Recessions seem to be an inevitable part of the business cycle, with a downturn happening every five years on average since World War II. Despite their regularity, recessions are not an easy circumstance for business leaders to bear.
Decisions made during economic downturns can have life-or-death impacts on a business, closing the doors permanently or allowing a business to flourish amid chaos. As we enter the latest recession brought on by the COVID-19 global pandemic, what are the strategic decisions business leaders should — or should not — be making?
New research from Michigan State University, the University of Melbourne and Monash University answers this question, providing insights into different strategic decisions made during recessions and how they can impact business performance for the manufacturing sector.
“Our study considered the context of a recession presented by the financial meltdown circa 2008–2012,” Anand Nair, professor of operations and supply chain management and lead researcher, said. “This recession showed mixed outcomes in terms of how plants dealt with uncertainty — some plants closed while others were able to perform strongly. We wanted to understand these dynamics and help plants respond better to uncertainties.”
The research paper, “Withstanding the Economic Recession: Examining the Efficacy of Manufacturing Strategy Alignment and Process Integration,” was published in the August issue of the International Journal of Production Economics. Prakash J. Singh, professor of management at the University of Melbourne, Ananya Bhattacharya, scholarly teaching fellow of management at Monash University, and Sukrit Pal, Broad operations and sourcing management doctoral student, coauthored the paper alongside Nair.
The team examined performance data from the most recent recessionary period for 514 manufacturers from 21 industries, spanning 14 countries. Specifically, the researchers compared decisions tied to manufacturing strategy alignment versus those tied to process integration and how they influence cost, quality, delivery and flexibility performances.
Alignment vs. integration
Strategic alignment and process integration are methods that can ultimately lead businesses to have synergies, attain competitive capabilities and mobilize resources quickly towards unified goals. Although they are similar and can even impact one another, alignment and integration stand alone in terms of their scope and implications, leading the researchers to some mixed results.
They found that when firms pursue alignment during a recession — by syncing corporate and manufacturing strategies — quality is improved in the short term, but delivery, flexibility and cost are not. Alignment isn’t easily attained during resource-restricted times of an economic downturn, and there can be operational roadblocks to overcome, too.
“The manufacturing function needs to have adequate say in corporate policy, which very often is not the case,” Nair said. “This is mainly due to a perception in many organizations that manufacturing is much more of a tactical function (as compared to, say, finance and marketing). The tactical view limits clarity on strategic objectives to be set for manufacturing, and often manufacturing takes place without an assessment of existing capabilities of an organization.
“For organizations that do end up having a clear manufacturing strategy formation process, oftentimes this is not communicated to all staff members and/or is not frequently reviewed and revised. Most of these impediments relate to the culture within an organization.”
On the flip side, when firms pursued process integration during a recession — by coordinating and sharing information between customers and suppliers — quality, delivery and flexibility are improved, but they come at a high cost.
“Likewise, to attain process integration within supply chains, firms need to have well-defined planning/scheduling processes and methods,” Nair said. “Information flow within the manufacturing plan needs to be automated, which may not be the case either due to resource constraints or a lack of clear automation strategy within an organization.”
Syncing processes with global suppliers and customers, internally and externally, can be a tricky task to accomplish. Nair added, “Cross-border integration always carries substantial challenges as now organizations have to deal with the cultural, strategic and process-level differences among organizations.”
However, the researchers also found that process integration improves the longer the recession period lasts, with the quality, delivery and flexibility benefits outweighing the costs.
“Process integration enables manufacturing plants to gain better knowledge of value addition within internal processes, suppliers’ limitations and capabilities and customers’ demands,” Nair said. “With the coordination efforts inherent in process integration activities, firms are better equipped to evaluate, assimilate and exploit the related knowledge that is coming its way from being embedded in the network, thereby facilitating better prediction of the nature of the environmental uncertainties.”
Ultimately, the findings show that although strategic alignment and process integration are both worthy pursuits, a strong focus on process integration during a recession can play a pivotal role for performance benefits.
As business objectives and resources may change during an economic slump, the researchers note that leaders must prioritize the types of integration to approach rather than pursuing everything at once.
“It’s important for firms to recognize the trade-offs,” Nair said. “Although it could be a common policy to strengthen the manufacturing strategy alignment during a recession, too much attention on aligning manufacturing strategy with corporate strategy as well as other functions during these times could lead firms farther away from the requirements of the market.”
So, what’s the bottom line? During a recession, manufacturers should focus more on process integration. This can be done internally within the plant through activities such as manufacturing lead time reduction programs, planning/scheduling processes and methods, integrating manufacturing and design processes and implementing automated plant information flows, as well as externally with suppliers and customers. And when the threat of a recession is low or when markets emerge out of the macroeconomic downturn, it’s a great time to concentrate on manufacturing strategy alignment and process integration to improve performance of the firm overall.