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How to react to a sharp decline in demand?

With the adjustment of the operating point ready for realignment.

How to overcome the challenges of a crisis?

hpo Insights

The current economic downturn is posing significant challenges for manycompanies. The road back to the pre-crisis level will likely take longer thanexpected. But how? Create competitive advantages by adjusting the operating point and building a high-performance organisation.

Impact of a sharp decline in demand on the operating point – how to respond?

The current downturn in demand has shown how sensitively the economic system reacts and how thin the line is between a functioning and non-functioning company. In contrast to previous crises, such as after the Lehmann crisis in 2009, the forecasts indicate only slow recovery and that demand will develop at a lower level than before the crisis.


How can companies deal with this situation? It is helpful to take a closer look at the so-called operating point of a company. This operating point indicates how many resources are needed to generate a defined output. The operating point can also be regarded as “company efficiency.” Practical experience shows that companies cannot scale arbitrarily along the so-called “efficiency gradient” – a prerequisite would be total flexibility in resource use. Companies can usually handle a change in demand of only around 10% without significant efficiency loss.


There are three typical strategies, each of which is based on differently anticipated demand developments:


  1. The scaling strategy: The downturn in demand is limited in time and number; the operating point shifts on the previous efficiency line (ƞ a) within a few per­centage points. A return to the original operating point is possible but unnecessary because the organisation also functions in the “new operating point”.

  2. The bridging strategy: The demand recovers briefly, and this period is bridged with resource reduction or short-time work. During this bridging phase, the com­pany is willing to operate at a less favorable operating point. In the graph, this corresponds to operating point b on the efficiency line ƞ b.

  3. Realignment strategy: The company expects no or a very long-term recovery in demand. The company temporarily creates its own breathing space and secures its operations by resource reduction and/or short-time work (operating point b). In contrast to the bridging strategy, the company imitates an improve­ment in efficiency through appropriate measures and transforms the company from operating point b to c and further in direction d.


Looking at the emerging far-reaching changes in the economy, such as a realignment of value chains, increased competition, and changed customer and supplier behavior, a realignment strategy currently offers the greatest opportunities for many companies. Because regardless of how quickly the demand recovers: These companies will be more sustainable and in a better position than those that simply wait and see.



"Companies can usually handle a change in demand of only around 10% without significant efficiency loss."



Written by

Stefan Zirhan, Partner

A more detailed explanation of the graphic can be found in the video In search of a new operating point (only in German).

Corona is the trigger but not the cause of the current crisis

The current economic crisis is likely to be referred to as the corona crisis in history books. However, it had been foreseeable long before the pandemic that a significant downturn would occur.


This article provides answers to three questions by the forecasting specialists at hpo forecasting:


  1. What caused the current crisis, and how was it predictable independently of COVID-19?

  2. What are the effects of the crisis on the industry?

  3. What will happen to the real economy?


What caused the current crisis, and how was it predictable independently of COVID-19?

More than a year ago – at a time when the world was still unaware of the pandemic – the following facts pointed to an imminent, sharp economic downturn:

  • Industrial and consumption cycle: The industrial cycle had already passed its peak in all major eco­nomic regions. The euphoric consumption in Europe and the USA was a typical sign indicating that the crash was not far off. In the last 50 years, there has always been a recession when retail sales and indus­trial production peaked together in the OECD, defined as the maximum deviation from long-term trend growth (see above chart)

  • Falling order volumes in the industry: Especially early-cyclical industries, such as the semiconductor industry, have recorded a sharp decline in incoming orders as of late 2018. This is an important early indicator for other, more late-cyclical industries.

  • Declining business confidence: The Business Confidence Index – also a reliable leading indicator for the industry – has been declining synchronously in the three major economic regions of Asia, Europe, and North America for several months.

  • Inverse interest curve: On 13 May 2019, the Ameri­can interest rate curve turned negative. This means that US government bonds with a ten-year maturity bore lower interest rates than those with a three-month maturity. In recent decades, this has always been a reliable indicator of an imminent recession in the USA.


We already highlighted these points more than a year ago in the Economic Commentary for the 2nd quarter of 2019. The signs showed that a crisis was imminent; all that was missing was the trigger. It is probably impossible to predict precisely this. We had not expected a pandemic either. Our “favorites” for the trigger at that time were rather political events like an escalating trade war, a hard Brexit, or a military conflict in Iran.


The lockdowns and the resulting uncertainty further intensified the downturn. This is why we regard COVID-19 as the trigger and also as the catalyst for the downturn in the real economy that would have occurred in 2020 anyway.

What are the effects of the crisis on the industry?

