Reflections on the crisis

By Tom Benson

Like “a massive earthquake” was how one watching Wall Street worker put it. “The collateral damage will be huge,” said another. And as the news broke that Lehman Brothers was filing for bankruptcy last September, neither description sounded like hyperbole.

In the few hours it took for word to filter through that efforts to save the 158-year-old investment institution had collapsed and it was applying for Chapter 11 protection, the financial landscape suddenly became a very different place. Over a breathtaking two-week period, the US government took control of mortgage-lending giants Fannie Mae and Freddie Mac, along with insurance behemoth American International Group. One-time brokerage powerhouse Merrill Lynch rushed into the arms of Bank of America, while federal regulators seized Washington Mutual in the biggest bank failure in American history. Wells Fargo acquired larger rival Wachovia, and numerous other financial institutions applied for federal handouts. At one point, panicked investors even offered to buy US Treasury bills without asking for any return on their investment, hoping to simply find somewhere safe to put their money.

And it wasn't just the complex world of stocks, bonds, securities and derivatives that was affected, either. The crisis that started on Wall Street soon spread to other sectors: day-to-day operation became an exercise in survival for companies in every industry and across every continent; it spawned unprecedented levels of government investment in the private sector; and it left local authorities and services reeling from the impact of budget shortfalls that are likely to last for years. By early 2009, when the stock market hit what now looks like its post-crisis bottom, the collapse had vaporized more than $30 trillion - a decade's worth of investment gains. Today, the Dow Jones Industrial Average stands roughly 2000 points below where it was this time last year.

Without doubt, things are as tough for companies now as they have been for generations. Yet below the sensationalist headlines and high-profile failures, life does go on for the vast majority of American businesses. And while the impact to the economy has been considerable, perhaps now, with the benefit of a full-year of hindsight, is the right time to reflect and put things in perspective. For despite commentators predicting a plunge into the economic abyss, the business of doing business - reducing inefficiencies, keeping costs down, maintaining and improving quality, motivating staff and planning for growth - is not significantly different than it was before those few crazy months last fall.

Decision-making

Indeed, if the last 12 months have proven anything, it's the value of sound economic fundamentals and the need for clear-headed judgment. A back-to-basics approach, if you like. As such, the mood at many American businesses is remarkably upbeat. "The challenges are there in terms of how to save money and continue to support the existing business in an efficient fashion," explains Hong Loh, Managing Director at global asset management firm Legg Mason. "But we also have a priority that if the growth comes back, we need to be able to support it. So for us, it's more like a shrink-to-grow program - it's not just about efficiency, it's about being competitive."

"There's only so much cost cutting and overhead reduction that a company can do," agrees Rob Solomon, CEO of marketing firm Bulldog Solutions. "Eventually you have to get back to sitting around the table and asking questions about what you need to do to find new prospects and sell them stuff. That's what business is about, after all."

Such attitudes are typical of businesses across the industrial spectrum. For the first time in a year, Mckinsey reports that more respondents to its monthly economic survey expect their companies' profits to rise than fall in the near term. Product development and long-term planning are high priorities for many companies, and most are optimistic about their prospects in the longer term. Overall, the responses indicate that a 'new normal' is settling in - an environment that is less comfortable for many companies than the one they knew in the pre-crisis world, for sure, but one that can be managed through sound policies and effective leadership.

Indeed, the most noticeable trend to emerge from the crisis is confirmation that economic uncertainty puts a premium on good decision-making. Recessions tend to expose organizational weaknesses that might have remained undetected in more settled times; they also open up entirely new opportunities, as competitors scale back and customers seek more value. By gathering the right information, systematically analyzing it and routing it to the appropriate level of authority, organizations can make quick and informed decisions to rectify flaws and seize opportunities. "In previous recessions, companies that re-positioned themselves were able to shine when the recovery came," says Dan Armstrong, Senior Editor at the Economist Intelligence Unit and author of a recent study on the fallout from the crisis. "Companies with a clear and solid long-term plan can use a downturn to secure an unassailable market position, at a time when their competitors are struggling to survive."

Improved self-knowledge

Clearly, staying focused and having a solid idea of what you need to do to survive and thrive is essential. "It is about choosing the two or three things around which you can best differentiate yourself in the marketplace and staying true to those," suggests Stephen Monk, Executive Consultant with the Forum Group. "The tradeoff is that you're not going to be able to do all of the things that perhaps you had on your strategic agenda; but picking two or three things that will most add value to the organization will certainly help channel your focus."

Stephen Perry, Director of Strategy and Planning at Xerox Corp., feels that improving your knowledge of the firm's key competencies and capabilities is critical. "We have been quite a lean company for a while now," he says. "And the advantage there is that when you get into a crisis, you know where you're at; not that you're landing on your feet exactly, but you know what your current status is, what your opportunities are, and you're better able to readjust. To some extent, the crisis really makes you sharpen that whole process a little bit more. It makes you check and double-check some things that you're not quite as clear on, and zero in on what's important."

He agrees that getting the basics right and defining your strategy is key to making long-term progress. "When times are tough, we are often more critical of ourselves," he says. "That's natural, and it's also probably a useful process. But I think if you have a fairly well defined strategy, and if you have the right people in the assignment, I think that you can weather most storms. Having a solid structure and a solid plan can help you deal with adversity pretty well."

