Business Day

Companies need to prepare for the tough times ahead

Don't wait for sudden shifts in your business - plan for them.

By Chris Zook and Darrell Rigby

Published on March 28, 2002
min read


Even before the September 11 terrorist attacks in the US, business executives were paddling furiously to traverse the economic doldrums. Now it is almost certain that the crossing will be longer and harder. How can your company make it through the difficult times ahead? The following practices will help ease your passage. Build strategic contingency planning into your culture. The contingency measures World Trade Centre tenants adopted after the landmark's 1993 bombing are widely credited with saving lives and businesses in the wake of the September disaster. The impending downturn, however, calls for more: you will need entire strategies crafted to address your worst-case scenarios. What if your risk profile shifts dramatically? Act now to spread potential risk or buy it down. US insurers rethought risk-sharing in the wake of 1992's Hurricane Andrew, which caused $16,8bn in losses. Primary insurers began to share risk more broadly among themselves and sell off more to reinsurers, which upgraded their computer models to predict pay-outs and avoid overextending themselves. Look at how your risk profile could change, and what you should do to prepare. What if demand suddenly falls off? Could you quickly find allies to help consolidate the industry and save jobs? Arrow Electronics, a US distributor of electronic components and computer products, faced such a dilemma in 1985. The industry's scrappy number two player, Arrow, was able to acquire the number three player, catapulting it into the top position, which it still holds. Take a cue from Arrow, review the competitive landscape and think through merger scenarios. If you think you may experience a drop in regional demand, map out alternative markets that could absorb your additional supply. Many Asian consumer products suppliers had to shutter or trim production when the region's economy went south in 1997. Some, like Emerson, however, quickly shifted product to export markets and kept Asian plants running. By locking in talent and capacity, Emerson was able to gain market share when local markets rebounded. What if global events disrupt your supply chain? Compare General Motors' plight in the days after September 11 to those of Dell Computer. General Motors had to close factories in Ontario because of parts delays at the Canadian border. Dell, which has built one of the world's best supply networks, chartered an airliner to fly parts from Taiwan to its Texas factory, ran factories day and night, and converted three 18-wheel trucks into mobile technology and support facilities to supply 24000 computers to New York and Washington. Which position would your company find itself in, and where should you strengthen your supply chain network to avoid a General Motors situation? What if prices plunge? The high-cost producer sets the price in boom times, and most competitors make money. In hard times, the low-cost producer sets the price, controlling competitors' profit margin levels. The speed of the economy's decline in the past 18 months will soon underscore the importance of relative cost position. Scrutinise purchasing costs and cycle times relative to competitors, find the inefficient processes and then fix them. What if a global recession hits? The variance of gross domestic product growth rates across countries is at its lowest point in 30 years; never in recent history have economies been so closely in step with each other. This increases the odds of a synchronised global recession, which means companies will have nowhere to turn to shift supply. Do you have the cash reserves to help consolidate your industry and save jobs? Have you evaluated which competitors you should acquire? Or, if you have a weaker financial position, have you identified where you are making profits and generating the best research and development to renew product lines? Where do you hold the most competitive cost position? IN NORTH America, scenario planning rated 17th out of the 25 techniques included in Bain's most recent management tools survey. Only 30% of the 245 senior executives who responded said they used it in 2000, which is a third fewer than in 1994. But scenario planning is a critical step toward a comprehensive contingency strategy. Pay attention to two assets in particular: customers and staff. Prove to customers that you deserve their loyalty and trust. To help customers get back on their feet after the terrorist attacks, hundreds of US companies offered price breaks, even though it meant taking a financial loss. Many firms set up counselling sessions and gave employees time off to support others. Be a good vendor. Unless you are looking to exit a particular business, now is not the time for running short-term profit optimisation models. Dell lowered prices on many of the servers, laptop and desktop computers it sold in the first week following the September attacks. You can bet its customers will not forget. Granted, not every business is a loyalty business, but for strong customer-facing businesses, research shows that a 5% increase in customer loyalty can lead to 40% to 90% increases in the lifetime value of a customer across a variety of industries. While it is tempting to give more attention to the most troubled businesses, you must, like the body during trauma, divert blood to vital organs, protecting core assets. Reinforcing core assets helps recession-proof your company. Employees need to know that their action matters. Explain to them in detail how their efforts can help protect your core assets. You may also need to ratchet down targets and extend time horizons. Realistic targets will help the people who power your core get back on track without feeling like they are failing. But it is surprising how overly optimistic companies can be: a recent analysis of long-term revenue and profit targets revealed that, in spite of the slowdown, nearly 80% of companies are targeting long-term performance levels that only 15% of companies have managed to achieve in the past decade. Don't set up stake holders for disappointment. Clear-eyed expectations and strategic contingency planning will reassure them that your company can be counted on in a recession. Zook and Rigby are directors at strategy practice Bain & Company. This is an edited version of an article first published in Harvard Management Update. Financial Times Information Ltd - Asia Africa Intelligence Wire All Material Subject to Copyright

Even before the September 11 terrorist attacks in the US, business executives were paddling furiously to traverse the economic doldrums.

