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Act if you want to walk tall in zombie economy

"The first danger is illiquidity. Zombie banks, despite highly profitable trading, nurse huge losses on their balance sheets and cannot provide the support that businesses need for growth."



Mark Thomas
The Times
1 December 2009

It might seem as if the economy is moving towards some degree of recovery from the recession, but in fact, the crisis has created four zombie areas.

Banks, governments, consumers and companies are all entities that appear to be recovering, but actually are only half-alive.

These zombies will transform three sectors — energy, finance and healthcare — but they will have an equally dramatic effect across the corporate landscape. As a result, we will see many losers, but some big winners. The winners will be those who act now to avoid the dangers and reposition their businesses for the zombie economy.

The first danger is illiquidity. Zombie banks, despite highly profitable trading, nurse huge losses on their balance sheets and cannot provide the support that businesses need for growth — or even for survival. In this environment, capital ceases to be a commodity and becomes a powerful competitive weapon.

The second danger is irrelevance. Zombie consumers are unable to spend as before. Businesses whose products and services are aligned to the changed needs of consumers and business customers will thrive; those still focused on last year’s customers will struggle badly.

The first step in avoiding these dangers is to secure sufficient liquidity, not merely to survive a V-shaped recession but to survive an anaemic recovery or a double-dip recession. Most businesses have more to do: despite strenuous efforts (corporate bond issuance this year exceeded $1 trillion for the first time), liquidity is lower than a year ago because falling profits have hurt interest cover.

The second step is to stop carrying baggage. Even in good times, it is inadvisable to allow good parts of a business to cross-subsidise poor ones. In bad times, cross-subsidy can be fatal. At the very least, managers need to identify the baggage and stop pouring capital into these parts of the business. Ideally, fix the baggage or sell it.

The third step is to remodel the business. Customer needs have changed, so any business offering the same until the return of business-as-usual will lose market share and profit. The winners will build business models to meet the needs of today’s customers.

The final step is to stake out an enhanced market position. With weakened competitors and a likely stock market correction, those businesses will be well positioned to take market share organically and to drive consolidation. They will be big winners.

To reach this position, managers need a good grasp of the economic situation, its challenges and its opportunities. They can then diagnose their own position and that of their key customers and suppliers. This will enable them to ensure that their plans meet the twin dangers of illiquidity and irrelevance and position their organisation to emerge from the recession stronger than they went into it. Only strong and united top management teams will be able to achieve this.

Those who act now to seize the opportunities of the zombie economy will win — and win big.

Mark Thomas is head of the strategy and marketing practice at PA Consulting Group. This article is the last of five based on: The Zombie Economy: Leadership in times of uncertainty (PA Consulting, £12.99).

To see the original article from the Times Online, please click here.

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