Economist Intelligence Unit (EIU) white paper produced at the height of the financial crisis in January 2009 outlining the opportunities to learn from the downturn and best practice to success in a changing environment.
2. Opportunities in adversity Responding to the crisis
The economic news at the beginning of the New
Year has made for grim reading. Headlines hype
to attract attention and journalists simplify, but
the collective media assessment of 2008 is
clearly “economic crisis” and the forecast for
2009 is clearly “economic challenge”.
And by any measure, the past few months have been extremely difficult for the global
economy. Following the financial services turmoil in September, we can see how the
bursting of the credit bubble has caused a severe economic downturn with major
repercussions across the world. Yet the “credit crunch” actually started in 2007 and the
downturn has been evident in many sectors and countries for sometime — indeed the US
economy appears to have already gone into recession by December 2007.
If we had assessed the 12 months to August 2008, many headlines would have been very
different. A year that ended with oil priced at US$37-40 a barrel also saw record highs of
US$135-140. A year that saw sterling fall to record lows started with discussions about
the flight from the dollar. A year that saw grandiose statements about the “reversal of
globalization” and the final emergence of the “emerging economies” ended with the
Chinese stock market seeing the worst falls of any major exchange and many of the new
Russian economic powerhouses grinding to a halt under the weight of debt. Volatility and
rapid change do not make for a simple and predictable narrative. The task of management
has become even harder.
As the supply of historically cheap credit that characterized the past decade has been
turned off, the growth of many companies has faltered. Major economies in Western
Europe and the US have now entered recession and global growth has slowed significantly.
No longer fuelled by cheap and large loans, property prices have fallen and many business
models have come under great stress. Consumer spending falls and so do the prospects
for employment and export-led economies.
Yet some companies continue to prosper. The Times of London reported at the New Year
that “those fortunate to hold shares in British Energy or Astra Zeneca would have reaped
gains of 40 and 20 percent respectively.” The top investment fund in the UK saw returns
of 80%. Without disputing the poor state of the economy or minimizing the real misery
that many individuals are experiencing, we encourage people to get behind the headlines
and get deeper into the detail. Some complexity is best not avoided. There is opportunity
in the adversity of the worst of markets.
3. Introduction
1Opportunities in adversity Responding to the crisis
A number of factors are impacting business around the world:
➢• Financing costs have increased as banks tighten their
lending standards.
➢Slowing economic growth: the IMF expects the world economy•
to grow on average by only 0.5% in 2009, revising its forecast
down significantly. Developed economies are expected to
contract to an average of -2% in 2009 — the first such fall
since the 1940s. Growth in emerging economies will slow
to an average of 3.3% in 2009.
➢Rising unemployment and falling consumer confidence are•
impacting revenue growth.
➢Falling profits: analysts are lowering corporate forecasts as the•
recession bites.
Government intervention and potential regulation is changing•
the operation of the market.
Equally, market volatility has increased significantly, making
planning difficult:
➢• Risk spreads on corporate bonds have soared to record levels
and ratings agencies have downgraded many corporates,
greatly increasing financing costs for firms seeking credit.
➢Many currencies have suffered volatility as global investors•
continue to assess strength of economies thus undermining
financial arbitrage strategies.
➢Commodities and energy: the slowdown in global demand has•
led to a fall in commodity prices to six-year lows. Oil has fallen
over US$100 a barrel based on the gloomy economic outlook
and falling demand.
As a consequence, we are seeing an increase in stressed
companies across the world. A record number of companies are
expected to go bankrupt in 2009 with 200,000 insolvencies
predicted in Europe alone — according to world’s largest credit
insurer Euler Hermes. In the US there is likely to be an explosion of
failed businesses as an estimated 62,000 firms go under this year
compared with 42,000 in 2008. More companies are likely to
breach their loan covenants in 2009 as the slowdown intensifies,
prompting a surge in company restructuring and failures.
Why study
But this is not the first recession — and the business world has
experienced serious downturns before. At Ernst & Young we have
an interest in understanding how companies are reacting to the
current crisis and seeing if there are opportunities to learn from
their experience and best practice. To that end, we have worked
with the Economist Intelligence Unit to interview over 300 senior
executives from major companies from around the world to see
how they are being impacted by the economic crisis and what they
are doing about it.
Given the rapidly changing environment, the timing of this study
was of particular importance. All interviews were done between
January 6 and 19 2009.
4. Opportunities in adversity
What has immediately emerged from our study is that
not all companies are equally affected by the downturn
and that a sizable minority see opportunities from the
current crisis — albeit also recognizing the threats.
Whilst the overall impact on market capitalization has been
extremely negative in the past 12 months, there is significant
variation in performance by sector. Taking the aggregate market
capitalization of the top 30 companies, per sector, in a particular
economy (Europe) reveals this. Aggregate market capitalization
change varies from an astonishing fall of 65% in the banking sector
to virtually no fall at all in the biotechnology sector. It may be a
miserable year to have been an investor but there were clearly
choices that could have been made in portfolio scope that would
have had dramatically different impacts. Those choices will be
available again in the coming year.
