Developing A Sustainable Business Strategy for A Dynamic Business Environment
Ever since the pandemic, the business environment has gone through various disruptions, such as high interest rates, inflation, and labor availability. Some of the factors that led to these disruptions include a recessive economy and geopolitical tension. Based on our expertise, we believe that such factors severely impact a business's cash flow margins and profitability. Therefore, to tackle such threats, businesses require a sustainable strategy.
In fact, 2020 was one of the most damaging years for the retail industry in the US, as over 35 retail companies filed for bankruptcy.(1) Although the effects of these factors have dimmed down, the business environment hasn’t fully recovered. In addition to the retail industry, businesses from the other sector had to file for bankruptcy in 2020 as well. Some of the large enterprises that filed for various types of bankruptcy include NPC International Inc, Hertz, and J.C. Penny.
NPC International operates over 1,200 PizzaHut and more than 385 Wendy’s franchises and filed for bankruptcy in July 2020. J.C. Penny, and it had to file for bankruptcy in May 2020. Other large companies such as Hertz also had to file for bankruptcy in mid-2020 due to the effects of the crises in the business environment.
To maintain profitability and ensure business continuity, organizational leaders need to consider various factors that can cause crises in the business environment.
Factors That Cause Crisis in the Business Environment
The reasons for bankruptcy vary from one business to another but are often dictated by crises in the business environment. Some of the underlying factors that contribute to such crises include:
Inflation
All businesses, irrespective of their industry, have to bear the impact of inflation. However, those that offer non-essential products are the first to experience these impacts. As a result of the pandemic and the geopolitical crisis, global inflation rate for the consumer price index has been on a consistent rise and reached 9.22% (2) in March 2022.
During times of inflation, the purchasing power of money decreases for both businesses and customers. Where customers have to pay more for products and services, businesses incur additional charges to procure raw materials required for providing these products and services. Businesses do have the power to raise prices and pass the burden of inflation to the customers. However, we believe that this practice can lead to a stagnated business environment in severe cases of inflation.
Interest Rates
Interest rates that are charged on both personal and commercial loans also serve as a crisis to the business environment. High-interest rate is a direct descendant of high inflation. Inflation decreases the value of money, resulting in borrowers seeking additional compensation due to the decreased purchasing power. Central banks increasing interest rates (3) have a trickle-down effect on a business’s ability to take loans and on consumer spending.
Over the past few years, interest rates (4) have increased all over the world. Businesses often use loans to scale their operations and have outstanding debt. When interest rates increase, businesses have to pay more on debt. Various debt restructuring (5) and refinancing (6) options can allow businesses to prolong these payments. However, in our experience, they make it difficult for businesses to maintain sustainable profitability. In addition to this, customers who have debt also reallocate their spending to higher debt payments as opposed to purchasing products or services.
Supply Chain Issues
As a result of the seemingly never ending Covid-19 pandemic and the ongoing Russia-Ukraine conflict, companies worldwide are experiencing supply chain disruptions that hinder business operations. In fact, recent statistics (7) have shown that the number of disrupted supply chains all over the world increased to around 11,000. Such drastic disruptions in the supply chain can lead to a shortage of required goods and raw materials.
Supply chain disruptions resulting from geopolitical tensions have also caused the annual average crude oil prices (8) to reach an unprecedented amount of $104.01. This causes the prices of available goods and raw materials to increase. In our experience, these factors, in combination, are a severe crisis for the business environment. They make it difficult for businesses to procure required materials, result in high cost of freight operations, and influence the customers' buying behavior.
Labor Availability
Labor availability refers to the number of labor that’s available to perform required jobs. The availability of labor helps businesses employ capable workers and allows them to ensure operational efficiency. However, the lack of labor availability can prove to be troublesome for the business environment.
This can occur due to travel restrictions imposed as a result of geopolitical conflicts. In such cases, some businesses are unable to find qualified workers and can not meet market demands. Recent statistics (9) have shown that the global unemployment rate declined to 6.2% in 2021. Apart from 2020, this is the highest unemployment rate since 2002.
Geopolitics
Among all the others, geopolitics is a factor that has major trickle-down effects on the business environment. Tensions that arise from geopolitics can cause uncertainty among decision-makers. Such uncertainty can lead to immediate business decisions, such as a production halt implemented due to increasing raw materials prices.
Geopolitical tensions also contribute to an increase in inflation, interest rates, and the costs of raw materials. In addition to this, these tensions also dictate the global supply chain procedure and the availability of labor as well. Such effects are hostile to the business environment and limit an organization's ability to continue operations in a sustainable manner.
Recession
Although a recession generally lasts for a few financial quarters, it can have long-lasting effects. During a recession, unemployment rates are high, consumer spending decreases, and businesses often cut back on production.