Nearly three-quarters of the executives in the Mckinsey survey expect their companies to be in a stronger position in five years than they were before the crisis; they also think that their industries will be more consolidated and innovative - but will grow more slowly. "It's very important to get out of the mentality of only thinking in negative terms or believing that things are all doom and gloom," opines Vinnie Aggarwal, Professor in Political Science and Business at the University of California, Berkeley. "Companies need to start thinking about the next step because, as we all know, all recessions end and this one is not going to be any different. The question now is how firms can really succeed and gain market share as we look towards the future."

A question of balance

In this regard, recessions exacerbate the tension that all businesses experience in trying to achieve a balance between short-term needs and long-term development and expansion. A significant majority of businesses respond to a more challenging environment by focusing on costs, customers and survival, while only four in 10 - according to the Economist Intelligence Unit - regard the recession as an opportunity to invest in product development and get ahead of their competitors. To capitalize and seize the initiative, optimizing your investment decision-making is key.

"You've got a much greater chance of succeeding during boom times because that's just the way it works; in tough times you don't have the luxury of making so many mistakes," explains Krishna Srinivasan, Global President at research firm Frost & Sullivan. "The smart companies that are succeeding, even in this environment, are the ones that are doing a much better job of optimizing investment in their growth. Even as you cut back on those products, markets, applications, customer segments or geographies you're not doing well in, you have to ensure you reinvest the money into those areas where you do have the chance to succeed - whether it's a core market or an adjacent market. So being able to intelligently evaluate where you can shift money from one place to another, where you can have a much better chance of succeeding, is a very important part of a company's strategic diversification."

It comes down to knowing how to grow effectively. "We're looking for adjacent opportunities," explains Sam Valenzuela, Corporate Strategy Manager of telecoms provider CenturyLink. "Can we take what we already do well - our current capabilities and technologies - and apply those to adjacent markets? What other markets can we get into, perhaps through acquisition, to complement what we already do today, extend our network capabilities and leverage our relationship with customers outside of our core business? The downturn notwithstanding, we see identifying new sources of growth as our biggest challenge."

Such anecdotal evidence suggests that firms are finally ready to look forward rather than back, and Berkeley's Aggarwal believes that with companies once again starting to focus on growth, the economy is in a position to recover strongly - a view backed up by recent research. McKinsey reports that 19 percent of survey respondents around the world (including 28 percent of those in Asia's developed economies) believe an economic upturn has already begun, with successive surveys taken since March showing an increase in the hopes of executives for their national economies. And while it's been much maligned, Aggarwal feels that the strong and swift government intervention seen around the world - but especially in the US - has played an important role in nurturing the fragile confidence of the business community. "The most important impact of the stimulus packages has been a psychological one, in that it gave business people an opportunity to start looking forward - to stop thinking in recessionary terms about how to deal with the downturn, lay people off and cut back on budgets, and actually think about expansion, about new sectors that they could go into," he says.

A new approach

Overwhelmingly, the prevailing feeling is one of hope for the future. The credit crisis has led to many corporate casualties over the last 12 months, and is likely to impact the longer-term structure of industries too. Many weaker players will have been squeezed by a lack of access to liquidity for expansion, thus harming their market positioning - that is if they still exist. But just as many others will be able to take advantage of weakened competitors to consolidate market-leading posi­tions and potentially improve pricing. Their cost structures may also be superior due to their ability to invest or acquire others. These players have the ability to enjoy a step change in profit­ability as they capture market share and raise barriers to entry. Opportunities do exist.

"There is definitely room for optimism," concludes Srinivasan. "However, there is far too much debate right now about when the boom cycle is going to start and how big it is going to be, and not enough debate about how to position yourself to drive growth for the inevitable boom cycle that's ahead of us. It's going to happen, and the issue is less about whether it is going to happen in the next three months or the next six months, and more about what you are doing now to start rebuilding your growth pipeline and identifying the opportunities that are going to emerge."

Ultimately, what has emerged over the past 12 months is a recognition that business cannot afford to remain static, whatever the circumstances. Whilst operationally challenging, periods of recession actually provide the perfect springboard for growth when the recession eventually lifts. The most successful companies never stop looking at opportunities to grow effectively and sustainably. As Jack Welch, legendary former CEO and Chairman at General Electric, puts it: "If the rate of change on the outside exceeds the rate of change on the inside, the end is near." We may be on the road to recovery, but the hard work starts here.

Making better decisions

A study from the Economist Intelligence Unit entitled Management Magnified: Getting Ahead in a Recession By Making Better Decisions reveals that executives are listening more keenly to customers, broadening information sources and seeking greater insight from the CFO as a result of the recession.

• Survey respondents sought to diversify the sources of information used to make vital decisions: 46 percent looked for more insights from middle managers, 57 percent cited the importance of customers and 33 percent mentioned providers of capital.
• Two-thirds of respondents said that the most important source for good decision-making came from the financial and operational information held by the finance function and interpreted by the chief financial officer.
• Functions with direct links to customers (sales, marketing and customer service) were each mentioned by about a third of respondents as crucial to decision-making.
• About 39 percent of respondents cited the strategic planning function as important for good decision-making.
• Decisions at the worst-hit companies surveyed emphasized the short-term and tactical, focusing on survival rather than on long-term strategy.
• The downturn has led 96 percent of those surveyed to improve the efficiency of their operations and 53 percent to focus more closely on key customers.