Impact by sector — change in aggregate market cap of top
30 companies in EMEIA (Europe, Middle East, India and Africa)
Percentage fall
in value
Sector
0 < 10 Biotechnology, pharmaceuticals
10 < 20
20 < 30 Consumer products
30 < 40 Power & utilities, media & entertainment, oil & gas
40 < 50 Automotive, insurance, technology
50+ Real estate, metal & mining, banking
The executives we have spoken to recognize the challenge to their
business but only 30% felt their focus for the next 12 months
would be on corporate survival. 70% believe there are
opportunities to do more. While 35% reported a significant
deterioration in the profitability of their sector, only 22% reported
such a problem for their own company — indeed 15% reported
some improvement in profitability over the past 12 months.
Similarly, their perspective of development in the competitive
environment was also mixed. Price competition has increased
for most — significantly so for almost a quarter of respondents
— but other developments offer opportunity:
40% are seeing reduced risk of new entrants•
30% are seeing competitors withdraw from their market; and•
11% are seeing an increase in bankruptcies among competitors.•
This is the harsh reality of competition — performance is relative
and the misfortune of your competitors can provide the greatest
of opportunities.
We can see this pattern repeated when we asked respondents
how the crisis had affected their approach to their customers.
72% reported that they had increased their focus on key accounts
— with the increased service that this implies for their customers.
39% reported that they had launched new products and services
and 34% had moved to broaden their customer base by entering
new markets. These are tough challenges but they speak of new
opportunities. Balancing the upside, however, smaller but
significant numbers of respondents talked about terminating
high-risk contracts, losing customers to bankruptcy and having
customers end contracts with them.
2 Opportunities in adversity Responding to the crisis
5. In which of the following ways has the global economic crisis
affected your organization’s approach to its customers over the
past 12 months?
The pattern is even more stark with suppliers where respondents
reported that whilst 46% of them had narrowed their supplier base
to obtain more favorable terms, some 42% had acted to broaden
their supplier base to “reduce the impact of the failure of an
individual supplier”. Here the response to adversity is driving
diametrically opposed behavior from different companies.
A supplier is clearly almost equally at risk of losing a customer
as gaining a new one.
Looking to the future we asked what change companies expected
to see in the importance that their organization attached to
different goals:
74% reported that they were focused on “securing the present”•
40% expected to see a significant increase in protecting their•
current assets
39% were seeking significant performance improvement•
37% expected to see reshaping of the business to meet•
new conditions
19% expected to see a significant increase in the pursuit of•
new market opportunities.
Over the next 12 months, what change do you expect in
the importance that your organization attaches to the
following activities?
3Opportunities in adversity Responding to the crisis
We have increased our focus on
key accounts
We have launched new products
or services
We have broadened the customer base
(by entering new geographic markets)
We have terminated high-risk contracts
with customers
We have key customers that have
suffered bankruptcy
Customers have terminated contracts
with our company
72%
39%
34%
31%
24%
19%
Please select up to three. (Shown: percentage of respondents)
Securing the present
Protecting our current assets
Improving performance
Restructuring to meet new conditions
Pursuing new market opportunities
74%
40%
39%
37%
19%
(Shown: percentage increase)
6. Faced with these conflicting messages,
how should management respond?
The evidence from earlier recessions showed that the majority of
companies responded with what seemed like very understandable
caution. Subsequent research, however, has shown that those
which emerged strongest had clearly identified opportunities
to sustain their development during the downturn and to take
strategic decisions that distinguished them from their competitors.
Perverse as it may seem, a period of crisis can provide an
opportunity to drive change more rapidly and effectively than a
period of prosperity.
Our conclusion is that uncertainty cannot be allowed to become
inaction, performance is relative, a risk is an opportunity that has
not yet been exploited. Whatever a company’s position — from
cash-rich through to deeply distressed, there is now a great need
for decisive management action.
4 Opportunities in adversity Responding to the crisis
How can I address my immediate financial issues...•
faster and better than my competitors?
How can I protect what I have... so my business•
is stronger?
How can I get the most from current assets... and out•
perform the sector?
How can I reshape my business to fit the new reality...•
to become faster and leaner?
How can I exploit the new market to find growth...•
where others may have taken their eye off the ball?
How can I sustain my business going forward... so that•
I am the best prepared to cope with change?
Key questions for management
Peverse as it may seem, a
period of crisis can provide an
opportunity to drive change
more rapidly and effectively
than a period of prosperity
7. The starting point is cash
Many companies are facing a future of great
uncertainty. Change in the market has impacted
their performance and that of their suppliers and
customers. Time is limited. Management is stressed.
Old certainties have disappeared. Yet in seeking to
take the right steps, it is critical that management
ensures that they are going in the right direction.
How badly has the company been hit, how
fundamentally has their world been changed?
The search for understanding must be deep, broad and focused.
Deep — as management seek to understand the full consequences
across the entirety of their organization, broad — in encompassing
the impact on customers, suppliers and, critically, competitors and
focused — in that the primary short-term goal in a credit crisis must
be cash.
At Ernst & Young we have been utilizing a stress pendulum that
focuses especially on the issue of cash. 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 burning cash during
a credit crisis, your priorities are clear. If you are generating cash
through operations, the opportunities are many.
