Austerity is not a strategy

Three clients, three strategy workshops, 8 days: intense.  Each client is at a different stage of the strategy life cycle (see my recent blog).  And each workshop highlighted a theme which reflected where that client sits on the strategy life cycle: viz. 

This is the first of a series of three blogs that discuss the three themes.

Austerity is not a strategy.  What’s next?

Mining services clients are clearly in the ‘rebuild’ phase.  For about two years now the mining sector has drawn up the moat bridge.  Responding to dramatic commodity price collapses mining companies did what they always do: cut capital projects; slashed exploration budgets; slashed headcount; banned consultants; cut travel.  This is Management 101.  The more recent collapse of the oil price suggests the oil and gas sector is about twelve months behind the miners. 

All of this makes sense although, just as we over-invest on the upswing, undoubtedly we overdo the ‘slash and burn’. 

There are many anecdotes about sub-optimal decision making as executives seek to dramatically squeeze costs out of the business and Boards overreact to shareholder demands for returning capital.  For example, major resource companies will buy from third tier suppliers to capture the short term cost benefits, knowing full well there is a material performance risk – but hoping it doesn’t show up on their watch.  The consequences of these decisions will eventually come home to roost. 

Mining services companies have followed suit, with even more dramatic headcount cuts, many of them in survival mode.  Austerity became the main game.  And of course, they all slashed prices: it was the cost of being in business when markets collapse. 

But let’s be clear: austerity is not a strategy.  Austerity is akin to major surgery when something goes wrong.  You may be suffering badly, and you need to get through that, but at some point you turn your attention to ‘what’s next?’

So what is next? 

Across mining services the boom period demand was such that availability often trumped ability.  The ability to differentiate hardly mattered.  Galbraith once quipped: genius is a rising market.  Everywhere you looked across the service sector there was evidence of ‘genius’.   

But what happened within these businesses?  Many service companies lost their ability to differentiate.  Firms whose competitive advantage pre-boom was their culture now find that it has been weakened: culture was near impossible to maintain in these boom conditions.  Agile businesses that once were lean in systems and procedures and relied on the skill and experience of their ‘wise heads’ find they have compensated for a weakening of their core by increasing reliance on procedures.  Across both mining and services companies the capability of the businesses typically fell. 

At some point services firms need to get back to basics: they need an organisational reset.  Companies need to have a point of view: an ability which is distinctive and that clients value.  Do you have a view about how your organisation is going to regain a distinctiveness which will allow it to compete on some basis other than price?  If you want to be known for something, you have to stand for something. 

Remember, too, leaders trade in hope.  After your organisation has been through the slash and burn phase, leaders need to re-engage their workforce: they need to give them reason to believe that the future holds more than further cuts.  The leadership conversation has to take a turn. 

Perhaps it’s too soon in your sector?  I have clients that are still hurting; still looking to get through the next 6 months.  But the leaders in these businesses know that mere survival is not enough.  They are getting on with building an agenda beyond austerity.  Without this, organisations will leak talent.  And without talent, survival is at even greater risk. 

Has your executive team begun a substantive conversation around ‘what’s next?’  Successful US firm The Limited Brand has a mantra: “what’s new?  what’s next?”  Could this be the catalyst for an emerging leadership conversation in your organisation?