnaround partner. To achieve real change, companies must also establish a high-performance culture and simplify their organizations. IT should be upgraded as well, so that the organization can be agile, flexible, and efficient. Finally, companies should deploy a change management program to engage stakeholders and deliver results.
X5 implemented a number of measures to make its gains sustainable. The retailer overhauled its leadership team, which now includes managers with both Russian and international experience. In terms of technology, X5 improved its analytics capability by adopting one customer relationship database for all store formats. It improved the efficiency of its service centers and promotions and created internal processes to manage documents. X5 also greatly expanded its electronic data interchange, which is now used by 98% of suppliers and processes ten times as many documents as in 2011.
A Brazilian industrial goods manufacturer took advantage of that nation’s economic downturn to overhaul its corporate culture and become more customer focused. During this process, the company discovered that its salespeople spent only 35% of their time actually meeting with customers and almost 60% traveling and doing administrative work. To achieve behavioral change, the manufacturer slashed the time spent on administrative chores by almost half and rearranged the geographic responsibilities of its sales team, reducing travel time by one third. On average, the manufacturer’s salespeople now spend 55% of their time meeting with customers. Through these initiatives, the company was able to effectively double the time devoted to meeting with customers and prospects without hiring a single new employee.
The action agenda we have outlined is daunting. With consumer sentiment still holding up surprisingly well, companies have time to begin the process of recalibrating their organizations to South Africa’s new economic reality. But this is no time to wait and see how the market unfolds. Companies can continue to grow, or at least improve their market share, during the current economic crisis—but only by carefully targeting their product offerings, marketing, pricing, and go-to-market strategies to the evolving wants and needs of specific South African consumer-market segments. At the same time, companies should take advantage of the downturn to execute holistic change that will boost their competitive position in three to five years. The winners in South Africa will be the companies that are already taking action to achieve this transition.
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