As shown earlier, different sectors will be in different places on
this spectrum but this analysis needs to be done for individual
segments of a sector and for individual companies within each
segment. Take oil & gas as an example: some NOCs and IOCs are
extremely cash rich whereas many smaller exploration companies
find themselves extremely resource stretched.
Equally, it is important to recognize that this model can be applied
within many larger companies which may have business units at
very different places on the spectrum. Our belief is that “one size”
does not always fit all and frequently does not fit any. Management
should seek to drive programs of action related to where they sit
on this spectrum.
5Opportunities in adversity Responding to the crisis
Assetimpairment
Divestitures
Business unit closure
Cash flow Cash burn
Workingcapital
Marketreassessment
Liquiditymanagement
Costreduction
Capital restructuring
Court supervision
Stakeholdermanagement
Supplier stability
Portfolio optimization
Acquisition opportunities
Success
Downturn
Stressed
Dis
tressed
Insolvent
Stress pendulum
8. A time for speed — securing your present
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.
70% of respondents reported that they had already conducted a
top-down review of cash management. More significantly, over half
of respondents have already built working capital measures into
their performance objectives. But clearly such a review does not
always find a satisfactory picture — indeed the years of high
liquidity and “cheap credit” initially encouraged and have now left
many businesses in a highly leveraged state. 36% of respondents
report that they are considering possible assets that can be turned
into cash and 21% are currently making emergency plans to
release additional cash.
Which of the following cash management actions is your
company currently taking?
Companies need to secure their positions by identifying and
resolving critical issues quickly to protect against value erosion,
or to be well placed to take advantage of opportunities. A holistic
review of a company’s ability to access liquidity, manage and
release cash and control costs is essential to managing overall
risk from changes in market forces.
There are six key areas that companies scrutinize to reduce
expenses and support revenue growth — without sacrificing
corporate strategy. These are customer portfolio, contracts,
finance operations, supply chain, information technology and
real estate.
Customer portfolio represents more than just the people and•
companies to whom you sell. To a large extent it also represents
your profitability. Invest in customer portfolio management.
Establish and implement a process of regular assessment and•
monitoring of contractual partnerships.
Organizations look to the finance function in times of downturn•
to provide business insight and lead the way with sound financial
management. The finance function needs to be agile enough to
respond effectively and drive the changing business agenda.
A large portion of a company’s expenses may flow through its•
supply chain so it is no surprise that a close examination can
yield saving opportunities. But supply chain also presents an
opportunity to increase revenue by selling into markets that
may not be as affected by the downturn.
Information technology is another significant budget area for•
a company. As leading companies look for increased value and
cost improvements there is an interest in understanding where
IT investments are occurring, the value derived and the
alignment with strategic objectives.
For many companies, more capital is tied up in real estate than•
in most other assets. Opportunities for disposal may be limited
but should be explored.
6 Opportunities in adversity Responding to the crisis
Top-down review of current cash
management and of cash flows
Building working capital measures into
performance objectives of management
Considering possible assets that
can be turned into cash
Making an emergency plan for additional
cash release
Agreeing an approach for investing excess
cash (e.g., bonds, securities, etc)
68%
52%
36%
21%
18%
(Shown: percentage of respondents)
9. 7Opportunities in adversity Responding to the crisis
Which of the following steps is your company currently taking
to maintain liquidity in the light of current market conditions?
1. What steps are being taken to manage cash more tightly
and improve cash flow forecasting? What are the
potential sources for improving liquidity?
2. Are there plans in place to divest non-core businesses to
increase liquidity and satisfy lenders? Is the company
prepared for potential bid approaches?
3. Is there a disciplined working capital management
program in place?
4. What are the objectives of cost reduction efforts?
Is a cost reduction or management program needed
and in place?
5. Who is at risk in the customer or supply chain?
Key questions — Cash preservation
and generation
A holistic review of a
company’s ability to access
liquidity, manage and release
cash and control costs
is essential
Considering alternate sources of liquidity
(e.g., disposal of assets, shut down or
sale of segments/revenue streams)
Making an inventory of all debt covenants
and monitoring covenant compliance
Communicating with lenders, analysts
and rating agencies proactively
Other steps to maintain liquidity
None of the above; cash is not an issue
33%
29%
23%
6%
26%
Obtaining access to short-term finance
facilities/credit
Considering options to renegotiate
debt covenants
43%
35%
Please select all that apply. (Shown: percentage of respondents)
10. A time for knowledge — protecting your assets
Many of the world’s foremost corporate leaders
indicate that the current global economic downturn
caught them by surprise. But, with hindsight, some
may question why this was the case. For several years
there have been a growing number of commentators
questioning the sustainability of the credit boom
and its consequent impact on asset prices and
consumer confidence. Even the credit crunch itself
had happened a full 12 months before the financial
crisis hit in September 2008. Given that business is
inherently risky, it is not unfair to question whether
risk management systems could and should have
been more helpful to management?
We draw the conclusion, based on earlier research, that good
risk management systems should have helped mitigate the crisis.
