Factiva

A strategic approach for firms

1153 words

30 March 2009

Business Times Singapore

English

Modified objectives and strategies will guide leaders, write ISHTIAQ MAHMOOD and KULWANT SINGH

SINGAPORE is now in what may be its most severe recession of the last three decades. The eventual recovery of the world economy will facilitate Singapore's recovery. But what should Singapore firms do until this recovery arrives?

Conceptually, how firms should react is clear, though not necessarily easy to undertake. First, firms must review their objectives and strategies. This process must consider whether objectives and strategies established for moderate or high growth environments continue to be relevant during a major global economic slowdown.

It is likely that major declines in demand and substantial competitive changes, such as most industries are now experiencing, will impact what firms should aim to achieve and how they can achieve these aims. For example, it is unlikely that most financial institutions can continue with existing strategies in 2009, even though some may try. Airlines and car manufacturers are in the process of scaling back their objectives, and substantially modifying their strategies.

Strategic approach

Firms experiencing major slowdowns should establish new strategic objectives, and modify their strategies to deal with the crisis. Modified objectives and strategies will guide leaders as they balance the short- and long-term consequences of their actions.

Having revised their objectives and strategy, firms should next review the appropriateness of their structures. Structure comprises the pattern of deployment of financial, human, and other resources a firm possesses. Structure is the means by which a firm implements its strategy. Consequently, leaders who modify their objectives and strategies should review how they deploy resources to implement these strategies. Hence, strategy must guide the structure of the firm.

This intuitive description of what firms should do - which we term the strategic approach to dealing with a crisis - is based on extensive academic research of firms in many industries and countries worldwide. Unfortunately, experience suggests that such recommendations are often discarded as impractical, unrealistic, unworkable, or simply too difficult.

We believe that these objections to a strategic approach are misplaced, for two reasons. First, the strategic approach to dealing with a crisis is better than alternatives. Managers could choose to do nothing and wait out the crisis, or could simply reduce all costs by a certain percentage, an approach commonly adopted. Firms with adequate resources may find these approaches will suffice. But these firms may waste resources, miss opportunities, and underperform. Second, as we will describe below, many firms gain from adopting the strategic approach.

Our recommendation of adapting objectives, strategies, and structures in response to radically altered environments requires that firms can change substantially. Unfortunately, most organisations face difficulty changing, particularly to sudden environmental upheavals. The difficulty of changing organisations is the major difficulty of the strategic approach, and often explains organisations' failure to attempt or to adapt to change.

Organisations are complex entities, combining people of various skills and abilities, and tangible and intangible resources, to conduct operations that lead to outputs that ideally generate greater revenues than the costs incurred. Successful organisations divide their tasks into smaller activities, which they organise and efficiently perform as standard operations.

Managerial and strategic activities also benefit from routinisation, allowing leaders to strategise and manage in an organised and efficient manner. This is a fundamental strength of modern organisations. Thus, Singapore Airlines has routinised its high quality in-flight service to the extent that they are consistent and predictable, even to the extent of sometimes seeming forced and machine-like.

Effective organisations balance their ability to perform routine operations with the ability to adapt to altered environments through innovation and change. However, routinisation hinders organisational change. The reliability routinisation offers - an important advantage in stable environments - creates inertia that hinders changes.

Indeed, highly specialised and efficient organisations that hone their operations most may have the greatest difficulty changing. Organisations with well-ingrained operations or routines may find it difficult to change without a costly overhaul, and may continue operations inappropriate in new circumstances. In this sense, firm structure limits change and constrains strategy.

Leaders who resist the strategic approach to dealing with crises probably recognise the difficulty of changing their organisation, and persist with sub-optimal strategies, expecting that the crisis ends before their firms fail.

Yet, there are many examples of organisations that can adapt their objectives, strategies, and structures. Perhaps because of its unfamiliarity with losses and absence of growth, Toyota is undertaking major changes to its objectives and strategy. This has resulted in substantial structural change, including the cancellation or postponement of new manufacturing plants. Following its record, we predict that Toyota will use the slowdown to upgrade its people, products, and technology, to prepare for economic recovery.

Clear objectives

Samsung is considering increasing its R&D workforce by 10 per cent, to exploit opportunities in the crisis. A similar approach following the 1997 Asian financial crisis created the base for Samsung to enjoy a decade of industry-leading growth.

Leaders who establish clear objectives and offer a strategy that guides the achievement of these objectives will be more successful at getting their organisation to adapt. This will help firms survive the crisis and create the base for future success.

Firms should thus be cautious about cutting investments too drastically during a crisis, to avoid immediate savings that come at the expense of future growth. Firms prone to layoffs at the first signs of economic trouble discourage employees from making firm-specific investments essential for sustaining competitiveness. DBS Bank's substantial layoffs in late-2008 reduced its costs, but may have lasting consequences in reducing its pool of managerial talent, and through its impact on remaining staff.

Our research of how Singapore firms reacted to the 1997 Asian financial crisis suggests a greater focus on organisation restructuring than on such areas as financial and portfolio restructuring. Singapore's supportive tripartite labour relations approach provides firms the ability to restructure more readily, in some cases allowing them to avoid difficult decisions on redeploying other resources.

In contrast, with a major fleet enhancement for its regional operations, SIA is repeating its similar upgrade during the 1997 crisis. Though this timing may be coincidental, it is consistent with SIA's strategic approach. AirAsia's accelerating the delivery of new planes to exploit lower prices during the crisis and to expand its route network, reflects a similar approach.

Many organisations in Singapore are known for their highly efficient handling of centrally guided routine operations, and for their much weaker ability to handle exceptions or adapt to changes. It is thus even more important that Singapore firms adopt a strategic approach to the crisis.

Ishtiaq Mahmood is associate professor and Kulwant Singh is professor in the Department of Business Policy at NUS Business School, National University of Singapore. This is the last in a series of 12 articles on the global financial crisis by faculty members of the NUS Business School