Recession in the US, Europe and Japan has forced companies to aggressively cut costs and focus on their core competencies. John Yoshimura, chief operating officer of US-based management consultancy AT Kearney, has spent most of his career advising companies on how to reduce costs and find the right strategy to ride out a slump. He says in an interview firms that had anticipated the recession and slashed costs are more often than not today’s winners. Edited excerpts:
With the recession, companies have moved aggressively to cut costs. What has stood out in the cost cutting this time around?
There are two things. I was a little surprised to see how many companies did this in a reactionary manner. Most people didn’t project this big a business downturn.
As we saw, many industries, many companies saw a 30% decline in their topline and there was a necessity to cut costs to survive and maintain profitability. Those companies tended to take a slash-and-burn approach to the cost cutting and basically did across-the-board moves, reducing people, cutting all discretionary expenditure, as a short-term survival tactic.
Straight talk: Yoshimura says the focus more on core competence is only going to increase. Harikrishna Katragadda/Mint
Others looked at it a little more strategically and said, ‘How can I cut costs but also reinvent my business model for the future.’ So I think the biggest thing is companies restructuring their business model to be much more effective going forward, trying to look at core competencies, what they should be doing internally, what they could outsource, and reconfiguring their value chain.
You mentioned that some companies moved to cut costs in a reactionary manner while others anticipated the slowdown and cut costs faster. Are companies that anticipated the recession today’s winners?
Absolutely. They are not only doing better this year but their positioning is better for future years as well because what they did was strategic in nature. So when they made the cuts, they made them without really sacrificing their business proposition going forward and so they’ll not only be winners now, but winners in the future.
Any global company names that you can think of?
The typical ones are those that you always hear about. Some of the large US conglomerates like GE (General Electric Co.) are always good at restructuring their portfolio. Some of the other companies in basic commodity areas have done well. People like Alcoa (Inc., the US-based aluminium producer) have done well. A number of Indian companies have done well. There’s usually one or two companies in every sector that stand out.
Another theme of this recession has been consolidation—companies going back to their core businesses and revisiting what they stand for. Did the consolidation in some cases go too far? Did companies pull back too much?
No, not at all. I think the conglomerates have done this in a couple of ways. They’ve spun off and sold businesses to make sure their balance sheets were well structured and that was a good move. They haven’t done it enough yet. There’s further room for consolidation and focus in their portfolio. Even for companies with a narrow portfolio, focusing more on their core competence...is only going to increase.
Worldwide, job losses have been the most heart wrenching part of this recession. Could companies have gotten by without cutting so many people?
That’s a good question. Their motives in many cases in most countries were driven by the financial returns they needed and their obligations to shareholders. So they cut costs to maintain the bottomline.
Did they cut too much? In most cases, what they cut off was capacity that was not being appropriately utilized. So it may seem harsh but what they cut off were resources that weren’t productive. This resulted in job losses. It’s going to take new businesses to get the job creation going back but for all the companies that cut people...it hasn’t to a large degree hurt their ability to deliver.
Who are the winners and losers from this recession?
I think consumer products and retail companies will do okay coming out of the recession as they’ve been pretty aggressive cutting costs—both the manufacturers and the retail outlets. The automotive sector in the US because of the cost cutting they’ve had to do. The US auto industry will be much more healthy than it has been for the last 14 years. It’s been painful and it’s going to get a little more painful.
The pharma business in Europe is another (such) sector but they still have a pipeline issue—their product pipelines are still weak. Companies in the energy sector that have continued to make investments even though times are tough are going to benefit.
Indian business houses went through a pretty painful period in the 1990s and had to focus on their core competencies in order to be competitive. Where does Indian business stand today in terms of competitiveness?
That varies by sector. In general, most sectors are improving in terms of global competitiveness. If you were to ask across each of the sectors if there was an Indian company in the top three, globally then that’s not where they’re at. India still has some way to go in the top tier across most sectors.