Our research has found that many companies had inadequate risk
management systems — they either didn’t do risk management or
did it inadequately in scope or frequency. Had these gaps been
addressed, the risks would have been mitigated and the surprise
minimized. Too frequently, however, risk management appears to
have become an act of management compliance rather than the
exercise of leadership judgement — the wrong people looking for
the wrong things at the wrong time.
The current crisis is the time for companies to form a strategic
view of the risks that they are facing and develop the necessary
action plans required should the event they fear actually happen.
The situation is rapidly changing and can get worse. A number of
the highest profile casualties of the current crisis, confidently and
honestly predicted that they were through the worst only weeks
before their worlds caved in. Risk management needs to be
taken back from the compliance function into the boardroom.
Management needs to be alert and nimble, prepared to define
their risk appetite and tolerance, and monitor it.
Keeping a company strong is not just about the bottom line —
a company’s value is now defined by a wider picture where both
good governance, transparent reporting and communication form
an integral part of investor decision making processes. Once lost,
a company’s reputation can be hard, and sometimes impossible,
to regain. Investors have told us that in the event of a reputational
problem, they expect quick, clear communication which addresses
the issues and outlines the remedial action taken.
In light of current market conditions has your company
conducted a revised risk assessment?
Of course, the key is for issues not to become problems in the first
place, and if early warning systems identify potential strategic,
operational, financial and regulatory risks, mitigating actions could
already be in place to protect the company’s assets and reputation.
Yet 42% of C-suite level executives in a recent Ernst Young study
indicated that risk assessment had been inadequate in the
past year.
Of our respondents only 57% had already implemented enterprise
risk management and only 53% had implemented any form of
scenario planning — albeit even if that planning may not have
factored the credit crunch and recession into the model. It is fair to
assume that many of the companies that will prosper during this
difficult market have a robust approach to risk management.
Our study also indicates that risk profiles have changed in light of
current circumstances with increasing scrutiny on strategic risks
such as planning and resources (78%) and operational risks such
as sales and marketing activities (70%) and supply chain (64%).
8 Opportunities in adversity Responding to the crisis
We have revised our assessment within
the last quarter in response to
current conditions
We have revised our assessment within
the last six months in response to
current conditions
We are maintaining our regular risk
assessment schedule and have not
changed it as a result of current conditions
45%
25%
30%
(Shown: percentage of respondents)
11. 13% 18% 19% 17% 34%
32% 30% 25% 10% 3%
20% 36% 30% 9% 4%
The company should be
improving its internal
controls to respond to the
increased business risk
from the current
economic conditions
The company’s internal audit
function currently has the
capability to address
increased business risk
as a result of the
economic downturn
Strongly
agree
1 2 3 4 5
42% 36% 16% 5%1%
10% 32% 36% 16% 6%
An information security
breach could severely
impact our brand and
financial reputation
Due to the current economic
climate we feel more at risk
from fraudulent activity
Over the next 12 months,
we will be primarily
focused on survival
Slightly
agree
Neither
agree nor
disagree
Slightly
disagree
Strongly
disagree
What is needed in many companies is a new approach to assessing
the potential risks that now present themselves. This will ensure
that processes are in place to flag issues early and at the same time,
and identify opportunities for getting ready for the rebound whether
they are strategic growth or operational cost reduction related.
Please indicate whether you agree or disagree with the
following statements
9Opportunities in adversity Responding to the crisis
1. When was your last risk assessment conducted and
has this been updated to take into account current
economic circumstances?
2. Have you determined your risk tolerance? Do you have
a thorough understanding of your degree of flexibility
and critical assets to protect?
3. Has due diligence been re-visited for key suppliers and
major contracts? What’s your “plan b” if a supplier or
major contractor goes into administration?
4. What controls are in place to improve early warning?
5. What scenario planning have you conducted?
What balance is there in your risk assessment?
Does your organization have plans B and C in line
with the above scenarios?
6. At what point will you move from short term
fire-fighting/cost cutting mode towards a strategic
mid- and longer-term modelling?
Key questions — Protecting your assets
12. A time to perform —
improving your performance
Management should always be seeking to maximize
the effectiveness of their operations but in times
of broad economic growth and profitability, this
goal can sometimes be downplayed against other
worthy goals of achieving market and reputation
share, strengthening client relationships or long term
strategic positioning. In the current market conditions,
however, improving performance effectiveness
becomes critical to business survival.
It is also important not to overlook the fundamentals. In our
survey, 55% of respondents reported increased delays in cash
collection from customers. Businesses need to ensure that their
functional processes are streamlined — and more visibly connected
throughout — in order to increase lines of communication between
potentially distressed business functions or operating units and
their customers. This will facilitate improved cash collection,
reduce revenue leakage and allow companies to identify
customer-debtor issues early on.
On which of the following activities is your company most likely
to focus its capital expenditure over the next 12-18 months?
23% of respondents believe future investment focus is on
maintaining the current business model whilst 53% seek
improvements to the current model. Overwhelmingly, therefore,
management is focused on getting improved performance from
the assets and operations that it currently has. Now is a time for
business to ensure that it is getting the maximum return on the
assets that it employs. Cost reduction — although hard to achieve
— is the starting point. Improved effectiveness, however, must be
the goal.
