Article

Tailor a plan to beat the cycle of boom-and-bust

Prepare for bold moves. Because so many companies are struggling, a downturn brings the possibility of game-changing acquisitions and partnerships.

글 James Hadley and Julien Faye

First published on 7월 21, 2009
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A tropical storm viewed from a weather satellite looks more or less uniform, as if it is affecting every area it touches with equal force. On the ground the picture is different. One home loses its roof while others on the same street come through intact. One community is devastated while its neighbour a mile away escapes unscathed. The same is true of economic downturns. Even a sharp downturn affects everyone differently. Each company has particular strengths and vulnerabilities. Each will have different answers to three critical questions: How is the slowdown affecting the industry I compete in? What is my company's strategic position within that industry? And what level of financial resources can my company draw on? Your most powerful moves in a downturn depend on where you stand on these three dimensions. Industry Impact In considering the first question, executives need to know: Will the downturn hurt my sales and earnings harder than the overall GDP? Will it force bankruptcies and capacity reductions? Recessions hit some industries harder than others, so staying alert matters. The variations get amplified in a globalizing, interdependent economy. Here, history doesn't repeat itself, but it does provide context. The US economy provides a compelling example of the way boom-and-bust cycles affect industries differently. From 1987 to 2007, it experienced two recessions. But look at how it affected specific industries. The apparel industry weathered negative growth in 13 of those 20 years, petroleum and coal in 10 of the 20. Insurance carriers also suffered 10 years of negative growth, compared with eight years for automobiles, while real estate survived the period without any down years through 2007, but experienced massive declines in subsequent years. Recovery times also vary dramatically. Following the 2001 recession, the S&P 500 index for construction staples bounced back to positive growth in only three months while computers took nine months. The telecom index took almost three years. We're seeing the same variability today. The financial services industry entered an acute slowdown with the collapse of Lehman Brothers in September of 2008, especially in the United States and Europe. Retailing activity in the United States and elsewhere has declined dramatically. Most health care-related industries, by contrast, have continued to grow—albeit at a slower pace. One indicator of the difference: between February 2008 and February 2009, the S&P pharmaceutical index sank only by 28 percent, while financials dropped by nearly 71 percent during the same period. Strategic Position The second facet for executives to consider: How strong is our strategic position? Are we one of the most viable long-term competitors? Will this downturn favour our competitive advantages? Do we have the opportunity to gain significant market share? Within a given industry not every company suffers equally. A company's prospects depend heavily on its strategic position and leaders are better placed to deal with the effects of a downturn. The returns of market leaders on average are both higher and more stable than those of followers. As prices decline in a recession, followers typically see profits turn to losses and may be forced to cut costs sharply. Leaders may record lower returns, but their profitability will usually remain above the cost of capital, which provides them greater flexibility to maintain or even increase spending on research and development, advertising, capacity expansion, or acquisitions. Financial Strength Financial resources provide the fuel for navigating through a downturn. "There are enormous opportunities in recessions," Virgin Group founder Sir Richard Branson commented in Fortune. "It's a good time to get brand-new planes at reasonable prices." So you need accurate assessments of the resources available to you in a downturn to weather the storm. What is your company's financial leverage? How much debt does it carry? What are its cash reserves? Will you be able to refinance your debt? How do these numbers compare with your competitors? An important step for a company in a downturn is to run a series of short-term and long-term downside scenarios to determine the resources required for survival. Guidelines for an Action Plan These three dimensions-the downturn's impact on your industry, your company's strategic position, and its financial strength—can provide guidelines for an action plan. Say you're in a business that is less affected. Your strategic position is weak but your financial position is strong. Investing in your core is top priority. You may want to acquire companies to build that core. But what if your industry has felt the downturn more acutely? If your financial and strategic positions are both strong, you have some options against competitors. In the last downturn, Intel Corporation invested in state-of-the-art production capability and spent heavily to advertise its P4 processors—moves that helped it pull away from Advanced Micro Devices Inc. (AMD). At the extremes, companies with weak strategic and financial positions face serious challenges. Chances are they need complete restructuring, alliances, or merger partners. They are racing against time to find and sustain a viable core business. Conversely, companies that are strong both strategically and financially should invest to protect their leadership position. They may also have opportunities to gain share organically, acquire weaker competitors, or both. You'll also need a set of specific tools to address your situation, and the key is to pick the right ones. The tools reflect four broad imperatives: Clarify strategy and shift resources to core business activities. Winners in a downturn typically invest to gain share in their core. These companies also strengthen relationships with their core customers. Investments in strengthening the organization help winning companies avoid decision paralysis and focus on the decisions that matter most, then make and execute those decisions well and quickly. Some companies may free up cash and management time by divesting noncore assets; others will choose to wait. Aggressively manage costs and cash flow. Most companies can improve their performance significantly by reducing complexity, streamlining back-office and other G&A functions, and optimizing their supply chains. These are the most powerful cost-management levers you can pull in the short term. Increase revenue and margins. Many companies have shored up declining sales and even increased revenue quickly by restructuring and refocusing their sales reps. A series of data-driven tools help reps concentrate on the right targets, manage their pipeline effectively, and maximize customer face time. To maintain margin, you need to price for margin or share gains. Prepare for bold moves. Because so many companies are struggling, a downturn brings the possibility of game-changing acquisitions and partnerships. If you have a strong financial position, you can make use of the downturn to consolidate or expand your market position and acquire capabilities at bargain prices. The current turbulence presents companies with major long-term challenges. Some firms will rise to the occasion; others won't. They'll fall back in the pack, be acquired or face bankruptcy. But downturns create opportunities as well as risks. With a practical action plan that reflects the firm's unique position and puts the right tools to work immediately, companies can emerge from the storm stronger than ever. James Hadley is Managing Director of Bain & Company in the Middle East and Julien Faye is a partner in the Middle East and head of the financial services practice.

