Restrategise to survive liquidity crunch

By IAfrica
In Zimbabwe
Aug 24th, 2014
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August 24, 2014 in Business

Situations emerge in the process of creative destruction in which many firms may have to perish that nevertheless would be able to live on vigourously and usefully if they could weather a particular storm. —Joseph Schumpeter

Phillip Chichoni

Every year wild fires destroy millions of acres of forest.

Some fires are caused by people while others occur due to natural causes, such as heat from the sun or fiery meteors hitting the ground from space.

Although forest fires cause a lot of destruction, they also play a critical role in rejuvenating vegetation. In the 1960s, scientists in the US discovered a surprising phenomenon with the giant sequoia tree. The government at that time used to have a policy of putting out all forest fires before they could spread.

In the region where the sequoia tree traditionally grew, no new species of the tree were growing. However, the tree was reproducing in areas that had been burnt by forest fire. Research then showed that fire plays a critical role in the trees’ lifecycle.

Fire takes warm air up into the tops of the tree, which dries up the corns and makes them split, allowing the seeds to pop out.

Fire also clears the undergrowth, allowing the seeds to germinate. To allow this process to continue, the authorities started creating controlled fires and allowing natural fires to burn.

Last week this newspaper carried an article in which economist Brains Muchemwa was quoted saying the liquidity crunch gripping Zimbabwe was being largely exaggerated.

He said many companies and individuals had recklessly piled up debt on their balance sheets and failed to turn around their business models. Going forward, the economist, who is also an advisor to the Zimbabwe National Chamber of Commerce and the Reserve Bank of Zimbabwe, said inefficient and imprudent companies will fail and be replaced by new and more efficient ones. This is a way of self-correction of the economy, the same way forest fires enable the sequoia tree to reproduce.

Now, as a business owner or manager you need to re-examine your business model. Tough economic times call for a lean and resource efficient business model. This starts with having a clear strategy which enables you to be much focused.

I spoke with a group of farmers recently and they were complaining about the low prices their produce was fetching in the market. It seems whenever there is an abundance of a certain crop, prices tumble at the open market such as Mbare Musika.

This is a natural economic phenomenon, known as the law of supply and demand. A business that sells commodities in the open market has no choice but to accept the prevailing market prices. Your strategy should then be related to your specific target market. When your product is a low margin commodity, you have to produce at the lowest possible cost. Cost leadership will therefore be your strength.

An alternative strategy would be differentiating your product or service in a way that your preferred buyers find unique and of value to them. By setting your business apart from the crowd, you become the leader in your specific market.

Some companies have managed to be sole suppliers by targeting niche markets and offering unique solutions that competitors find difficult to copy.

For example Supersport television channel is targeted at a niche market of sports enthusiasts who are willing to pay premium prices to watch their favorite games live. It is difficult for a new competition to start offering a similar service and reach the same audience.

So start working on developing a strategy for winning because without one, you will be setting yourself for losing. Write down your strategy and make sure it is specific enough that it can be implemented.

It should define a target market, specific products or services and how you will market and brand your business.

In a tight economy, efficiency is of outmost importance. With big pressure on margins, every business has to practise strict cost control. You need to look at all your processes from a financial point of view.

Compile budgets and measure performance. Measuring helps you see which areas have excess costs that can be reduced.

Tracking your progress against set targets or milestones enables you to make course corrections. Those businesses that do not reexamine their business models to be more strategic and efficient now will find themselves being burnt by the fire of change.

Already, many businesses have folded because their business models are obsolete. We expect more to close as the economy adjusts itself and sifts out uncompetitive businesses.

Please email me your feedback. Until next week, keep on accelerating your growth.

Phillip Chichoni is a business development consultant who works with SMEs and entrepreneurs. You may contact him by email, chichonip@smebusinesslink.com. You can also visit http://smebusinesslink.com

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