As a result of these effects, businesses may find it difficult to maintain profitability due to the increased costs and low customer spending. In addition, a recessive economy makes it difficult for businesses to secure loans at feasible interest rates. These factors often force organizations to reduce manufacturing costs to maintain business continuity.
Understanding A Dynamic Business Environment
When developing a strategy to counter crisis contributing factors, understanding a dynamic business environment is critically important. A dynamic business environment is an environment that is rapidly changing and requires businesses to tailor their operations accordingly. Such changes occur due to various internal and external factors.
Some of these internal factors include:
● Change in production.
● Change in business direction.
● Change in business objectives.
External factors that affect the business environment include:
● Increase or decrease in customers’ income
● Geopolitics tensions
● Economic crisis
Developing A Sustainable Business Strategy
A business strategy should take into consideration various economic and business environment factors that can help organizations tailor their policies and practices to gain long-term benefits. When developing a sustainable strategy, you should consider the following factors:
Market Existence
When looking to see if a market exists, businesses should examine its size and ensure that the company can serve the market. Businesses must calculate their potential profitability and see how industry events impact market dynamics.
Based on our expert findings, we believe that market structure greatly impacts the profitability of a business. Therefore, businesses also need to assess the structure of the markets that exist. Market structures can be categorized into four types:
● Pure Competition - This market consists of multiple small businesses that compete against each other to gain maximum market share. Due to such competition, no individual organization has the ability to influence market prices, and production capabilities are determined by the market supply and demand. In addition, these markets do not have any significant entry or exit barriers.
● Monopolistic Competition - In a monopolistic competition market, firms offer products or services that are similar to each other but have a unique selling proposition. Organizations in such a market use various pricing mechanisms and marketing strategies to create differentiation among products. However, due to the number of competitors, businesses often find it hard to achieve economies of scale.
● Oligopoly - An oligopoly consists of a few major organizations that dominate the industry and limit competition. Organizations in an oligopoly often collaborate with each other to gain collective market power resulting in increased prices and profitability. Due to such collaboration and competition, new businesses often face a significant barrier to entry.
● Pure Monopoly - A pure monopoly is when a single organization controls the entire market. Such markets do not have any product alternatives, and a monopolist can often limit production to increase prices and profitability.
Viable and Defensible Strategy
Viable strategies are essential in a dynamic business environment as they ensure long-term sustainability. A viable strategy encompasses organizational goals and objectives and provides a specific time horizon with regard to their achievement.
In addition to the viability, businesses must ensure that their strategies are defensible. Such strategies help businesses that are in a market-leading position protect their market share from competitors. Some of the best defense strategies are:
● Position Defense - Such a strategy allows companies to keep a firm hold on their brand perception and focuses on building customer awareness and loyalty.
● Flanking Defense - A flanking strategy allows businesses to identify and strengthen their own weak points, including various regions and market segments that are underperforming.
● Counter-Offensive Strategy - This strategy allows market-leading businesses to retaliate against threats posed by smaller competitors. It often encompasses an increase in advertising or promotions, price-cutting, and the launch of innovative products.
● Contraction Defense Strategy - This strategy allows organizations to strategically withdraw from market segments that are underperforming and emphasize gaining market share in newer markets or segments.
Strong Organizational Control
Organizational control is a key management function encompassing any process to align employees and stakeholders to the company’s objectives. Businesses need to make sure that they can control measurable factors such as the number of sales and customers.
In addition, businesses also need to implement clan control through social norms and organizational policies that are used to meet business objectives. Implementing organization control can help tailor time and resource allocation in a dynamic business environment.
Good Profit and Loss
Dynamic environments have constantly changing interest rates. Companies need to keep business debt at a feasible amount and make sure that debt servicing can be managed. We believe that using an optimal capital structure can help businesses find the right balance between debt and equity financing and can maximize their market value.
Businesses also need to focus on their working capital management. This allows them to maintain profitability, resulting in the effective allocation of capital required for organizational operations. It can also help them maintain profit and loss margins which can strengthen the company’s liquidity.
No Crisis On The Horizon
In a dynamic business environment, unpredictable crises can occur at any given moment. Such crises threaten a company's stability and can be caused by internal or external factors. However, there are various crisis identification measures that can help identify a threat indicator.
Our expert findings show that having an understanding of the elements of an emerging crisis can help businesses identify them before any significant damage. Some of these elements of a crisis include its potential to cause immediate damage and its unexpected nature that pressurizes businesses to make timely decisions
Line of Business Report
Before making any material commitments, a deep understanding of the business environment is required when dealing with unavoidable crises. In cases of a severe crisis, a full pivot that fundamentally changes the direction of business may be required. A line of business report that encompasses the factors mentioned below can help businesses come out on the other side better than before.