The long-term driver of the real economy is consumption. It slumped dramatically in Asia, Europe, and North America during the lockdown in the first half of the year. The sharpest decline was observed in China, which also took the longest to recover compared to Western countries. In our opinion, the very dynamic consumption in Europe and the USA over the summer is strongly related to compensatory effects from the lockdown and is not sustainable.


When comparing consumption in the 12 months from September 2019 to August 2020 with the same period in the previous year, it is noticeable that consumption in the USA fell by 1.4%, in Europe by 3.6%, and in China by as much as 10.8%.


The development of industrial production shows a different picture. China’s lockdown-related downturn was only short-lived, and the industry’s momentum is already back above pre-crisis levels.


The downturn in Europe and the USA was comparable, although the recovery is much slower and the industry in the West is still well below pre-crisis levels. It also appears that the recovery process as a whole has come to a halt again, and the development is moving sideways at a low level (see next graph).


Comparing the industrial production of the last 12 months until August 2020 as a whole with the values of the same period of the previous year, we obtain the following results:


  • Europe –6,2 %
  • USA –5,2 %
  • China –3,0 %


What will happen to the real economy?

The uncertainty remains high despite reports of success in the development of a vaccine against COVID-19. Unemployment is expected to increase in the coming months. Further lockdowns, such as those imposed in Europe this autumn, are also poison for the economy. The hpo model calculation continues to indicate a low level of dynamism for the coming year, although developments in individual sectors can be extremely volatile. As usual, the developments in the individual industrial sectors can vary greatly.


Written by Josua Burkart

and Benjamin Boksberger

Order intake forecasts for the industry

hpo forecasting is specialized in the preparation of individual forecasts of incoming orders for industrial companies. The forecasts of hpo forecasting are based on the Peter Meier Forecasting Model, a scientifically sound and empirically tested model. The Swiss association of mechanical and electrical engineering industries (SWISSMEM) has obtained industry forecasts from hpo for over 20 years. Large companies such as TRUMPF or BOBST but also major SMEs use company-specific order intake forecasts. Using the forecast model, the last three major crises – the dot-com bubble in 2001, the financial crisis in 2008/2009, and also the current downturn – were each predicted with a lead time of about two years.


hpo forecasting is a sister company of hpo management consulting ag.


Contact

Josua Burkart

Managing Director hpo forecasting ag

josua.burkart@hpo.ch,
+41 44 787 60 15

How to change and realign the operating point?

With a strategic enterprise design and systematic transformation.

Change old ways – or try something entirely new?

The answer is clear: Do the one and do not let the other be. What does this mean?


Since the beginning of the Corona crisis in spring 2020, it has become clear that the demand for individual products and services will probably remain reduced in the long-term. For example, this includes many travel-related matters, primarily air travel and associated services such as limousine services or travel agency services. Also affected are numerous industrial goods such as those in the automotive supplier sector. At the same time, there are products and services that are experiencing a marked increase in demand. These include, for example, disinfectants, hygiene masks, general hospital equipment, but also offers for video conferencing, homeschooling, or the entire field of research related to the cure of or vaccination against the COVID-19 virus.


Most companies cannot stop or at least significantly reduce the production or provision of existing products and services overnight and switch to a product area that will continue to enjoy great demand for the foreseeable future. Existing know-how, infrastructure (e.g., production facilities), customer and supplier relationships – all these factors are aligned with the existing product or service range. A switch to a new field of activity with high demand usually requires the development of new skills, new infrastructure, new customer and supplier relationships, and often an entirely new business model. In most cases, there is still some demand on the market for the services previously provided. But how they can still be provided profitably in the future is changing compared to the past: Demand is lower, supply chains are changing, and so are customer needs. This is why the current situation must be questioned as a matter of principle:


  • Do we still occupy the right stage of the value chain in our industry?

  • Does our value proposition meet the needs of exist­ing (and potential) customers?

  • Do we have the necessary high-performance busi­ness process model that efficiently generates our current products and services, even at reduced demand levels?

  • And does our management structure correspond to this new way of providing services?


When questioning the current situation, it is inevitable that the question of new business areas with better prospects for demand arises – in extreme cases, this even leads to a significant shift away from existing business areas. Typical questions in this context are:


  • What competencies do we have that can be applied in business areas with better growth opportunities?

  • What does this mean for our value creation system?

  • Are we set up to pursue innovations systematically?

  • And how do we transform our organisation accordingly?


All these questions can be answered systematically and efficiently with strategic enterprise design.


