Businesses will be keen to find opportunities offering greater exposure in these markets, particularly as valuations are considerably below earlier levels. China, India, South East Asia and Eastern Europe were the areas where most global companies saw the best growth opportunities and India was number one as an outsourcing destination. US companies tended to favor South East Asia over India, while for the European companies the reverse held true.
Businesses continue to be bought and sold. Those companies that use the situation as an opportunity to maintain a sustainable business model that will not only survive the downturn, but also emerge stronger will be in the best position to take advantage of the new growth opportunities once the economy starts to improve.
Performance improvement ranked relatively high and was a very close third on priorities, following “securing the present” and “protection of assets.” In India, particularly, it is observed there is a surge in corporate discussions around this subject. Strategy of some future investments will focus on maintaining the current business model, while 53 per cent seek improvements in the current model. Overwhelmingly, therefore, management is focused on getting improved performance from the assets and operations that it currently has.
An extensive focus on cost reduction is already under way. Eighty-four per cent of our 337 respondents had completed their cost savings analysis, focusing on the major areas of head-count, IT rationalisation, employee benefits rationalisation and real estate rationalisation. The chart lists prepared by companies indicate they have already rated the areas for cost reduction.
Keeping a company strong is not just about the bottom line. A company’s value is now defined by a wider picture where good governance, transparent reporting and communication are integral to influence investors’ decisions. Protecting assets, therefore, is of high priority for our respondents. Early warning systems can identify potential strategic, operational, financial and regulatory risks, facilitating mitigating actions to protect a company’s assets and reputation.
The credit crunch has forced companies to seek alternative ways of improving liquidity. Nearly half of all the companies had disposed of or shut down parts of their business and others are looking at alternate short term finance facilities. Some are considering options to renegotiate their debt covenants as well as proactively communicating with lenders, analysts and rating agencies and considering renegotiating debt covenants. For some others the availability of cash was not an issue.
There are six ways in which companies can reduce expenses and support revenue growth, without compromising corporate strategy. These are:
Invest in customer portfolio management
Regularly assess and monitor contractual partnerships
Develop an agile finance function
Review of supply chain
Understand the value of technology investments
Explore opportunities for releasing capital tied up in real estate
C-suite executives in one of our other recent studies indicated that risk assessment had been inadequate in the prior year. 57 per cent of the respondents had already implemented enterprise risk management.
Often risk management becomes an act of management compliance rather than the exercise of leadership judgment. It must be taken back from the compliance function into the boardroom. The current crisis presents an opportunity for companies to form a strategic view of the risks that they are facing and develop the necessary action plans.
Respondents, however, paint quite a challenging picture of how the engines of growth, namely M&A (mergers and acquisitions), R&D (research and development), sales and marketing are getting affected by the current conditions. While a cutback in M&A is understandable given the levels of market uncertainty, the cuts in marketing, R&D and operations may make it difficult to secure opportunities that the market now offers.
Yet, balance emerges as the key theme from past downturns. Balance between improving operational efficiencies and improving revenue growth and balance between cutting costs and investing in process improvement to prepare for the future. Companies that emerged successfully from previous downturns focused on reducing expenses without sacrificing their long term health.
It has become evident that companies are looking at a realignment of their business models for future growth. Business restructuring can play an increased role in the coming year. Eventually, businesses that can intelligently reshape their model will emerge stronger than those who are tempted to move quickly to extract additional value.
Of the business-reshaping options, 40 per cent of the companies were focused on divesting non-core/non-performing assets; almost the same number, however, were actively exploring strategic acquisitions in their core business. Outsourcing was seen as particularly appropriate for logistics, IT network management and telecommunications. Shared services were more attractive for human resources and accounting.
Expanding into new geographical markets or developing new product lines were, understandably, on low priority. Companies preferred to concentrate on maximising potential from existing markets, perceived as more of a known quantity in uncertain times. Business diversification was envisaged by a more limited, but still significant, of those surveyed.
Many organisations react instinctively during economic slowdowns by cutting discretionary spending across the organisation. That is a risky bet. They often fail to distinguish between short term operational and long term strategic programs which are vital to build capabilities for long term competitive advantage and growth. For building a sustainable future, it is important to maintain a sustainable business model, capitalise on growth opportunities in emerging markets like ours and take advantage of timely deals.
A successful model will be flexible and scalable (across people, processes and technology) to take advantage of emerging opportunities. It can rapidly adapt to changes in volume without being dependent on large scale recruitment, training and capital investment. Corporate alliances, which are growing and account for about a third of revenues at most companies, need even more care during a recessionary business climate. Product development, technology and innovation budgets are likely to have been reduced. Those who stick with a focused investment program emerge stronger than their peers.