And our respondents indicate that extensive focus is already
underway on cost reduction. Some 84% of respondents have
completed their cost savings analysis. Overwhelmingly they have
focused on four major areas of headcount, IT, employee benefits
and real estate.
Which of the following cost reduction initiatives have you
already implemented or started to implement?
Whilst the first response to a more difficult market is to seek to
improve efficiency — reducing costs, slowing recruitment, reducing
inventory — the risk of reduced effectiveness is real. Cost cutting
— though difficult to achieve in reality — is frequently at best a short
term solution. Leading companies who want to win in the market
longer term, cannot lose sight of the effectiveness agenda —
however hard the conditions get. In addition therefore to reducing
resources used they must move to reexamine the processes
they adopt.
10 Opportunities in adversity Responding to the crisis
Strategic
acquisitions
16%
Maintaining current
business model
23%
Improvements
or growth
to current
business model
53%
We are currently undecided
on the best approach
8%
(Shown: percentage of respondents)
Head count reduction
IT rationalization
Employee benefits rationalization
84%
60%
42%
30%
4%
4%
Overall cost savings analysis
Real estate rationalization
Other, cost reduction initiatives
None of the above
44%
Please select all that apply. (Shown: percentage of respondents)
13. 11Opportunities in adversity Responding to the crisis
Respondents, however, paint quite a challenging picture of how the
engines of growth have been affected by the current conditions.
A cut back in mergers acquisitions is perhaps the most
understandable given the levels of market uncertainty but the cut
backs in marketing, RD and operations, may make it difficult to
secure the opportunities that the market offers.
Which of the following functions or activities in your business
have been most affected by a decline in investment at your
company in the current economic climate?
Given current market conditions, the need for performance
improvement has never been more urgent. The speed of change
presents a challenge, and business success rests on management’s
ability to achieve considerable improvements quickly. Consequently,
effective performance improvement is now a crucial differentiator
and can provide significant competitive advantage.
Balance emerges as the key theme from past downturns. All too
often the immediate reaction is to cut costs, to stop capital
programs and to delay strategic initiatives. But leading companies
seek balance. Balance between improving operating 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.
How would you rate the opportunities for cost reduction?
6% 22% 40%
Operations
Mergers and acquisitions
Sustainability
Sales and marketing
Significant
opportunity
1 2
18% 14%
16% 18% 29% 18% 19%
15% 42% 28% 12% 4%
12% 29% 33% 19% 6%
3 4 5
No opportunity
at all
25% 33% 25% 13% 4%
11% 23% 32% 21% 15%
13% 30% 36% 17% 4%
Supply chain
Research and development
Information technology
Key questions for management
Research and development
Operations
Information technology
37%
31%
25%
14%
6%
15%
Sales and marketing
Sustainability programs
Risk management
There has been no decline in investment
at our company
27%
Mergers and acquisitions
40%
Please select up to three. (Shown: percentage of respondents)
Have you adjusted the scope of your ongoing•
performance improvement and cost reduction initiatives
as a result of the economic situation?
If you are reducing your available resources (i.e.,•
Headcount, IT functions), how will this impact on the
efficiency of your core processes, and your ability to
react quickly to major opportunities?
What steps are you putting in place to mitigate against•
the fall in the creditworthiness of customers?
If your key competitor ceased trading tomorrow,•
how quickly could you capitalize on this new market
opportunity?
How close is your ideal business model to your actual•
model, and are there opportunities now to make
key changes?
14. A time for change — reshaping your business
The impact of the market changes has clearly been
significant — many businesses have been damaged and
some business models have been radically changed.
Management must take action to change their
operations and assets to reflect their new world
and prospects.
Whilst current economic conditions change, many long term trends
do not change at all. Business models have been undergoing a
deep-seated restructuring as long-term trends challenge models
that have been the norm for many years. Companies are being
forced to review their methods of organization due to a range of
macro influences:
Diversification, globalization and (de)regulation are challenging•
the current organization model.
Business models need to be increasingly flexible to facilitate•
adaptation to changing market dynamics across both geographic
and product divisions.
Niche specialists are increasingly prevalent in specific business•
divisions such as logistics, HR, IT and back office functions.
These specialist players compete with vertically integrated
businesses operating across all operating divisions, bringing
their viability into question.
Innovations in information technology are facilitating the•
emergence of new players, new organizational models and
increased competition.
Even in favorable market conditions, business remodeling requires
careful planning. With growing economic uncertainty, structural
adjustments require an even higher level of due diligence and
analysis. But the demand is, if anything, accelerated rather than
changed as a robust and flexible model is critical to achieving the
same results in less favorable conditions.
In response to the economic crisis, companies may be tempted to
put aside long term strategic plans and opt for what seem to be
quick fix solutions, in an attempt to deal with burning issues.
Businesses that emerge strengthened from the current crisis will
be those that reshape intelligently, not those tempted to move
quickly to extract additional value. They will be able to benefit from
increased flexibility, which is key in these uncertain times. However,
the advantages extend beyond this and represent the necessary
adjustments to stay ahead and respond to the long term,
underlying change in the business operating environment.
