An Ernst & Young global survey seeks out the opportunities in the present economic crisis that companies across the globe can make the most of.
By any measure, the past few months have been extremely difficult for the global economy. The collective assessment for the business environment in 2008 was termed as an “economic crisis” and the forecast for 2009 is termed “economic challenge”.
But this is not the first recession — the business world has experienced serious downturns before. At Ernst & Young, they have sought to understand how companies are reacting to the current crisis and see if there are opportunities to learn from their experience and best practices. Along with the Economist Intelligence Unit, they conducted in-depth interviews with 337 senior executives to see how they were being affected by the economic crisis and how they were seeking the opportunities in adversity.
Indian respondents featured prominently in this global survey; their number (28) was second only to the United States. All executives polled across the world worked for companies with a turnover in excess of $1 billion and businesses were cross-industry, with financial services and manufacturing forming the largest chunk in the representative sample. Given the rapidly changing environment, the time taken for this study was of particular importance.
What has emerged from study is that not all companies were equally affected by the downturn. While the overall impact on market capitalisation had been negative in the past 12 months, there was a significant variation in performance by sector. The market capitalisation change varied from a fall of 65 per cent in the banking sector to virtually no fall at all in biotechnology. For an investor, there could have been choices made in the portfolio that would have had dramatically different impacts. Such choices will continue to be available.
Generally, the executives recognised the challenge to their business but only 30 per cent felt their focus for the next 12 months would be solely on corporate survival. Seventy per cent believed that there were opportunities to do more. Similarly, their perspective of development in the competitive environment was also mixed. Forty per cent saw reduced risk of new entrants and 30 per cent saw competitors withdraw from the markets.
So, how has the crisis affected the corporate response to customers? Seventy-two per cent reported they had increased their focus on key accounts, which implied increased services for their customers; 39 per cent launched new products and services and 34 per cent moved to enter new markets. The pattern with regard to suppliers was particularly interesting while 46 per cent had narrowed their supplier base to achieve more favorable terms, 42 per cent broadened the same to reduce the risk of failure. A supplier, therefore, is clearly almost equally at risk of losing a customer as gaining a new one.
The primary but not the only driver of management actions is the amount of cash that the company has and is generating. If you are generating cash during a credit crisis, the opportunities are many.
In this regard, they have developed the ‘Stress Pendulum’ which focuses on the specific issue of cash. Different sectors will be in different places on this spectrum but this analysis can be done for sectors, individual companies and diversified businesses of conglomerates. This will help pinpoint a company’s cash status.
Working capital is the lifeblood of a company, and the ability to manage it becomes even more important in a downturn due to falling revenue and restricted access to new funds. Not surprisingly, when talking about the change expected in the importance attached to different goals, nearly three-fourth of the respondents said they were focused on “securing the present”. Survey further indicated that 70 per cent of respondents had already conducted a top-down review of cash management, while half had built working capital measures into their performance objectives.–