Written by

Oliver Kohler, Managing Partner

Strategic enterprise design to create a clear target image for the transformed organisation

The transformation of a company can only be successful if there is a clear picture of how the organisation should look and function in the future. Such a target image must answer a wide variety of questions. These can be divided into two main topics:


  1. What will our “service provision” look like, i.e., how do we satisfy known needs of (target) customers with specific products and services generated by high-performance business processes in a pro­cess-based leadership structure?


    Typical questions that need to be answered are:
    • How is the company positioned in the market?
    • Which value creation stages are being addressed?
    • Which customer needs are satisfied, and what is the corre­sponding value proposition?
    • What core competencies do we need for this?
    • What is a business process model that most efficiently generates or procures the products and services required for this value prop­osition?
    • What does this mean for the management structure - especially in larger and internationally active organisations?
    • How can end-to-end respon­sibilities and clearly defined contact points between main processes be ensured?

  2. What does our “innovation” look like, i.e., how do we systematically deal with changes in the market and with technologies, and continually adapt our “system for service provision” to new requirements?


    Typical questions that need to be answered are:
    • Which innovation areas differentiate our offer and are particularly critical for our customers?
    • How can they influence today’s value proposition or the “architec­ture of our market performance”?
    • How do we ensure that ideas for improvements and innovations can be systematically reviewed and agilely tested for their suitability for our organisation?
    • What does this mean for our management structure?


Achieving the target image through strategic enterprise design

Strategic enterprise design is a scientifically based methodology for designing companies. It is about making the right (positioning) better (end-to-end responsible processes and an appropriate organisational structure). Enterprise design is the holistic view and design of a company (or a business unit, an institution, or a public authority) according to a clear design logic – from strategic positioning with clear market performance and the derived architecture of the offered products and services to the design of responsible processes, management structure, and empowerment of the organisation and employees. The enterprise design ensures that the company is successfully positioned and that the right strategic goals are achieved.


Strategic enterprise design ensures that an enterprise can achieve its full performance (“high performance”), both at the planned “operating point” (measurable point for optimal performance) and in the event of deviations from the planned operating point, for example, caused by economic fluctuations. Strategic enterprise design enables flexibility and scalability. Business-critical elements are optimally coordinated, resulting in the highest possible level of performance – a high-performance organisation.


The steps towards a high-performance organisation

The strategic enterprise design looks at a company (or a business unit, an institution, a public authority) from a holistic perspective. It is like with a soccer team: It is no use having the best defense if the striker fails. Neither is it any use having good goalies if the defense fails with every enemy attack.


A well-coordinated team is more successful than a team with individual exceptional talents that are uncoordinated and do not have a good formation. It is just as crucial for a company’s success that its core business elements are perfectly coordinated, complement each other, and operate well together.



"Successful companies can respond quickly to changes."

Enterprise design …

  • defines the strategic positioning in which the company can operate successfully;

  • identifies the corresponding services for which customers are willing to pay;

  • reflects these services in responsible business processes and ensures a management structure with clear responsibilities;

  • assigns a small number of directly influence­able KPIs to the processes, thus ensuring the measurement of the company’s performance and control;

  • identifies strategic projects at an early stage;

  • is the basis that all employees understand and support the goals and functioning of the company;

  • ensures the goal-oriented and agile development of the organisation


... and thus leads to a long-term competitive high-performance organisation.

A company’s design through strategic enterprise design is always based on a clear standpoint:

  • Where does the company currently stand?
  • Which services are provided for which customers?
  • How great is the need for action? What is going well?
  • Which areas are expected to have the greatest optimization levers?


Based on the standpoint analysis results, the enterprise design can be focused on specific parts of a company.

For example, if the assessment of the current situation shows that the strategic direction and the positioning are clear and meaningful, the company starts directly with the customer needs and the derived value proposition structure. Strategic enterprise design often first focuses on the area of service provision and addresses the area of innovation at a later stage. The approach of strategic enterprise design is very flexible. It can be adapted to a company’s situation, the urgency of changes, and the areas with the greatest leverage. What is fundamentally relevant in this respect is that all business-critical aspects are always kept in focus. This ensures that the effect on other elements is adequately considered when designing individual elements.


The design of a company’s service provision

(see upper half of chart: The core elements of strategic enterprise design)


  1. The clarification of the positioning shows which value creation the company should generate or in which direction it should develop. For this purpose, we use the industry model, which precisely depicts all relevant market participants with the corresponding interfaces and enables complex relationships to be discussed in a boardroom-suitable presentation.

