Stand still now, get left behind tomorrow
(As originally appeared in The Globe and Mail, 29 June 2009)
Canadian companies that are paralyzed by fear or mired in inertia risk missing out on the valuable lessons and opportunities that an economic downturn often brings. Doing nothing in a downturn is not an option, and leaders need to act.
With the first half of 2009 behind us, this is the time for businesses to look at their plans for the months ahead and start moving. That means getting out from behind the walls, looking for opportunities and making smart moves. If they don’t, they risk seeing others race ahead when economic recovery unfolds while they sit on the sidelines.
A few questions companies should ask now:
1. Has the recession changed the way we do business?
It’s getting harder for traditional, vertically integrated companies to respond effectively in this quickly changing market. Companies that don’t seize the opportunity now to build leaner, more flexible organizations may be unprepared to compete once the recovery gains momentum.
Nearly 90% of global respondents to Ernst & Young’s recent survey, Opportunities in adversity, said their operating model had been altered by the recession. Many companies are using current conditions to accelerate the reshaping of their businesses, trimming fat to build muscle. Reshaping can help reduce costs and give a company access to specialized expertise that’s not available in house. In the long term, it can provide the flexibility needed to handle fast-changing market dynamics like we’re seeing now.
There are many reshaping options: engaging external service providers by subcontracting, outsourcing and joint ventures; changing the internal operating structure through relocation or shared services models; even modifying the composition and legal status of a company through acquisitions, disposals, carve-outs or the transfer of a business to a subsidiary. The key is to take a comprehensive approach that focuses on the big picture, not quick fixes.
2. What do we need to know about emerging markets?
Companies that are already in emerging markets, or plan to enter them, shouldn’t necessarily abandon their plans to grow their customer base this year. Doing so can fuel the sort of growth that can’t always be achieved in mature or developed markets.
Although it’s still too soon to predict a sustained recovery, now is an ideal time to explore neglected or overlooked markets. For instance, while developed economies shrink, the World Bank recently raised its 2009 economic growth forecast for China from 6.5 to 7.2%.
Companies can take advantage of weaker competitors and changing customer, regulatory and financial dynamics within those markets. Our recent Opportunities in adversity survey indicated that 60% of respondents saw the best growth opportunities in emerging markets, yet only one in 10 had a clear view of where they would direct their investment. Those who choose to move quickly may secure a lasting advantage.
3. Should we be shopping for deals?
This year, financially sound organizations could lay the foundation for future success. While the days when a seller could arouse the interest of 20 or 30 private equity groups are gone, the M&A market isn’t dead. The downturn has actually priced strategic buyers back in. Opportunities that would have been impossible a year ago are now within reach; those looking for growth through acquisitions may not see such opportunities again.
Downturn mergers typically generate about 15% more value than “boom-era” deals, in terms of total shareholder return. Strategic buyers should be exploring the attractive valuations and prices that today’s market presents, especially since they may not need to rely on third-party financing.
Holding off now doesn’t mean the competition will: companies afraid to make a move could soon find themselves surrounded by bigger players who seized the deal of the day.
4. Do ‘green’ initiatives belong on the chopping block?
Some companies may let environmental sustainability slide during the downturn. Our Opportunities in adversity survey found 34% of respondents saw relatively significant opportunities to cut further costs around sustainability programs. In fact, they would be wise to turn their thoughts elsewhere.
Tackling sustainability issues can create cost savings that help companies survive tough times. Increasing energy efficiency, reducing resource consumption and improving supply chain logistics can all help business reduce carbon emissions and costs. As well, staying committed to sustainability can help companies uncover business opportunities and secure competitive advantage in markets where green products and production processes are gaining an edge.
Making sustainability a priority can improve profitability, shareholder value and risk management. Failing to take bold action here could leave companies out in the cold when the economy rebounds — especially if competitors hone their own practices and generate goodwill in the marketplace.
5. Are we doing enough for our employees?
A company’s people are often its most important source of competitive advantage. Companies that continue to invest in their people during a downturn — rather than radically changing policies and practices developed in better times — can inspire the employee loyalty needed to weather the recession and seize opportunities in the recovery.
Talented people don’t put their careers on hold during a downturn. That’s why successful companies identify the talented people they need to nurture, invest heavily in their development, and find innovative ways to reward them, such as public recognition or asking them to take on high-profile projects.
Companies that invest in their people signal their strength and resilience in the face of challenging conditions, and demonstrate their integrity as an employer. Abandoning those efforts could mean losing the very skills and talents you need to compete now, and down the road.
By Lou Pagnutti, Chairman and Chief Executive Officer, Ernst & Young LLP
