Management Memos

Making Measurably More For You Since 1985

August 2016
 

Is It Time To Rethink Your Business?

It’s tough to ‘do strategy’, when there’s day-to-day business to be done. Even more difficult to do it while things seem to be going OK. The question is, “How sure can we be that things will stay OK - or get even better?” Particularly when 'OK' doesn't really cut it, does it?


You Really Can’t Ignore this Anymore

Retail Sales Slow Australia’s economy is a bit of a puzzle - so most of us ignore it, and just get on with business. There are a few other things happening too, on a world-wide scale. These might affect us as well, but they’re so big, and lumbering, and remote, it's best to ignore them too. We’ll just get on with the things in hand - the things that really matter. Whoa! Some of this is closer than you think!

“Retail spending growth is at its slowest annual pace in three years,” - says the Australian Bureau of Statistics, with a June rise of just 0.1% against a market expectation of 0.3%. When growth is just one third of what was expected - and that was not optimistic in the first place - there has to be something wrong. That is here, right now, in Australia!

Good Conditions - Bad Outcome

What makes this astonishing is that there have been interest rate cuts to stimulate spending, persistently low and reducing unemployment, and rising house prices to give a spending boost through the “wealth effect”.Discounts Keep Growth LowGlobal factors are entering our local economy through internet sales that are not captured, but more significantly, through continued oversupply on a world scale bringing constant discounting to boost volume.

Here’s the kicker. Retail sales volume is increasing - but dollar sales continue in the slump. If you think that is likely to change any time soon, it might be time for a reality check!

Some Inconvenient Truths

  1. Australia might look set for a recession. Who knows if this is right? But there is a strong body of opinion that with our foreign debt rising, and our Terms of Trade worsening, there is no ‘wriggle room’ left for government intervention in the economy. At the same time, Australians have an historically high saving ratio, yet still have lower net worth than eight years ago, before the GFC. With the cash rate so low and still not nudging up spending, there seems to be no salvation from the pincer movement of higher national interest payments and lower national income. That is code for the “R” word!
  2. Brexit Happened.Brexit There is a long way to go for this to be played out in full, but already RyanAir has relocated flight capacity to Europe and away from Britain, with a loss of jobs and value added to the UK economy. The Bank of England has reduced interest rates for the first time in seven years!

    As “The Economist” noted:

    “The Bank of England had not changed base rates in seven years, but when it finally moved, it did so with a bang. In response to the low growth it expects in the wake of Brexit, it cut rates by a quarter point, to 0.25%, expanded its quantitative easing scheme and introduced a new funding scheme for banks. The move came on August 4th—three prime ministers, two disappointing European football championships and one referendum since the last wiggle in the rate.”

    Imagine what happens when the world’s fifth largest economy, and Australia’s seventh largest trading partner, goes into recession. A strong push towards recession for Australia is the answer. There's that “R” word again.

  3. The US Presidential Elections.US ElectionsUS Elections
    Every responsible economic commentary points to the protectionist positions being pushed by Trump and forced on Clinton will lead to a deep recession in the USA. That magnifies the effects of Brexit many times over, and adds more weight to the fear of a recession.

 

How Can You Beat the Odds?

So, in these circumstances, what strategy might work to make your business actually get stronger?

With prices and margins remaining low, there is only one way forward - improved productivity. For a retailer, that is a pretty big ask! For just about any small business, it is a tough call.

That means it’s time to ‘think outside the square’, but more significantly, it really means it’s time to think the unthinkable. For instance,

  • what trading hours should you really be open?
  • What services do I package with the goods I sell, to improve the overall margin?
  • How do I reduce selling expenses, for instance by increasing my use of and reliance on the internet?
  • Are there more effective uses for my customer database?

For your business there are many more questions like these.

This is a good time to write out this list, then add your own questions, and think through each point.

But do look at these things as if you were outside your own business, please!


 

It Pays To Get Help - Even If You Don't Need it

The process of looking at your own business can be pretty difficult. It is even more difficult if you have got where you are with sheer hard work and good instincts.

At times like these you need a well structured framework so you can systematically go through both the issues and the options in front of you. When you do this systematically, in a structured way, you will be amazed at the way in which future possibilities unfold before your very eyes.

That’s when you need strong discipline. Without it, you’ll dismiss some really important ideas as “too hard”, or “too impractical” - when really it's these very ideas that hold the key to a successful future.

It doesn’t cost a cent to contact McNicol Williams and chat about the things that concern you. The first consultation is free anyway, and it may just lead to the inspiration you’ve been looking for, all along.


 

NAB And Business Innovation

Principal Consultant

National Australia Bank publishes a very useful series of business analysis and insight reports. The latest of these reports (July 2016) covers a subject closely related to this month’s ‘Management Memos’.

This latest report analyses the ways in which businesses of all sizes approach innovation. See it in full here.
 
In setting the scene, the report's authors write “The NAB Labs Business Innovation Index is based on what a business does “differently”, “more quickly”, and “more cost efficiently” – behaviours that are at the very heart of innovation. It measures innovation across all business sizes and sectors.”

Note these three factors: ‘differently’, ‘more quickly’, and ‘more cost efficiently’. Therein hangs the secret of competing more profitably in a market dogged by declining margins.

You see, if your business is “doing OK”, it really isn’t “OK” at all. You need to be strongly profitable to generate funds for growth and renewal. We had a client once who did think he was doing OK - because each year he was able to report a profit and keep his tax liability quite low. A kind of “win-win” it might appear.

In fact, he would not be convinced that he was not making enough to replace his capital assets. After a few years, he found it almost impossible to operate at all. Years of appearing to do ‘OK’ had hidden his need to generate the money he needed for business renewal.

Don’t fall into the trap of accepting today’s ‘OK’ profit, in the expectation that “things will get back to normal soon”.

This is the new normal, and innovation as described by NAB, is the ONLY way ahead!

 

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Any advice, information or comment contained in this document is general in nature, and should not be relied on as the basis for any specific commercial, business, employment, or financial decision. Specific advice should always be obtained for each individual circumstance. Accordingly any advice, information or comment contained herein is for general guidance only.

 

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