Macro-economic headwinds and business strategy

by Michael Ikpoki | June 8th, 2016

Apple released its results for 2016 Q1 results confirming sharp drop in iPhone sales, revenue down 12.8% and profits down 22.5% on year-on-year basis. This is the company’s first revenue decline in 13 years. Reasons: ongoing macro-economic headwinds in much of the World including currency weaknesses in majority of its International markets. Similarly in sub-Saharan Africa, we have seen companies especially in the FMCG space attributing their underperformance mainly to “macro-economic” headwinds. This is on account of the generally challenging economic conditions in the sub-region mainly attributable to a drop in commodity prices (mainly Oil). IMF has reported that the economies in Sub-Saharan Africa grew by 3.5% in 2015 (lowest in some 15 years) and is expected to contract further to 3% in 2016. This is what some are now calling the “new normal” unless deliberate integrated economic decisions are taken by responsible governments in the Region.

Not so long ago, it was an unspeakable sin for companies to suggest that macro-economic factors have impacted the business performance. It sounded like a lame and uncreative excuse by lazy CEOs. Businesses were meant to grow regardless of any externalities. When the World’s largest phone maker and most innovative brand starts using this kind of language which was hitherto an anathema, so to speak, it means we should pay more attention.

The problem is that for most companies, business strategy is driven by traditional metrics and thinking, comparing financials year-on-year without rigorously understanding the underlying change drivers over this period. Generally, companies plan to acquire customers with propositions around well-manicured brands selling products which are sold through effective distribution channels and other support systems all driven by, hopefully, committed staff across the company. The plan is to achieve all of this within reasonable costs (benchmarked against the previous year) to deliver good margins for the business. With the economy now playing a key role in our lives, the question is to what extent has the economy been taken into account in articulating a winning strategy with attendant business plans and if not, how credible will those plans be? Even more critical, is whether businesses can interpret economic trends/patterns to understand how they specifically affect or can influence their respective sectors, consumer behavior and by extension their individual businesses now and into the future. What is the implication of certain policy decisions (or possible decisions) or other trends on consumer behavior and spend now and into the future? What other factors, apparently unconnected, will coalesce to impact consumer behavior? What threats or opportunities do all these portend for the business and how can the company be organized to take advantage of the opportunities and avert the risks? How quickly can the company respond to these? So many questions…

All of these throw up the new reality that business models will have to be rigorously interrogated against more variables than traditional metrics like traditional competitor market share indicators. Business planning tools will have to be more rigorous. Consumer purchasing power and behavior is driven by the economy. Therefore, understanding the economy must be at the very heart of strategy, business planning and tactical plans. The economy cannot be an afterthought or side consideration. The new normal challenges our traditional business management paradigms more than ever before.

I believe it was Albert Einstein that said “insanity is doing the same thing over and over again and expecting a different result”. How prepared are businesses for these implications of the “new normal”?