The conventional approach to recession – and one, incidentally, encouraged by consultants and other experts the world over – is to batten down the hatches and stick to the basics while waiting for a return to “business as usual”. But, according to PA Consulting, this is a formula for failure.
The group’s “Managing Uncertainty” survey of the reaction of more than 200 business leaders around the world to the financial crisis that struck in early 2007 suggests that most companies were too cost-focused, too slow and too passive. Most companies took 18 months to understand the nature and severity of the global financial crisis and then to act in response. This was, in part, because many business leaders were neither observing what was happening nor orientating themselves to the new environment.
SLOW SPEEDS KILL
The study indicates that there is a direct correlation between speed and success in decision making. Companies that responded faster were far happier with their decisions, despite having had less time to make them.
In its analysis of the survey data, PA focuses on total shareholder return because it is a measure that looks at the value the market places on a company’s stock over time, making it a good indicator of medium and long-term performance.
Only a third of companies saw the downturn as opportunity – but those that did saw a total shareholder return that was significantly higher than the average. This was particularly true of those that acted quickly. Conversely, companies that made drastic cuts to their costs had a total shareholder return that was markedly lower than that at organisations that took a more moderate approach to cuts.
Mark Thomas, business strategy expert at PA, says that traditional management strategies failed because they are “designed for conventional inventory-cycle recessions – and a balance-sheet recession is a completely different beast”. He adds: “The highest-performing companies took a different approach: they identified the crisis early and responded quickly. They had a moderate approach to cost reduction, and they looked beyond this to focus on the opportunities to get ahead.”
Indeed, PA says that companies that reacted positively – planned flexibly, strengthened governance and acquired new businesses – emerged from the financial crisis with a sustainably higher market share.
With the economy in Europe once more teetering on the edge of recession, companies need to realise that a “fundamentally different approach is what produces the highest performance”, he adds. They need to plan management strategies for a range of scenarios and adopt a more flexible approach in order to respond quickly and seize the opportunities of crisis, as well as manage its challenges.
There are four key lessons:
Avoid drastic, panic reaction cost cutting. Cut costs in a focused and measured way;
Prepare ahead of time. Develop contingency plans and secure financing.
Make sure that your business is not carrying baggage. Avoid being forced to make “fire sales” at the lowest point in the economic cycle.
Take the opportunities – acquisitive and organic – to gain market share in key markets.
No downturn – even one as severe and as sustained as the present one – is bad for everybody. The PA study suggests there is a lot that companies can do to ensure that they prosper while others struggle. Its findings offer some explanation for the apparently contradictory experiences of companies throughout the world. Even within individual sectors, some companies have performed strongly while others have foundered if not collapsed. Perhaps not as many factors affecting business success are outside companies’ control as their executives suggest.
You can read the Future of Business blog here.
PA’s Managing Uncertainty survey, conducted this summer, asked more than 200 senior business leaders from across the world how they had responded to the financial crisis and what management strategies had proved most effective. Our analysis establishes which actions added value and which did not. Find out more here.