Surviving the Market Recovery
Part I – Reading the Warning Signs
Have you heard the expression, “snatching defeat from the jaws of victory?” Well, many tech companies – just like yours – are about to become intimately familiar with it. Sure, we seem to be well on our way to recovery, spelling the end of the longest famine in tech history. But does that necessarily mean that everyone recovers and it’s all smooth sailing from here? There are several reasons why the hard times are not yet over for hundreds of high-tech companies.
Survival Of The Fittest
Perhaps Darwin didn’t have the internet boom-turned-bust in mind, but the market over the past few years has become a Petri dish for the over-funded tech industry. And with few customer designs to feed on, the weakest companies have certainly died off. But many other companies have adapted by downsizing and reducing spending – essentially tightening their belts. While this adaptation was necessary, it may not have been sufficient for survival. You see, hundreds of companies have taken this approach and anxiously await the return of their customers’ old spending habits. But that’s not exactly the way a recovery works.
Sure, at some point corporate IT and consumer spending will begin to show sustained, upward momentum, and companies will begin new development programs again. But this will take time, as the demand for new products and services trickles down through the food chain. It will also take time for increases in consumer and IT demand to tax our still-overbuilt internet and telecom infrastructure. As a result, the recovery will come later-than-expected to many tech companies.
As if that isn’t enough, there’s an even more daunting factor to consider. Now that the weakest companies are gone, competition will be even stiffer among the survivors. And many companies have – in addition to downsizing – used the downturn as an opportunity to reposition their corporate and product strategies to improve their competitiveness. So there’s a double threat lurking in the oasis: the deceptive end of the famine, as well as stronger competitors for the food.
Remember the good old days when we used to say that one in ten startups make it? Well, we’ve returned to those days, and the situation is not much better for more established companies. When all is said and done, the true survivors will be those companies that have fully adapted to a leaner environment and taken the following steps to improve their positioning for the recovery:
- Reduce capital and operational expenses to conservative, pre-bubble levels; stretch development timelines to coincide with realistic customer schedules.
- Analyze their business and consider cutting product lines that lack leadership potential and are therefore not likely to contribute to sustainable growth and profitability over a reasonable time horizon.
- Assess and reposition corporate and product-line strategies to ensure a compelling value proposition to facilitate rapid customer acceptance with the potential for sustainable market leadership.
Reading the Warning Signs
In case you’re not sure if your company has met these conditions or not, here’s a test you can take to determine how fit-for-survival your company is. While these warning signs are somewhat endemic of poor corporate health in general, they are more specific to a market recovery scenario than you may realize. This is because a company that can sustain one or more of these warning signs during a healthy market environment will not survive a recovery scenario for the reasons I’ve already outlined. Take the test and remember, you have to be honest. Like all diagnostic processes, it’s painful at first, but pays off in the end.
Financial warning signs
- Sustained gross margin decline
- Sustained revenue decline
- Sustained losses
Product development warning signs
- Slipping schedules and missed milestones
- Changing design targets and spec’s
- Changing target market requirements or MRD
Sales warning signs
- Average selling price (ASP) decline
- Design losses in target markets
- Loss of strategic customers to top competitors
If your company is experiencing one or two of these warning signs, then you may be in for a slow, painful decline while your competitors flourish. If your company exhibits three or more of the warning signs, then you are definitely on the “endangered species” list and should take immediate action to ensure your company’s survival. We’ll explore some of the root causes of the warning signs, and what to do about them, in Surviving the Market Recovery, Part II – Adapting to the New Environment, in the next issue of Invisor Insights. |