  2. The value proposition and the range of services are structured based on necessary competencies and are 100% aligned with customer needs, eliminating services that do not add value. The value proposition is developed into a value proposition structure that shows where and with which connections differen­tiating customer benefits are generated—a kind of parts list of the value proposition.
  3. End-to-end responsible processes are created to provide these partial services. These E2E processes are supplemented by the primary contact points between the processes. This leads to a macro-level business process model, which describes organi­sations’ activities and the requirement profiles for management positions. Depending on requirements, these E2E processes are then further optimized in detail at the micro-level in a further step, which describes the activities of individual persons and the use of aids. This can be used to derive requirement profiles for individual employees and specifications for ERP systems, robots, etc.

  4. Based on this model, objectively and comprehensibly develop the future-oriented organisation, including the corresponding responsibilities and role profiles. The hpo design principles require that end-to-end responsible processes are designed indivisibly in one management area. In this process, we are guided by the question: Which processes have the greatest benefit if they are combined into a common, higher-level management area? Or in other words: “It is not bosses looking for management areas, but processes looking for common bosses.”:


"There is nothing quite so useless as doing with great efficiency something that should not be done at all." Peter Drucker

The design of a company’s innovation

(See lower part of the chart: The core elements of strategic enterprise design)


  1. If the assessment shows that the current business model is no longer up-to-date or needs to be adapt­ed, the first step is to develop a sustainable model. The adjusted industry model also serves as a framework for this, allowing new models to be presented and interpreted accurately.

  2. An optimal design of innovation activities is based on the so-called innovation architecture. This, in turn, is based on the value proposition structure mentioned above (= value proposition broken down into individual elements). The innovation architecture distinguishes between five innovation areas. This differentiation is of crucial importance. It is a pre­requisite for differentiating between slow and fast, unimportant and important, in-house and third-party development, zero tolerance, and agile processes. It allows a new way of conducting innovation in companies – especially in large international enterprises.

  3. The activities in the area of innovation run parallel and are not linked in a mutual customer-supplier relationship. The only (and unique) organizing principle is the innovation architecture, which shows the dependencies of the individual activities. Innovation projects are optimally aligned with the strategy and each other in a control process to consider relevant trends, link the innovation to the strategy, and make optimal use of resources. Therefore, innovation is not controlled by a sequence of activities (“waterfall”) but by pointing out priorities and dependencies. Such an innovation model is “agile” by definition.

  4. Also, the activities in the field of innovation must be classified in the organisation chart. This can be done in different ways, depending on the initial situation: They can be grouped together centrally as a single business unit and/or assigned decentrally to the various business units based on different criteria. The hpo design criteria provide clear indications for the specific company situation.


When designing a high-performance organisation, the steps mentioned above can be supplemented as needed by a targeted change in corporate culture using “strategy-based cultural change.” Following a conceptual phase, projects accompanied by hpo are always handled in the structure of the future organisation. The future managers and their teams develop the solutions that they will deploy later on. The transition from a project organisation with control meetings to the management by the line in the regular management rhythm is seamless.


Benefits of a strategic enterprise design

  • The unique customer journey, which is strictly focused on customer needs, effectively sets a com­pany designed in this way apart from its competitors.

  • The company, division, or department gains effectiveness and efficiency with minimal complexity. The organisation is scalable and able to respond flexibly to market changes.

  • Thanks to the consistency of processes and responsibilities, the organisation can learn and develop continuously.


Written by
Oliver Kohler, Managing Partner

Question the existing – Transformation as a success factor

A successful transformation requires two things:


A clear vision of what a company should look like after a transformation and the path to achieving this vision until the vision is established or until the company “functions” as envisioned in the vision. However, these two subject areas cannot be viewed independently: How a target image “emerges” has a significant influence on whether a transformation succeeds (or fails). Yet, the target image alone is not sufficient for a successful transformation. The optimal timing of the individual transformation steps – tailored to the needs of the individual company – and meticulous implementation are crucial for the success of a corporate transformation.


To better assess the opportunities and risks of a transformation, it is necessary to consider the transformation phases. A transformation is usually initiated by a symptom that needs to be addressed (e.g., a decline in profitability), an external change (e.g., market consolidation), or some other critical situation. The goal of any transformation is to secure the future, assume social

responsibility, and ensure the company’s attractiveness.


A distinction is typically made between three phases of transformation. Each has specific characteristics:

  • Unfreeze: The existing is questioned and broken up (“unfreeze”). Employees should be involved in developing the desired target state to ensure broad support for the target image. A structured process and a transparent method support the management in this task.


  • Change: The change from the current state to the target state. This phase inevitably results in a per­formance decline. It is management’s task to use suitable methods to keep the duration and severity of the decline in performance as minimal as possible. In this phase, the skeptics speak out, and there is a risk that the company will be “caught between two stools”.

