These questions have arisen for many businesses since the financial crisis erupted in the fall of 2008. But most of the debate has been led by policymakers, academics and journalists. To understand the corporate perspective, Booz & Company in December 2008 surveyed 828 business leaders, both in developed markets such as the US and Germany, and in emerging markets such as Brazil and India. Their replies offer insight into how businesspeople worldwide view the crisis and are responding to it.
It is a decidedly mixed picture. Many managers believe their firms are strong and well-positioned competitively. But a remarkably high number of managers at hard-hit companies said they are not accelerating their efforts to preserve cash, which experience in former downturns suggests is the first thing they should be doing. Moreover, one-quarter of financially healthy companies surveyed are not taking advantage of opportunities the crisis affords them. And at many firms, there is a lack of confidence in leadership.
Despite the depth of the challenges and the odds they face, many of the managers responding to the survey described their companies as being in an advantageous position vis-a-vis their competitors.
Contrary to most recent newspaper headlines, more than half of all respondents – CEOs and lower-level executives alike – believe that the crisis will ultimately have a positive impact on their companies' competitive positions. This sense of optimism was even higher among managers in emerging markets, which generally have seen almost nothing but growth in recent years.
The survey shows that many business decision makers have not yet come to terms with the troubling reality of the global recession. Respondents were asked to assess both their financial and competitive strengths: Financial strength depended on their company's ability to carry on without immediate external financial support, and competitive strength was determined by whether they were better or worse than the competition on five dimensions (costs, product/brand positioning, technology/capabilities, leadership/management, and ability to influence/collaborate with regulatory authorities). The answers made it possible to identify four categories: strong companies (characterised by both financial and competitive strength), stable companies (strong financially but weak competitively), struggling companies (weak financially but strong competitively) and failing companies (weak in both areas). For each of the four clusters, there is a clear and obvious course of action.
Unfortunately, many companies are still not following the course that is best for them. The disconnect between what companies should be doing during the crisis and what they actually are doing came through clearly in the answers to a series of questions about cash preservation. One would expect both struggling and failing companies to accelerate their efforts to generate near-term cash, either by disposing of assets or securing new funding. Yet only 33 per cent of struggling companies and 43 percent of failing companies are picking up the pace of their asset disposals, and only 46 per cent of failing companies are trying harder to secure external funding.
Likewise, one would expect all struggling and failing companies to accelerate their efforts to improve working capital positions, slash overhead, drive process improvements, and renegotiate deals with suppliers. Surprisingly, many are not.
The same disconnect between appropriate and actual actions was evident in a series of questions about growth initiatives. One would expect stable companies, given their relatively strong finances and weak competitive positions, to capitalise on the crisis by buying companies with the opposite characteristics or by pursuing other growth initiatives. Yet 21 per cent of stable firms are actually pulling back on merger and acquisition; the same percentage of strong companies is doing so.
The survey found that two out of every five respondents are skeptical of the plans being put forth by senior executives. There is even more skepticism about the ability of management to carry out those plans. And the skepticism grows the farther down one goes in the management chain. The wavering faith in senior leadership, not surprisingly, is highest within those categories in which the current actions are most at odds with perceived needs.
If the responses indicate an uncharacteristic amount of doubt and paralysis among managers, it may be explained by an overarching sense that this crisis is so big and fast-moving that there is no way of controlling the outcome. The gap between logical actions and actual actions, and between respondents' optimism and their faltering confidence in corporate leaders, are symptoms of one major problem from which companies are suffering. Their world view, at the moment, is not entirely realistic. This suggests a three-step process that senior leaders should follow as they plan to restructure their companies during the downturn:
1. Get an accurate read on the environment and your position in it. Without an accurate self-diagnosis, the cycle of inappropriate actions will inevitably continue.
2. Choose the appropriate actions. There are many different ways to strengthen the balance sheet or to reduce costs, some for the short term and some for the long term. Similarly, many companies have options for pursuing growth, such as making acquisitions, developing new products, expanding into new markets, or building a stronger talent pool. The key is to identify a limited set of straightforward initiatives that have the potential to make a difference quickly.
3. Communicate and execute. This is vital to regaining the confidence of all stakeholders, from skeptical managers to risk-averse shareholders.
These three steps will work best at those companies that have avoided the misconceptions revealed in our survey, misconceptions that may keep some companies from positioning themselves to survive whatever is around the corner – or from making the most of the opportunities that the crisis will provide. In all of these efforts, there is no time to waste.
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