5 strategies to survive a zero growth economy
In July, the Reserve Bank came out with a projection of zero economic growth for 2016. The International Monetary Fund also revised its projection for global growth in 2016 down to 3.1%, the UK to 1.7% and for South African to 0.1%.
Both the Reserve Bank and the IMF project growth in South Africa at 1.1% in 2017. The question for entrepreneurs over the next six months is how to survive a zero growth economy. Below are some pointers to keep in mind:
Watch your pricing: in tough economic times, it might seem like a good idea to give customers aggressive discounts to maintain market share. Yet, this can be a difficult strategy to reverse once conditions change. The underlying cost base of the business of the business may also not be able to support such a strategy beyond the short term, especially in an environment where inflation is not low. Rather, businesses should find ways to defend their price points and margins by offering added value.
Maintain some spending for capital expenditure and innovation that positions the company for growth when the cycle turns: As overall statistics for the economy have shown over the past quarters, capital expenditure by the private sector (alongside government) has been falling. This includes spending on equipment, machinery and buildings, and also on research and development. Though it is difficult to commit to significant capital investment and innovation during a down-turn, businesses that do not maintain and improve their operations will miss out on the early stages of the recovery.
Keep a long term view when developing strategy and planning ahead: As mentioned above, cost-cutting initiatives and capital investment decisions should be taken with a long term horizon in mind. This is not an easy thing to do given that the economy has not recovered to the buoyancy witnessed before the great recession in 2008. However, technological developments, changing consumer preferences and heightened competition mean that business decisions have to take into account not just short-term survival but also growth in the medium and the long term.
Pursue smart, value-preserving cost-cutting measures and avoid destructive or short-sighted cost-cutting: As some level of cost-cutting will be inevitable during tough economic times, it is important that it is informed by careful analysis. This is to ensure that business performance, especially relative to competitors, does not deteriorate. Cost-cutting should, as much as possible, not compromise customer service and should not be done in a way that attracts reputational harm for the business, such as through cutting down on health and safety practices.
Maintain or even expand sales in high growth markets in the rest of the Sub-Saharan Africa but monitor declining profitability: South African business subsidiaries in the rest of the continent have shown higher profitability than subsidiaries in SA or other parts of the world. However, profitability is falling across the board, including in the rest of the continent, as recent data from the International Monetary Fund has shown. In growing sales across the continent, businesses should be mindful whether their main markets are countries that are exposed to the low oil price, falling commodity prices and weakening macro-economics. Nonetheless, the growth rate in most major African economies is higher than that of South Africa, though margins may be under pressure.
About the author: Trudi Makhaya is CEO of Makhaya Advisory and a consulting economist at Mercantile Bank.