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Time to restructure, reinvest, reimagine

The current recession has many companies worldwide gasping for survival, unable to pay down debt or attract customers.

Print Edition: August 23, 2009

The current recession has many companies worldwide gasping for survival, unable to pay down debt or attract customers. Others have fired employees and drastically reduced costs in an effort to stay afloat. These are far from ideal strategies, says Fortune magazine’s Editor-at-large Geoff Colvin, author of The Upside of the Downturn. The recession is a turning point for every business today, says the author. Those who take advantage of it to ‘restructure, reinvent and reimagine their businesses’ will emerge far ahead of the pack when it ends, while others will fade away. Colvin lists 10 robust strategies that companies need to adopt right now in order to enhance their competitiveness and build long-term value. Here’s a sampling:

PROTECT YOUR MOST VALUABLE ASSET
Colvin points out that one of the biggest changes in business in the last 25 years is the role human capital has played as the foundation of the world economy. Financial results have long demonstrated that companies today are generating much more wealth with fewer physical assets. Capital equipment, which once held sway, no longer does. People do. Yet, “when it comes to people decisions in a deep recession, many managers obey ancient instincts from the industrial age,” says Colvin.

Sure, your best employees are probably in no position to jump ship right now. But they will not easily forget being treated shabbily when the going was tough. When things do turn around, they most certainly will be the first ones to flee. Which is why Colvin recommends a series of frank, career management conversations with employees, which include the structuring of goals and a plan for getting there. “This approach is free. It’s effective—it makes almost everyone better. And in a recession, unlike virtually any other time, everyone is powerfully motivated to make it work,” says Colvin.

Moreover, axing employees is seldom an effective survival solution, says Colvin. Why so? Layoffs are expensive in direct costs if you tack on severance payments and benefits. Also, a firm will rack up substantial costs in hiring and training new employees when things begin to turn around. Most importantly, your company runs the risk of damaging its brand as a destination for talent and could seriously endanger its existing leadership pipeline.

ENGAGE THE OUTSIDE WORLD
The world has changed suddenly and dramatically, and companies need to get a comprehensive understanding of how they are going to be affected. Equally important, they need to be able to communicate their positions with their major constituencies to assure them that they are, in fact, deeply engaged with these new and complex issues.

Colvin suggests that as “stock prices have dropped to levels not seen in more than a decade, shareholders have grown intensely interested in governance and are strongly positioned to make sudden gains.” First, voting new directors onto the board was once done ‘Soviet style’ where only one candidate would be nominated for each position, and required only one vote to win the seat. Now, shareholders will increasingly nominate director candidates to face-off against the board’s own nominess.

Voting procedures will also face an upheaval, stymieing the possibility of managers who have been able to influence a vote outcome by stretching the process over a lengthy period of time during which they lobby institutional shareholders aggressively.

All this new oversight means that firms today will be expected to become far more engaged with their shareholders, customers and partners. The more these constituencies hear from a firm, about how its tackling the various pitfalls of surviving in this new economy, the more they implicitly trust it to do right thing.

RE-EXAMINE YOUR STRATEGY AND BUSINESS MODEL
Here are some issues that Colvin says plague almost every company in the downturn: “Is our strategy going to work in this environment? What must we change—and what must we not change? Will the recession fundamentally change our industry and our place in it? Or will this downturn just throw us off the long term trend line for a couple of years? Do we need a new business model?”

Of course, the past has proved that constantly reconsidering a firm’s strategy can easily become an unproductive pre-occupation, bogging it down into a quicksand of indecision and inactivity. Yet the process is manageable. For many firms, investing in the company’s core is essential to retain a competitive edge. But what is one’s core? Just the “exercise of understanding your true core, and gaining the confidence of investing in it even now, will create strengths that will last a long time,” says Colvin. Also the recession has changed consumption patterns, often in counterintuitive ways. This means alterations to the business model for many firms.

MANAGE FOR VALUE
In a recession of this kind, many managers are making vital corporate decisions—about cash, debt, acquisitions or R&D—with no financial compass. Yet this is exactly that time when a wrong decision can send a seemingly healthy company into turbulence, says the author.

Colvin suggests that while everyone recommends managing for cash in a recession, it can actually gravely damage the inherent value built up in a company. Cutting big-ticket spending items—in marketing, employee training or research areas—are huge mistakes since they prevent a company from doing what it takes to survive, namely growing the business, selling new products and retaining quality professionals. Instead, manage for ‘value’, suggests Colvin. A firm should look at every one of its activities, figure out how much capital it required, how much that capital cost and whether the activity was earning more or less than the cost of capital.

Managing for value can reveal some startling insights—operations that were once thought necessary are exposed as duds— unearth lots of cash that were never thought available and streamline your operations in ways you never even considered. A focus on value also means realising that contrary to what you might think, a downturn is a terrific time to buy other companies at a bargain, or even sell your own at an attractive valuation.

CREATE NEW SOLUTIONS FOR CUSTOMER’S NEW PROBLEMS
In this brave new world, companies need to create new solutions for a whole set of new problems that customers experience, says Colvin. In fact, “The most successful companies understand that through good times and bad, they’re always creating complete experiences to meet their customers’ changing wants and needs,” says the author, but a downturn is a good time to learn this lesson.

Essentially, firms have to now create different value propositions for different customers segments. When the economy tanks, a customer often wants a completely different basket of products. As an example, Colvin suggests that a phone company, anxious that its customers will end up cancelling landlines to save money—landline phones being enormously profitable—can offer its customers a more limited, cheaper service that allows calls to only the police as well as customer service. This offers customers enormous peace of mind in the event of power failures and uncharged cell phones. Amazon does this constantly—through good times and bad—where its online model allows it to test new value propositions constantly by altering the shipping options or by tweaking the checkout process.

The Holy Grail of Macroeconomics
By Richard C. Koo
John Wiley & Sons
Price: $24.95 (Rs 1,197)
Pages: 339

After more than seven decades, many economists are still puzzling over what made the Depression in the 1930s so severe and so prolonged. Koo, Chief Economist at Nomura Research Institute, argues that Japan’s great recession (1990-2005) gives us some clues as to how this can happen and what kind of policy mix can get us out of this mess.

Financial Darwinism
By Leo M. Tilman
John Wiley & Sons
Price: $29.95 (Rs 1,197)
Pages: 172

Tilman offers us a new risk-based approach to thinking about economic performance, involving a framework he calls ‘financial Darwinism’— a blend of business strategy, corporate finance, investment analysis and risk management—that helps financial institutions steer through those turbulent economic waters.

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