Determining Customer Needs
To understand evolving customer needs in times of crisis, businesses need to gain customer context. Gaining customer context - sensing purchasing intent - is important because it helps shape the directional change required by a full pivot.
It can help organizations understand what the customers want, resulting in strategies and operations developed on a customer-need-based approach. This requires using data-driven insights, such as customer needs and pain points, that help understand the customers’ position. These insights can then be used to tailor business offerings to customers at the time of purchase.
Product and Services
A line of business report also needs to include a thorough assessment of the business's products or services. The assessment should include the features of the offerings and why they are important to the customer.
There are various different theoretical models that businesses can use to analyze products or services. Some of the models we’ve found that serve as a feasible option for such analysis include:
● PESTEL Analysis - A PESTEL analysis consists of a highly effective strategic framework that is used to analyze the business environment. It encompasses various political, economic, social, technological, environmental, and legal factors.
● SWOT Analysis - A SWOT analysis is the most commonly used product analysis framework and allows businesses to analyze their strengths, weaknesses, opportunities, and threats.
● Value Chain Analysis - This analysis encompasses logistics operations that are performed to generate value for the customers. Using such an analysis can help businesses identify areas of opportunity and improvements in their supply chain operations.
● Competitor Product Analysis - This analysis requires businesses to examine what the competitor offers and can help them identify how they meet customers' needs. Data for such an analysis can be collected from customer reviews, industry reports, and competitors’ product packaging.
Competitive Analysis
Conducting a competitive analysis involves researching major competitors in the market. This allows businesses to identify their biggest competitors and can help them gain insights into marketing tactics.
Such an analysis can help businesses identify their own product’s unique value proposition and can help determine gaps in the competitors' practices. It will also help a business identify its direct, indirect, and substitute competitors. In addition to being used for marketing strategies, such insight also helps businesses eliminate gaps in hiring.
Technical Outlook
A technical outlook encompasses the feasibility of your products and services with regard to customer needs. Assessing the feasibility requires businesses to conduct primary research with potential customers.
This will allow the business to gain actionable insights regarding the potential desirability and demand of the product. Some of the many ways to conduct this analysis include concept testing, intention survey, in-depth interviews, and focus groups.
Market Outlook
Conducting a market outlook can help businesses assess the future trends and characteristics of their target market and can help improve strategic sustainability. We’ve found that a market outlook can help businesses forecast important developments within the market.
Insights gathered from these forecasts can be used to tailor sales and investment decisions. In addition, it can help businesses identify areas of opportunity and risk within a market and can help predict the overall market movements.
Product Profit and Loss Review
A product profit and loss review can help businesses assess the financials of a product over a specified period of time. It encompasses various factors such as revenue, cost, and expenses and has a duration of a quarter or an entire fiscal year.
This review can help gain insights into a company’s ability to generate profits from a particular offering. Such an analysis can be used to determine a business's long-term profitability and can also increase strategic sustainability.
In addition, businesses can also use the Boston Consulting Group (BCG) growth-share matrix to help determine which products a company should focus on, and which to retire. A BCG matrix allows businesses to use a framework for the evaluation of each product. It can help categorize their products according to four categories that include:
● Star - Products within this category have the best market share and great potential for growth.
● Cash Cows - Products in this category are market leaders. Although these products have a great market share, their potential for growth is low.
● Question Mark - These products have a low market share, but exhibit great potential for growth.
● Dogs - Such products do not have a substantial market share and even lack the potential for growth.
Full Year Outlook
A full-year outlook encompasses the product demand and financials throughout an entire year. The data contained in a full-year outlook is less detailed when compared to monthly or quarterly outlooks.
However, it provides insight into fluctuations in demand and product financials over a greater period of time. Based on our expertise, we believe that conducting such an analysis can help businesses forecast their financial and logistical needs. Such forecasts allow businesses to tailor their strategies and adapt to the changing dynamics of the global market.
Conclusion
There are various factors that can cause crises in a dynamic business environment. These factors are often seen as direct descendants of geopolitical events and economic recession. To deal with these factors, organizations need to have a deep understanding of the business environment.
Such an understanding will allow you to gain actionable insights into market dynamics and customer behaviors. You can then use these insights to develop sustainable business strategies that ensure the directional changes required for a material pivot during a crisis. This will allow you to adapt business practices that are suitable for maintaining profitability in a dynamic environment.
Sources:
35 retail companies filed for bankruptcy - cbninsights.com
Global Inflation Rate 2022 - statista.com
Interest Rates - Country-list - tradingeconomics.com
Debt Restructuring vs Debt Financing - investopedia.com
Debt Restructuring vs Debt Financing - investopedia.com
Supply Chain Disruptions Worldwide - statista.com
OPEC crude oil price statistics annually 1960-2022 - statista.com
Global Unemployment Rate 2021 - data.worldbank.org