  • Stabilize: Most of the work is done, leadership qualities ensure stability in the target state and continue to develop the company.


Written by
Stefan Zirhan, Partner

What are the success factors for a company’s transformation?

Clear target image, implementation process, and communication.

A retail banking sales force is positioned marketably for the future

Practical case PostFinance


Over the past ten years, the interest margin of Swiss retail banks has dropped by over a third. This is eroding one of the most important sources of income in retail banking. Added to this are new market players from the Fintech sector, which are putting pressure on traditional banking with innovative business models. Considering these challenges, hpo supported a traditional Swiss financial services provider in reorienting its physical sales to remain marketable in the future.


Customer needs

The radical changes in the banking industry demand that retail banking, which has been severely affected by the ongoing low interest rate situation, be made more digital and efficient. The client of hpo has recognized this and decided on appropriate strategic measures to increase efficiency. The critical step was to align the quality of advice and support guided by new factors. Available customer data was to be used to a greater extent to serve customers in line with their potential. Also, further synergies were to be realized through an organizational adjustment of the sales structures. hpo was commissioned to design and accompany the comprehensive realignment of the entire sales department to ensure that the implementation of the defined individual measures result in a coherent overall picture.


Aim of the project

The strategic goal of the financial services provider was to ensure that its physical sales operations were fit for the future, considering the agreed efficiency measures. The focus of the realignment was on redesigning the service model based on customer potential, introducing a new lead-based approach, and realizing organizational synergies between the private and business customer segments. The determination of customer potential should be based primarily on appropriate customer intelligence. The primary challenge was to harmonize the customer care model, the working method, and the organization. Due to its methodical competence, hpo was commissioned to develop and implement a consistent business process model and the appropriate organizational structure for sales.

Approach

After an initial context analysis, the agreed efficiency improvement measures were refined and coordinated to create a uniform overall picture. The next step was to develop a target business process model – together with the internal project team – as an overall objective. Based on the designed support and business process model, the requirement profiles and roles of the various sales units within the organisation could be derived and the new, more efficient working methods defined. Thematic work packages were defined based on the target picture and transferred to an implementation road map. This ensured that the cost saving targets were achieved on schedule. After the design of the target picture and the rough implementation planning, the implementation project was set up and executed with the support of hpo. The main components of the implementation were on the one side the organizational adjustments, which had a strong impact on the employee level and on the other side the adaptation of the IT tools, which had to be adapted to the new support model and the new working methods.


Results

The transition to the new support model was successfully completed, software adaptations were rolled out, employees were prepared for the new working methods, and the new organization was introduced on the agreed date. A key success factor for this was that the numerous topics to be addressed were coordinated from the outset of the project, thanks to the initial integration of the efficiency enhancement measures into a coherent overall picture for sales. This enabled inconsistencies and coordination needs to be identified at an early stage and ensured that the measures were implemented successfully and on schedule. With hpo’s help, the retail sales department was adapted to the changed market conditions and thus created the basis for further digitalization.


Written by
Oliver Kohler, Managing Partner

“PostFinance is undergoing a fundamental change: Society – and with it banking – is becoming increasingly digital, which fundamentally changes the needs and behavior of customers. In close cooperation with hpo, we have succeeded in realigning our retail sales activities in response to this change and making them more efficient. Thanks to its methodological competence, hpo has made a major contribution to forming a coherent overall picture from various efficiency enhancement measures and thus to achieving the ambitious project goals. hpo’s support in the context of co-project management ranged from conception to implementation, which went smoothly and according to plan. hpo was always in control of the complexity of the overall project. Especially valuable was hpo’s ability to closely coordinate the IT, HR, and communication departments.”
Sylvie Meyer
former Head of Retail
PostFinance
Portrait Sylvie Meyer

Your partner for strategy and enterprise design

Who is hpo?


hpo makes companies more successful and more innovative. The strategy consultancy for enterprise design boasts more than 20 years of experience in the creation of strategies and organisations spanning many different industries. The management consultants at hpo specialise in the meticulous development of strategies, processes, business models, innovation and culture, and in accompanying the transformation.


The hpo design approach enables companies to better cope with strategic and organisational challenges and to realise substantial competitive advantages. The basis of the industry-spanning design approach is an academically grounded methodology with which high performance organisations are shaped and which is continually further developed with the latest findings from research and practice.


The management consultants at hpo come from a commercial or technology background and stand out with their high level of analytical and emotional intelligence. They are passionate in their dedication to the client’s concerns and enjoy working in a team.


hpo – we design organisations

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