Sustaining Tech Competitive Advantage During Economic Downturn
A Guide Through the Technology Lens
According to S&P Global Market Intelligence data, in July this year, global private equity and venture capital deals experienced a drastic 36% decrease in volume, from 1,290 last year to 828 in 2023. Decline in deal flow as well as expensive capital in general has had a profound effect on market economic activity leaving businesses (including tech) facing liquidity challenges and limited options to fuel growth. As we explore strategies for sustaining a competitive advantage in such an environment, the appropriate approach can make the difference between surviving and thriving under current conditions.
The significant loss of skilled professionals and intellectual assets, compounded by financial constraints, compels businesses to adopt a different course. As we explore strategies for sustaining a competitive advantage, the appropriate approach can make the difference between survival and thriving under current conditions.
This is the first of three installments of our new article series, in which we will explore how to sustain a competitive advantage in the tech industry despite economic turbulence.
Opting for the Appropriate Strategy: a Matter of Resources
While more available resources are favorable for any business, it is a luxury for most. Making inappropriate decisions regarding strategy or keeping the wheel turning per default as previously can, in many cases, result in the end of a business. Drawing from our experience of 500+ completed projects in technological due diligence, we can identify four distinct strategies tailored to different financial situations to help business leaders steer their ships toward a safe harbor of stability.
1. Companies with No Available Resources
In situations where a company has no available resources and cost optimization isn't a viable option, the most prudent strategy may be to consider closing the business temporarily. While this is a difficult decision to make, it can prevent further financial damage and provide an opportunity to reevaluate the business's viability in the long term. During this period, business leaders are advised to carefully plan for a potential relaunch when economic conditions improve, preserving intellectual property, customer relationships, and essential assets.
2. Companies with Limited Resources: The Cost-out Strategy for Competitive Advantage
For companies with a small backup of resources, implementing a cost-out strategy should be the primary choice. This means identifying and eliminating all unnecessary costs, streamlining operations, and tightening the budget. This allows the company to focus on core business activities, ensuring that it can deliver value to customers while conserving resources for essential functions. Although new development may be limited, it’s also a luxury under these conditions. Maintaining stability and financial sustainability is the primary objective.
3. Companies with a Healthy Reserve of Resources: Partial Cost-Out & Investment in Innovation Culture
Companies with a healthy reserve of resources have the advantage of navigating difficult market conditions more effectively. While utilizing the cost-out strategy to an extent where unnecessary expenditures can be reduced, these companies should focus on increasing their marketing and positioning efforts and exploring ways of adapting their offer to the new market circumstances. As an umbrella term, we can address this as fostering an innovation culture, both on the organizational and market levels. A well-executed marketing campaign, strategic partnerships with other companies, and an appropriate intellectual property strategy can all help maintain or expand market share during an economic downturn. Additionally, if resources permit, exploring the development of a new product or service that aligns with current market demands and decreasing competition can position the company for growth when conditions improve.
4. Companies with Ample Resources: Aggressive Growth & Acquisition of Competition
Companies with ample resources are in a unique position to take advantage of an economic downturn by implementing an aggressive growth strategy. One effective approach is to identify competitors struggling in the current economic climate and acquire them. This consolidation can lead to increased market share, expanded customer base, and improved operational efficiencies through economies of scale. Additionally, investing in research and development during this period can foster innovation and position the company for long-term success.
Companies with healthy resources, as mentioned in the 3rd strategy, have enough cash reserves to sustain their operations and invest in new opportunities. This is both a unique and tricky position. While fostering an innovation culture is imperative, mismanaged finances and overspending in the wrong technology buckets can drag the business into less fortunate categories. Therefore, even though each strategy deserves its own dedicated article, this short series will center its attention on the third strategy, which is composed of two components - balancing cost optimization and fostering a holistic innovation culture.
Here in this article, we will delve into different buckets for cost optimization and how they lay the foundation for sustainable growth. In the subsequent articles of this series, our focus will shift to the second component of our strategy. Specifically, we will uncover the key elements, from both organizational and market perspectives, that contribute to fostering a culture of growth and innovation.
Partial Cost-Out: Prioritize Research and Development
Businesses with healthy resources have an advantage in effectively navigating tough market conditions. To achieve this, they should implement cost-cutting measures to reduce unnecessary expenses while emphasizing research and development (R&D) activities that optimize costs, and facilitate resource reallocation. Given its distinct challenges and opportunities, this approach holds particular significance in the technology sector.
Uncovering Operational & Technical Debt of Growth Phases
First and foremost, addressing the operational and technical debt that may have accumulated during previous growth phases is essential. This debt can manifest in various ways, such as outdated systems, inefficient processes, or legacy technologies that drain resources. Prioritizing R&D efforts to tackle these issues systematically will optimize costs and improve overall operational efficiency. This may involve modernizing infrastructure, refactoring code, or migrating to more cost-effective and scalable solutions.
Driving Process Automation as Low-Hanging Fruit
One of the key areas to focus on is automation. Many aspects of operations, from routine IT tasks to customer support, can benefit from automation. While many consider automation as a mountain project, a thorough review of internal processes can highlight “quick wins” in operational efficiency. By identifying and implementing automation opportunities, the business can reduce manual labor costs, minimize errors, and enhance the scalability of its operations. Moreover, automation can free up human resources to focus on more strategic initiatives, such as innovation and product development.
Analyzing Computing Resource Usage for Cost Savings
Another cost optimization avenue lies in reviewing computing resource usage, particularly infrastructure. With cloud computing and containerization technologies, assessing whether the company is utilizing its resources efficiently is crucial. Rightsizing instances, optimizing storage, and adopting serverless architectures where applicable can lead to substantial cost savings without compromising performance.
Aligning Architecture for Scalability and Cost-effectiveness
Lastly, assessing the architecture is paramount to setting solution optimization trends. This involves evaluating the technology stack's scalability, flexibility, and cost-effectiveness. By failing to align the architecture with industry best practices and future growth objectives, businesses struggle to adapt to changing market conditions and to scale their operations. With expert-level advisory on the technology domain, these are pitfalls that can be avoided effectively.
As we conclude this article, it's essential to remember that cost optimization, as discussed, is just one facet of our chosen strategy for companies with a healthy reserve of resources aiming to support their market position. The second pivotal component involves strategic investments into an innovation culture, mainly driven by but not limited to marketing and product development efforts.
In the forthcoming article of this series, we will delve into the second component of our strategy, shifting our focus from cost optimization to the critical organizational factors that help foster a holistic culture of growth and innovation. Stay with us as we continue mapping the path for sustaining tech competitive advantage during an economic downturn.