In the current environment, companies need to see a discernible
short-term impact of their decisions — although business
reshaping can and must deliver quick fix solutions. Robust
implementation processes however are critical to ensure that
companies adopt sustainable models and do not increase their
level of risk or impair performance.
We anticipated that the current uncertainty would lead to
management delaying programs of re-shaping. Far from being
frozen into inactivity, however, companies seem to be using current
conditions to accelerate. A full 82% of respondents expect business
restructuring to play an increased role in the coming year.
12 Opportunities in adversity Responding to the crisis
A robust business case alignment with strategy•
Effective change management•
A planning and design process that is agreed with•
all stakeholders
Effective monitoring post-reshaping and an ongoing•
refining process
Key requirements for
successful implementation
15. Of the business reshaping options, some 40% of respondents are
focused on divesting non-core/non-performing assets. Almost the
same number, however, are actively exploring strategic acquisitions
in their core business — with a further 29% exploring the use of
strategic alliances. Almost a third are considering offshoring to
lower cost locations with a similar number anticipating an
increased use of outsourcing and shared service centers.
Expansion measures, whether expanding into new geographical
markets, or developing new product lines, are understandably
lower priority. Companies prefer to concentrate on maximizing the
potential from existing markets, which are perceived as more of a
‘known quantity’ in these uncertain times. Business diversification
is envisaged by a more limited, but still significant, 19% of those
surveyed, while 20% foresee geographical expansion.
In the next year, which of the following actions do you plan to
take in response to or in light of current market conditions?
There are a broad range of functions where management is
considering increasing either outsourcing or the use of shared
service centers. Outsourcing is seen as particularly appropriate
for logistics, IT network management and telecommunications.
Shared services are seen as more attractive for human resources
and accounting. Although such measures offer potentially
increased flexibility, the flip side for those entering into new
contracts is that they may be required to sign detailed contracts
where they may be locked in for several years.
For which functions are you considering an increase in?
% considering an increase
Function Outsourcing Shared services
Product research development 15 15
Product manufacturing 16 8
Distribution, logistics and transport 23 14
IT software network management 30 33
Knowledge services 11 12
Telecommunications management 18 11
Human resources 15 23
Tax legal services 13 10
Accounting 10 22
Internal audit 3 7
Customer related functions 14 15
Property management 11 12
13Opportunities in adversity Responding to the crisis
Divestments of non-core or
non-performing businesses
Strategic acquisitions in core business
Increased use of outsourcing
or co-sourcing
Increased use of shared service centers
Expanding into new geographical markets
31%
31%
29%
27%
20%
Moving operations to lower
cost locations
Increased use of strategic alliances
40%
34%
19%
15%
Diversifying the business/developing new
product lines
Strategic acquisitions in new areas
of business
Please select up to three. (Shown: percentage of respondents)
16. A time to be bold — sustaining your future
“2009 could be the year in which
financially sound organizations
make their corporate fortunes.”
In the current turbulent economic environment
there are market growth opportunities for those
businesses prepared to seize the moment — offering
businesses the potential to increase market share in
key geographies or sectors. Often when the market
is under most stress, organizations are forced to
re-examine their business models and create the
most successful foundations for growth. It is those
companies that have developed a sustainable business
model that will be successful in the downturn, as they
are well-placed to take advantage of the new growth
opportunities, especially when the economy improves.
It is clear that in 2009 there will be unparalleled opportunities to
acquire assets at very modest valuations. Any company with
access to capital will be in a very strong position to make value-
enhancing acquisitions. The main question will be one of timing.
Given the unprecedented nature of the current economic situation,
predictions on when the economic spiral will reach a bottom are
meaningless. The key attribute to taking advantage of attractive
opportunities will be flexibility and preparation.
Many executives react instinctively during economic slowdowns by
cutting discretionary spending across the organization. They often
fail to distinguish between short-term operational and the long-
term strategic programs which are still vital to build capabilities
for long-term competitive advantage and future growth.
Here we focus on three key themes for a sustainable future —
maintaining a sustainable business model; capitalizing on growth
opportunities in emerging markets and taking advantage of
opportunistic deals.
Maintaining a sustainable business model
Ernst Young’s experience has identified the characteristics that
determine those businesses that are best positioned for growth
coming out of a market downturn. There are three key areas of
focus — the business model; clear strategic decision-making and
customer loyalty.
14 Opportunities in adversity Responding to the crisis
It is those companies that
use the situation as an
opportunity to maintain a
sustainable business model
that will not only survive the
downturn, but emerge
stronger and in the best
position to take advantage of
the new growth opportunities
as the economy improves
17. The business model
A successful model will be flexible and scalable (across people,
process and technology) to take advantage of opportunities
that emerge. It can adapt to changes in volume rapidly without
being dependent on large scale recruitment, training and
capital investment.
As organizations find their path through the current economic
downturn, many executives tend to focus on staff efficiency and
headcount. In our survey, 60% reported that they were currently
or planning to implement headcount reduction strategies,
and 42% reported benefits from rationalization programs within
their companies.
