Driving change for growth
Seismic changes to the economy are keeping CEOs awake at night. With so much in flux, executives may think it best to just stay the course until the smoke clears. But inaction may mean missing rare opportunities to reposition their companies amid today’s shifting structural and competitive landscape. Market turmoil is creating new ways for companies to establish themselves as leaders, thwart competition, cut costs and respond to shifting customer tastes wherever they sit on the stress pendulum. Some are being forced to change by financial distress or bankruptcy. Others have the muscle to buy weaker rivals, move into new markets or otherwise pull ahead of the competition. But all companies should be considering transformative steps to keep up with a new economic world. Those who don’t — even if they are healthy today — risk losing ground to forward-looking rivals.
Calibrated response. The ongoing financial crisis has radically altered demand and supply realities for many companies as well as the cost of doing business. Companies face plummeting sales, tight credit, expanded regulations, maturing emerging markets and heightened scrutiny of management decisions by boards and oversight bodies. These changes call for a calibrated response to new opportunities and threats.
Transformational decisions should be based on a strong business case developed with as much objectivity as possible. Speed and sufficient resources are key to pulling off significant change, and such initiatives should be closely monitored after implementation. Appropriate right-sizing, with sufficient strength in R&D, operations and talent is imperative to win in growth areas.
Past downturns show that proactive, thoughtful action will be amply rewarded when recovery kicks in. That is why 90% of over 500 companies polled in a recent survey by Ernst & Young and the Economist Intelligence Unit (EIU) said they plan at least one reshaping activity within the year. Those actions range from cutting working capital to boost cash to investing in shared service centers to cut costs or build scale, to acquiring companies in entirely new areas.
Review and reassess. To grasp the implications of economic shifts, a company must review and reassess its mission, business model, operations and product offerings in light of changing market realities. Commercial due diligence, a detailed form of research and analysis, allows a fresh look at the business from the outside in, identifying business and market risks, gaps and opportunities. This understanding helps the company develop strategies and steps to reshape for long-term growth.
Market reassessment is a natural starting point to gauge the relevance of one’s business in today’s murky economy. Key assumptions about brands and performance may be wrong. Financial constraints due to joblessness or tight credit may have triggered permanent changes in habits. Rivals may have responded with substitutes or opened up new customer segments on the back of technological breakthroughs. These shifts may put one’s core business at risk, or make adjacent industries more attractive.
A fresh look at the stability of a company’s customers and offerings is a logical second step. A deep dive into product expenses and profit margins should follow. Questions to ask include how dependable or “sticky” are your customers? Are they highly sensitive to price? Who are your most profitable customers and are they being served?
Key suppliers should also be put under the microscope, with a keen eye for risks such as likely supply chain disruptions. A component supplier may look to be in good financial shape. But its own supplier, in turn, could be distressed or at risk. Delayed delivery times or an inability to provide complete parts could hold up a critical product launch. Scenario planning is essential.
The road to reshaping. Following a thorough analysis of a company’s industry and operations, companies may choose to expand, contract, cut costs or fine-tune a strategy. Future action should be determined based on available resources and growth prospects. Among some transformational ways to lock in growth:
- Forge alliances, collaborate or merge. Those with strong balance sheets may want to merge with others to fill strategic gaps. Pharmaceutical companies have been doing just this to expand their R&D capability and scale up. But history shows that many mergers add little value. A thorough analysis of a company’s assets, a roadmap to wring savings from synergies and a plan for thoughtful integration boost the probability of success.
Joint ventures, project-based collaboration or alliances can also help companies expand business, access technology or cut costs — committing less capital than in a full acquisition. JVs, along with tax-free spinoffs or asset swaps, may offer transitional moves toward divestiture or facilitate streamlining of corporate portfolios. A thorough understanding of these complex alternative structures and their tax, operational, stakeholder and other implications is essential. - Free up working capital. According to the EIU poll, cash is a key issue for 82% of businesses. Sagging sales create opportunities and needs to free up funds from working capital for strategic initiatives, acquisitions, expansion, to pay down debt, or to shore up a share price. Paring inventory levels, smarter, tighter delivery routes and adjusting billing and receivables schedules can also quickly boost cash levels. But changes to working capital levels need to be sufficiently flexible to respond to market shifts as well as sustainable over time.
- Streamline supply chains. New technologies and ways to integrate operations across geographies can speed the supply of key inputs, enabling companies to offer more current, lower cost goods. But operational changes need to be carefully calibrated to avoid costly delays that can damage reputations. Half of respondents to the EIU survey see scope for cost reductions in supply chains.
- Consider nearshoring. Tougher times demand that even those who shunned outsourcing consider approaches such as shared service centers, subcontracting or nearshoring, which offer similar advantages. Nearly 80% of those polled for Ernst & Young’s 2009 European Attractiveness Survey, for example, were considering relocating inside the region, with Eastern Europe a top nearshoring site. Protecting critical intellectual property at shared service centers is imperative. Cultural differences and the talent base also need to be assessed.
- Expand into new niches or geographies. Cash-rich companies may want to take a strategic leap into new niches like cleantech. Regulatory changes are triggering new demand for goods and services that help cut carbon dioxide emissions, while stimulus funds are bringing fresh sources of capital. Even financially distressed companies can radically redesign operations post-bankruptcy to capitalize on emerging opportunities. However, innovation and strategic shifts may entail substantial investment.
Fast-growing economies like China, India and Brazil, less traumatized by the downturn, also offer promise. Consumer demand in many emerging regions is shifting from household basics to more sophisticated financial services and consumer goods. This rising affluence may help offset softer US sales. That is why one-third of those polled by the EIU were considering expanding into other geographies within the year. But expanding overseas is fraught with risk, including unfair competitive practices, fraud, labor rights violations and heightened tax exposure. A broad understanding of the challenges is critical to protect one’s reputation and garner success. - Divest businesses outside the core. Offloading outdated units through a disciplined, buyer-focused divestiture process is essential to extract maximum value from a sale. In an environment with many sellers but few buyers, prospective acquirers will want full disclosure of a unit’s risks and growth prospects. Failure to provide information in a timely manner could derail a deal.
As companies work to position themselves for future growth, there are many directions they can take and many roads to reshaping. The essential first step is a fresh, hard look at one’s market, operations and product portfolio. Failure to adjust to the impact of the largest systemic economic change in 50 years would surely be an opportunity missed — and could have grave consequences.
Brad Kuntz •Ernst & Young LLP (US) •New York
Transaction Advisory Services
Greg Stemler •Ernst & Young LLP (US) •Chicago
Transaction Advisory Services