Now it is almost certain that the crossing will be longer and harder. How can your company make it through the difficult times ahead? The following practices will help ease your passage.

Build strategic contingency planning into your culture. The contingency measures World Trade Centre tenants adopted after the landmark's 1993 bombing are widely credited with saving lives and businesses in the wake of the September disaster. The impending downturn, however, calls for more: you will need entire strategies crafted to address your worst-case scenarios.

What if your risk profile shifts dramatically? Act now to spread potential risk or buy it down. US insurers rethought risk-sharing in the wake of 1992's Hurricane Andrew, which caused $16,8bn in losses. Primary insurers began to share risk more broadly among themselves and sell off more to reinsurers, which upgraded their computer models to predict pay-outs and avoid overextending themselves. Look at how your risk profile could change, and what you should do to prepare.

What if demand suddenly falls off? Could you quickly find allies to help consolidate the industry and save jobs? Arrow Electronics, a US distributor of electronic components and computer products, faced such a dilemma in 1985. The industry's scrappy number two player, Arrow, was able to acquire the number three player, catapulting it into the top position, which it still holds.

Take a cue from Arrow, review the competitive landscape and think through merger scenarios.

If you think you may experience a drop in regional demand, map out alternative markets that could absorb your additional supply. Many Asian consumer products suppliers had to shutter or trim production when the region's economy went south in 1997. Some, like Emerson, however, quickly shifted product to export markets and kept Asian plants running. By locking in talent and capacity, Emerson was able to gain market share when local markets rebounded.

What if global events disrupt your supply chain? Compare General Motors' plight in the days after September 11 to those of Dell Computer. General Motors had to close factories in Ontario because of parts delays at the Canadian border. Dell, which has built one of the world's best supply networks, chartered an airliner to fly parts from Taiwan to its Texas factory, ran factories day and night, and converted three 18-wheel trucks into mobile technology and support facilities to supply 24000 computers to New York and Washington.

Which position would your company find itself in, and where should you strengthen your supply chain network to avoid a General Motors situation? What if prices plunge? The high-cost producer sets the price in boom times, and most competitors make money. In hard times, the low-cost producer sets the price, controlling competitors' profit margin levels. The speed of the economy's decline in the past 18 months will soon underscore the importance of relative cost position.

Scrutinise purchasing costs and cycle times relative to competitors, find the inefficient processes and then fix them.

What if a global recession hits? The variance of gross domestic product growth rates across countries is at its lowest point in 30 years; never in recent history have economies been so closely in step with each other. This increases the odds of a synchronised global recession, which means companies will have nowhere to turn to shift supply.

Do you have the cash reserves to help consolidate your industry and save jobs? Have you evaluated which competitors you should acquire? Or, if you have a weaker financial position, have you identified where you are making profits and generating the best research and development to renew product lines? Where do you hold the most competitive cost position?

IN NORTH America, scenario planning rated 17th out of the 25 techniques included in Bain's most recent management tools survey. Only 30% of the 245 senior executives who responded said they used it in 2000, which is a third fewer than in 1994. But scenario planning is a critical step toward a comprehensive contingency strategy. Pay attention to two assets in particular: customers and staff. Prove to customers that you deserve their loyalty and trust. To help customers get back on their feet after the terrorist attacks, hundreds of US companies offered price breaks, even though it meant taking a financial loss. Many firms set up counselling sessions and gave employees time off to support others.

Be a good vendor. Unless you are looking to exit a particular business, now is not the time for running short-term profit optimisation models.

Dell lowered prices on many of the servers, laptop and desktop computers it sold in the first week following the September attacks. You can bet its customers will not forget. Granted, not every business is a loyalty business, but for strong customer-facing businesses, research shows that a 5% increase in customer loyalty can lead to 40% to 90% increases in the lifetime value of a customer across a variety of industries.

While it is tempting to give more attention to the most troubled businesses, you must, like the body during trauma, divert blood to vital organs, protecting core assets. Reinforcing core assets helps recession-proof your company.

Employees need to know that their action matters. Explain to them in detail how their efforts can help protect your core assets. You may also need to ratchet down targets and extend time horizons. Realistic targets will help the people who power your core get back on track without feeling like they are failing.

But it is surprising how overly optimistic companies can be: a recent analysis of long-term revenue and profit targets revealed that, in spite of the slowdown, nearly 80% of companies are targeting long-term performance levels that only 15% of companies have managed to achieve in the past decade.

Don't set up stake holders for disappointment. Clear-eyed expectations and strategic contingency planning will reassure them that your company can be counted on in a recession.

Zook and Rigby are directors at strategy practice Bain & Company. This is an edited version of an article first published in Harvard Management Update.

Financial Times Information Ltd - Asia Africa Intelligence Wire