The war for talent doesn’t stop during a downturn — it is
exacerbated. Forward-thinking organizations can use more
innovative talent-management approaches to gain a competitive
advantage that can help them ride out the downturn and create
a strong platform for recovery and growth.
People remain a key priority. Treating them in a fair and
transparent way during volatile times becomes even more
important to their future loyalty. Holding on to high quality talent
and capitalizing on the growing pool is often the real source of
competitive advantage and sends a clear message to the market
that this company is resilient.
Corporate alliances, which are growing and account for about
a third of revenues at many companies, need even more care
and handling during a recessionary business climate. The
interdependence between companies that may be competitors
with different operating styles and cultures becomes even more
acute as the immediate market pressures take hold.
Product development, technology and innovation budgets are
likely to have been reduced under the cost reduction banner.
Experience from previous downturns has been that those who
stick with a focused investment program have emerged stronger
than their peers. This requires a clear understanding of where the
opportunities are and in particular a heightened understanding
of where the competitors are weakened through the downturn.
Clear strategic decision making
Organizations that are successful in a downturn have absolute
clarity of their proposition, strategic direction and brand
positioning combined with responsive decision making.
They leverage existing management information more smartly
to take advantage of market changes and quickly exclude those
opportunities that do not fit with the strategic direction.
Investing in customer loyalty
Responding to and staying close to your customers has never been
more important for businesses than during times of economic
instability. Research shows that recessionary periods provide a
good opportunity to retain and develop customer loyalty through
investing in and developing effective customer relationships as a
vehicle for future growth.
It follows on that by aligning pricing strategy and products/services
to reflect the changing circumstances of customers, companies can
more readily deliver a strong growth value proposition. Identifying
pricing, channel and value opportunities across brands and
markets, developing pricing strategies optimizes shareholder value
and return on brand equity.
Capitalizing on opportunities in emerging markets
While most emerging markets are likely to experience slower
growth in 2009, many of them are still expected to grow by 5% —
a stark contrast to most developed countries. Businesses will be
keen to find opportunities offering greater exposure to these
markets, particularly as valuations are likely to be considerably
below recent levels.
While the BRIC countries (Brazil, Russia, India, China) are clearly
the major players (with China alone contributing nearly 27%
to global growth in 2007), another group of countries are
emerging and have the potential to behave like the BRICs,
driving growth and making waves in the global market.
15Opportunities in adversity Responding to the crisis
18. 16 Opportunities in adversity Responding to the crisis
Thinking of your geographic markets, which do you expect to
hold the best growth opportunities for your company, and which
are you most likely to consider as off-shoring destinations?
Doing opportunistic deals
Businesses continue to be bought and sold. 43% of respondents
to our survey said the current market environment would make
them more likely to consider divesting and 62% said they are
looking regularly at each business in their portfolio to determine
whether or not to sell it. Intense pressure is bearing down on
executives to create the right divestment and acquisition strategies
as many sectors consolidate further. Research shows that
downturn mergers generate about 15% more value (total
shareholder return) compared with boom time mergers.
Keeping sustainability on the agenda
When looking to the future, businesses still need to keep an eye on
their environmental and sustainability policy and practices, and
those of their suppliers — particularly with the tighter regulations
and increased number of oversight bodies. Short term profits built
upon unsound or unpopular corporate behaviors may appear to be
an attractive option today but the implications of these decisions
can be very long-lasting, and may permanently damage what
ever goodwill the company has achieved in the past for its
environmental and sustainability position. Staying close to the
regulators and emerging as a clear champion for responsible
action will remain a source of competitive advantage.
We undertook earlier studies into the attitudes of management
over the summer months of 2008. This was before the financial
crisis but the downturn was already noticeable and we were keen
to see how management was responding. At the time there were
some alarming signs that issues of sustainability were beginning
to fall down the corporate agenda.
Other studies have raised similar concerns but our latest study
suggests that few companies are seeing opportunities to reduce
their investment in sustainability issues. This is encouraging — not
just from an environmental perspective — but because there are
significant growth opportunities for companies who embrace the
sustainability agenda in addition to those opportunities to build
their brand and reputation.
Please select up to three for each column.
59
26
China
India
45
45
South-east Asia
26
15
Latin America
25
13
Eastern Europe
24
23
Middle East
20
5
North America
13
5
Western Europe
9
4
Africa
8
3
Australia and
New Zealand
7
2
Prospects
for growth
Offshoring
destination
19. 17Opportunities in adversity Responding to the crisis
Do not forget your people
Be clear and honest about purpose — Winning leaders increase
their level of communication during a downturn and recognize
the need to share greater understanding of where the
organization is going and why. Key talent is a critical audience
for this as their motivation and loyalty will remain high if they
trust what their leaders or future employers are saying, and feel
they have a vital role in creating a successful future.
Develop tomorrow’s leaders — Successful companies
prioritize the talent they need to nurture, and invest heavily
in their development. A major bank is even placing its talent
in high pressure opportunities created by the downturn and
increasingly using international placements when growth
opportunities in their home market are limited. Organizations
will find that the competencies they look for will change
as they move through the cycle, and it is critical that
performance frameworks quickly reflect and encourage
these changing skills sets.