A tropical storm viewed from a weather satellite looks more or less uniform, as if it is affecting every area it touches with equal force. On the ground the picture is different. One home loses its roof while others on the same street come through intact. One community is devastated while its neighbour a mile away escapes unscathed.

The same is true of economic downturns. Even a sharp downturn affects everyone differently. Each company has particular strengths and vulnerabilities. Each will have different answers to three critical questions: How is the slowdown affecting the industry I compete in? What is my company's strategic position within that industry? And what level of financial resources can my company draw on? Your most powerful moves in a downturn depend on where you stand on these three dimensions.

Industry Impact

In considering the first question, executives need to know: Will the downturn hurt my sales and earnings harder than the overall GDP? Will it force bankruptcies and capacity reductions? Recessions hit some industries harder than others, so staying alert matters. The variations get amplified in a globalizing, interdependent economy. Here, history doesn't repeat itself, but it does provide context. The US economy provides a compelling example of the way boom-and-bust cycles affect industries differently. From 1987 to 2007, it experienced two recessions. But look at how it affected specific industries. The apparel industry weathered negative growth in 13 of those 20 years, petroleum and coal in 10 of the 20. Insurance carriers also suffered 10 years of negative growth, compared with eight years for automobiles, while real estate survived the period without any down years through 2007, but experienced massive declines in subsequent years.

Recovery times also vary dramatically. Following the 2001 recession, the S&P 500 index for construction staples bounced back to positive growth in only three months while computers took nine months. The telecom index took almost three years.

We're seeing the same variability today. The financial services industry entered an acute slowdown with the collapse of Lehman Brothers in September of 2008, especially in the United States and Europe. Retailing activity in the United States and elsewhere has declined dramatically. Most health care-related industries, by contrast, have continued to grow—albeit at a slower pace. One indicator of the difference: between February 2008 and February 2009, the S&P pharmaceutical index sank only by 28 percent, while financials dropped by nearly 71 percent during the same period.

Strategic Position

The second facet for executives to consider: How strong is our strategic position? Are we one of the most viable long-term competitors? Will this downturn favour our competitive advantages? Do we have the opportunity to gain significant market share?

Within a given industry not every company suffers equally. A company's prospects depend heavily on its strategic position and leaders are better placed to deal with the effects of a downturn. The returns of market leaders on average are both higher and more stable than those of followers. As prices decline in a recession, followers typically see profits turn to losses and may be forced to cut costs sharply.

Leaders may record lower returns, but their profitability will usually remain above the cost of capital, which provides them greater flexibility to maintain or even increase spending on research and development, advertising, capacity expansion, or acquisitions.

Financial Strength

Financial resources provide the fuel for navigating through a downturn. "There are enormous opportunities in recessions," Virgin Group founder Sir Richard Branson commented in Fortune. "It's a good time to get brand-new planes at reasonable prices."

So you need accurate assessments of the resources available to you in a downturn to weather the storm. What is your company's financial leverage? How much debt does it carry? What are its cash reserves? Will you be able to refinance your debt? How do these numbers compare with your competitors? An important step for a company in a downturn is to run a series of short-term and long-term downside scenarios to determine the resources required for survival.

Guidelines for an Action Plan

These three dimensions-the downturn's impact on your industry, your company's strategic position, and its financial strength—can provide guidelines for an action plan.

Say you're in a business that is less affected. Your strategic position is weak but your financial position is strong. Investing in your core is top priority. You may want to acquire companies to build that core.

But what if your industry has felt the downturn more acutely? If your financial and strategic positions are both strong, you have some options against competitors. In the last downturn, Intel Corporation invested in state-of-the-art production capability and spent heavily to advertise its P4 processors—moves that helped it pull away from Advanced Micro Devices Inc. (AMD).

At the extremes, companies with weak strategic and financial positions face serious challenges. Chances are they need complete restructuring, alliances, or merger partners. They are racing against time to find and sustain a viable core business. Conversely, companies that are strong both strategically and financially should invest to protect their leadership position. They may also have opportunities to gain share organically, acquire weaker competitors, or both.

You'll also need a set of specific tools to address your situation, and the key is to pick the right ones. The tools reflect four broad imperatives:

Clarify strategy and shift resources to core business activities. Winners in a downturn typically invest to gain share in their core. These companies also strengthen relationships with their core customers. Investments in strengthening the organization help winning companies avoid decision paralysis and focus on the decisions that matter most, then make and execute those decisions well and quickly. Some companies may free up cash and management time by divesting noncore assets; others will choose to wait.

Aggressively manage costs and cash flow. Most companies can improve their performance significantly by reducing complexity, streamlining back-office and other G&A functions, and optimizing their supply chains. These are the most powerful cost-management levers you can pull in the short term.

Increase revenue and margins. Many companies have shored up declining sales and even increased revenue quickly by restructuring and refocusing their sales reps. A series of data-driven tools help reps concentrate on the right targets, manage their pipeline effectively, and maximize customer face time. To maintain margin, you need to price for margin or share gains.

Prepare for bold moves. Because so many companies are struggling, a downturn brings the possibility of game-changing acquisitions and partnerships. If you have a strong financial position, you can make use of the downturn to consolidate or expand your market position and acquire capabilities at bargain prices. The current turbulence presents companies with major long-term challenges. Some firms will rise to the occasion; others won't. They'll fall back in the pack, be acquired or face bankruptcy. But downturns create opportunities as well as risks. With a practical action plan that reflects the firm's unique position and puts the right tools to work immediately, companies can emerge from the storm stronger than ever.

James Hadley is Managing Director of Bain & Company in the Middle East and Julien Faye is a partner in the Middle East and head of the financial services practice.