Robert Hannah: To meet today's challenges, firms must change or fail

LIKE every recession, this one will sort out the winners from the losers. The former will be those who seize the opportunities of the upheaval rather than simply survive the dangers.

But too many companies are suffering from a streak of complacency when it comes to the fundamental ways they do business. Often, managers are unable to engineer change.

Who is ahead of the curve and who have their heads in the sand? A survey of 465 executives found little more than one third of firms in the UK and Ireland are pursuing, or plan to pursue, changes over the next 18 months to position themselves for renewed market growth to meet competition when conditions improve.

While 86 per cent of executives claim their firms have adjusted their business models significantly, cost structure has been the dominant focus of change. But by concentrating on reducing their costs, they may be missing opportunities to use business model innovation to address future risks.

The problem is that few are looking at developing strategies to deal with the pressures they suspect are coming.

Nine out of ten executives believe that their company's business model is set up to let them succeed over the next year and a half. This strain of complacency is worrying.

Whatever the immediate benefit of belt-tightening, cuts that are unaccompanied by efficiency gains do little to address perhaps the greatest long-term danger of any recession – enhanced competition.

A significant number believe it will fragment, which, in some cases, will result in less powerful rivals. Recessions, however, are rarely that kind to existing companies.

More likely is the danger from competitors consolidating into stronger firms as well as new entrants from abroad. Competition from adjacent sectors in particular can yield nasty surprises.

The iPod appeared amid a downturn nearly a decade ago and the music and radio industries are still adjusting. My-wardrobe.com has been allowed to stake out a lucrative growth market as high street fashion stores delay their website investment in order to keep cash. Virgin Money has made no secret of wanting to enter high street banking and Tesco Bank is making inroads.

Those companies with their heads in the sand see little need to change or adapt their business models or the assumptions driving them in the future. As a rule, these are smaller firms, mostly privately owned with revenues under 50 million. Companies that are ahead of the curve understand change is the only constant and are continually adapting their business models accordingly. They are forward-thinking and focused on improving both the top and bottom line in order to enhance margins. They are often younger businesses with revenues under 250m.

More than ever, business leaders need to focus on the reasons why their customers choose them over their competitors and to ensure that they maintain the differentiators they have developed. They must also recognise the strategic direction of their competitors and ensure they retain a competitive edge.

Yet one of the two top barriers to business model change cited by survey participants is the ability of their managers to engineer and lead change.

Business leaders need to combine flexibility of strategic thinking with a pragmatic respect for the realities of trading cash flows in order to thrive.

While they have been able to prosper during the good times with a "business as usual" approach, they will need more meaningful change if they are to fully prepare themselves for life after recession.

Robert Hannah is managing partner of Grant Thornton Scotland, which is hosting a debate on new business models on 11 June at Glasgow's Radisson SAS Hotel.