Get creative on rewards — With pay rises and bonuses
unlikely in the near future, executives need to move beyond
‘bribing’ their talent to perform. Key talent do not want to
put their careers on hold during a downturn, and so leaders
need to look at innovative ways to reward the value they
create, such as public recognition or asking them to lead
high-profile projects. Organizations are also getting smart in
the way they use flexible and home working, reduced hours
and sabbaticals where tough decisions need to be made.
Create the right environment — The best employees thrive
with challenge and come to the forefront during adversity.
While executives worry about the impact of their decisions
on staff numbers and facility closures, it is important they
also focus on the opportunities their staff can create if they,
as leaders, create the right environment in which they can
excel. This is where they can get ahead in the war for talent
and the battle for competitive advantage.
20. 18 Opportunities in adversity Responding to the crisis
A time for action
In times of great uncertainty and stress, there is a
temptation to wait and see. Maybe tomorrow there
will be more clarity as to risks, maybe things will
have improved and tough decisions can be delayed.
And our survey shows some evidence of that — the
almost 30% of respondents who have not increased
their focus on their customers, the 16% who have not
begun to think about cost savings or the 40% who are
taking increased time to action their plans concerning
reshaping their business.
At the other end of the spectrum there are those who have
panicked into a burst of activity — any activity. It has, fortunately,
been some time since we experienced a deep recession and
perhaps some managers have not experienced market conditions
that are this difficult. But our survey also saw a number of
respondents who seemed to be answering “all of the above” to
every list of possible actions. There is certainly no doubt that
many executives are working increasingly hard, but wasted effort
is more the consequence of clouded thinking than a solution to
economic hardship.
From our perspective, we believe it is necessary to recognize that
the crunch has happened, and that its consequences will continue
to emerge. Past actions can be regretted but they cannot be
reversed. The future, however, can be different and that is where
management must focus.
We believe that now is the time for leaders and management:
To quickly focus on cash and your exposure to the downturn.•
The greater your liquidity, the greater your options and your
prospects of success. Understand the impact on your clients
and your suppliers. Seek to understand the impact on
your competitors.
To seek to know your situation and your options. Now is the•
time to be serious about risk management — not as procedural
compliance but as the process for evaluating future actions
and consequences.
To focus on the performance of your team and your assets.•
When markets are tough and resources are scarce, this is the
time to be ensuring that you are making both efficiency and
effectiveness gains. Performance is relative — for even the most
distressed of companies.
To focus on driving the changes in the organization to match the•
changed environment that we have entered and to deliver the
performance that will shape the market of the future.
To be bold about the opportunities that do exist to fundamentally•
change the competitive position of your organization to not just
survive the economic downturn but to thrive and build a position
to rebound when conditions change.
21. 19Opportunities in adversity Responding to the crisis
For this study, the Economist Intelligence Unit
surveyed 337 C-suite and board level executives.
Respondents were drawn from across the world. All executives
polled worked for companies with a turnover in excess of
US$1 billion and businesses were cross-industry. The research
was carried out between 6 and 19 January 2009.
About this report
What is your primary industry?
Financial services
Manufacturing
IT and technology, Telecoms
Healthcare, pharmaceuticals
and biotechnology
Energy and natural resources
Construction and real estate
Retail
Government/Public sector
Other
Chemicals
Transportation
Professional services
25%
18%
14%
7%
7%
6%
5%
3%
3%
3%
3%
4%
What are your company’s annual global revenues in US dollars?
$10bn or more
$5bn to $10bn
$1bn to $5bn
49%
16%
35%
What is your job title? (number of respondents)
SVP/VP/Director
CFO/Treasurer/Comptroller
Manager
Head of department
Other C-level executive
Board member
Other
Head of business unit
CIO/Technology director
CEO/President/Managing director
121
44
39
32
31
24
18
10
6
12
Asia-Pacific
EMEIA*
Americas
30%
41%
29%
In which region are you personally located?
* Europe, Middle East, India and Africa
22. Contacts
Role Name Email
Opportunities
in adversity
Christian Moullion
Mike Cullen
Jeanne Boillet
christian.mouillon@fr.ey.com
mcullen@uk.ey.com
jeanne.boillet@fr.ey.com
Securing
your present
Jonathan Johnson jjohnson@uk.ey.com
Protecting
your assets
Martin Studer martin.studer@ch.ey.com
Improving your
performance
Lars Weigl
Arco Bakker
lars.weigl@se.ey.com
arco.bakker@nl.ey.com
Reshaping
your business
Thierry Muller thierry.muller@fr.ey.com
Sustaining
your future
Richard Reed rreed1@uk.ey.com
Assurance
and Advisory
Business Services
Pascal Macioce pascal.macioce@fr.ey.com
Tax Stephan Kuhn stephan.kuhn@ch.ey.com
TAS Dave Read dave.read@uk.ey.com
Further insight on management options are included
in the series of related whitepapers published in the
“Opportunities in Adversity” series:
“Securing your present”•
“Protecting your assets”•
“Improving your performance”•
“Reshaping your business”•
“Sustaining your future”•
Visit www.ey.com/opportunities-in-adversity
for more information
20 Opportunities in adversity Responding to the crisis