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BUSINESS CONDITIONS: Study Reveals Organisational Success in Business Conditions

 





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IQ Business (IQ), together with international leader in business best practices, The Hackett Group has released a research study that indicates a need for greater organisational agility to help South African companies sense and react to the current volatile business conditions.

Adam Craker, CEO of IQ said, “Business uncertainty and market volatility in South Africa has risen, causing major frustration to companies defining their organisational direction. Agility is the ability to sense and plan for changing market conditions combined with the ability to respond and execute those strategies, in a way that provides competitive advantage”. Through achieving agile strategies, organisations have the opportunity of optimising their back office functions resulting in a saving of up to 47% of an average company’s finance function cost, 25% of their procurement function cost, 17% of their HR function cost and 6% of their IT function cost[i][i].

However, this efficiency gain is marginal in comparison to the value added through increased effectiveness. Companies can enhance return on equity by up to 140% through having a world-class finance EPM, improve their net profitability index by up to 106% through having a world-class HR talent management function, improve their net profitability index by up to 96% through having a world-class ITBVM and enhance the procurement ROI by up to 204% through having a world-class procurement function[ii][ii].

The issue lies in understanding how to adjust a business strategy to the ‘new normal’ of uncertainty and volatility. Companies know that uncertainty in South Africa’s economic growth is being fuelled by many sources, including the US and European debt crisis and local factors, such as the public sector wage bill, complacent leadership and the nationalisation debate. Meanwhile, business conditions will also be more volatile than the historic norm. This volatility is manifested in higher levels of commodity price instability, financial market unpredictability and global competition. In the face of this uncertainty, companies need to mobilise their ability to respond to the changing economic business environment.

While the study results are multi-faceted, the findings can be grouped into the following three categories: Increased competition in emerging markets, cutting costs intel¬ligently and improving the level of operational flexibility needed to respond to the volatile and uncertain “new normal” environment.

Increased competition in emerging markets
For the foreseeable future, emerging economies will grow faster than developed economies, gaining economic power and offering attractive opportunities. The forecast regional growth for Sub Saharan Africa is over 5%[iii][iii] for the next half decade, with Europe and the US facing an almost certain double dip recession. In addition, large US organisations are sitting on a collective $1.2 trillion in cash[iv][iv], and are looking for the most profitable investment opportunities. The message for South African business is two-fold. Their positioning to expand further into the local and African markets which offer attractive growth opportunities is ideal. This is reflected in the strategies of company’s such as Standard Bank and MTN. The second message is one of warning. The competitive landscape will change, and local businesses will find themselves up against the world’s most efficient companies as large multinationals acquire South African businesses in order to enter the African market. This is clearly demonstrated by the Wal-Mart acquisition of Massmart and HSBC interest in Nedbank.

Cutting Costs Intelligently for Better Business Conditions


Profits are expected to grow, in part through even more cuts to budgets and staffing levels. What makes the “new normal” different from the previous reality is that com¬panies expect roughly half of the cuts will not be restored to pre-recession levels, even as revenues return to those same levels. Job losses in South Africa have been unprecedented with an aggregate 900 000 less jobs since 2008[v][v]. Where companies have recovered to pre-financial crisis levels of revenue, the recovery has been a jobless one. Pick n Pay recently announced the intention to retrench 3,137 employees (8.6% of its workforce)[vi][vi], to trim labour costs. Essentially organisations need to gain the ability to do more with less. Given the current global economic slowdown, and the pressure for multinationals to reduce operating costs, emerging markets offer attractive offshoring and low-cost country sourcing prospects. South African firms, with access to cheap labour have an opportunity to take advantage of the global search for cost optimisation.

Business Conditions Can Improve With The Level of Operational Flexibility


In the ‘new normal,’ both predictive and operational agility are needed to thrive. The ability to foresee threats and opportunities, combined with the ability to quickly make decisions and marshal resources to act upon those insights creates advantage. Predictive agility doesn’t require perfect predictions. What it does mean is understanding demand patterns, emerging threats/opportunities, and market variability, and preparing an operational response to each scenario[vii][vii].

A large transport infrastructure company, post the recession, was able to significantly improve their predictive and operational capabilities through implementing The Hackett Group’s database of best practices within the finance function. In the space of 18 months, the company achieved world class performance[viii][viii]. For the average organisation this would translate into a 47% decrease in finance cost.

Given the increasing level of uncertainty and volatility in the global economy, business agility is becoming an increasingly important core competency and competitive differentiator. The ability to quickly predict and shape demand, as well as the ability to equally quickly shape the predictable supply of goods, services, cash and information will command market valuation premiums and ensure long-term sustainability improving ones business conditions.

 
 
 
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