It has been a month of upheavals in the global financial services sector and overnight we have seen established brands disappear and fears of a global slowdown emerge. For companies, demand is declining, inventories and raw material are getting harder to manage, cash flow is tight, budgets and forecasts seem obsolete and the future is as opaque as it has been in at least a decade. While exercising caution is inevitable, what is equally important is to not lose oneself in the anxieties of the present, and continue to maintain a focus on the long term.
Illustration: Jayachandran / Mint
While this is easy to say, it becomes extremely difficult to practice when surrounded by an environment that emphasizes only one goal — simple survival. But history has shown that the savviest leaders realized that a period of great uncertainty, with financial and competitive landscapes changing almost overnight, could be the ideal time to make important strategic gains.
Conventional wisdom suggests that companies should put new investments and potential M&A deals on hold when markets are changing rapidly. Yet, the experience of many successful companies during periods of financial turmoil clearly demonstrates the opposite. Bain and Co.’s analysis of at least 24,000 deals in the US between 1996 and 2006 shows companies that acquired through the last downturn (2001-2002) generated almost triple the excess returns of companies that made acquisitions during the prior boom years.
Thus, for companies that have the right combination and level of readiness, prudence and risk appetite, economic turbulence actually presents some of the best opportunities to fill capability gaps, gain market share, enhance a company’s competitive position, and in the long run, create shareholder value and generate superior returns. It is also a time when companies under threat are letting go of important facilities and talent that can be acquired cheaply. The key to success is focusing on the right types of companies, typically those “with strong finances and relatively weak profitability”.
For private equity and venture capital funds, especially those which have successfully raised capital, the current environment presents very attractive valuations. There are a number of such funds which will now look to make “sensible” investments in sectors with high growth potential.
Tough times are also good times to review one’s own company operations, including finances, partnerships, human resources and even company culture. Sometimes shock, uncertainty and threat trigger the need for radical change and give alert executives the chance to relax their assumptions about the boundaries that normally confine their businesses.
Forward-looking companies can also take advantage of the fact that employees are more willing to accept change during a crisis and use the opportunity to restructure the company by changing its organization, strategy and performance culture. As there is an overall recognition that things must change, resistance is diluted.
Challenging periods can also provide opportunities for businesses, particularly those which can be nimble and quick to react to changes in consumer trends. McKinsey research shows that after 1997, consumers in many Asian markets became more receptive to new financial products, new channels and foreign institutions. The ability to track such market shifts, speed of response and the flexibility to incorporate such changes into the sales strategy are what define success in such a market.
At the same time, companies should spend even more time than usual with their current customers. While the competition may get distracted by the need for survival, alert companies can capitalize on this opportunity to stay focused on what drives customer satisfaction. A focus on unwavering customer support may be the most important commitment they can make in the foreseeable future.
Leadership gains even more prominence in such an environment. When teams see their leaders striving to be extraordinary, they are more likely to do so themselves. Therefore, not only will leaders need to come up with plans that are believable and fact-based, and acknowledge the tough times, they will also need to engage everyone around them — including stakeholders, team members and colleagues — if the strategy is to be implemented effectively.
Leaders who have taken the initiative to build teams comprising individuals who understand the values, mission, philosophy and ethics of the organization, will find themselves in a better place to deal with the current environment. With such an involved team, everyone is on board when it comes to the reason that the organization exists and what it strives to do. This will lend only positivity to the working environment.
Communication is key and conversations with employees will need to address concerns while seeking ideas and encouraging “effective” risk-taking. Transparency about the situation will also add credibility. A successful leader will engage in dialogue with his people, but only a dialogue based on facts, plans and solutions. Creating a solution-oriented mindset and inviting ideas to improve areas, such as productivity, sales and employee retention, will communicate sincerity on the part of the organization in an uncertain environment.
The right perspective
India is witness to a number of successful turnaround stories driven by far-sighted leaders during challenging times. Post-2001, Cisco Systems Inc. stepped up its focus on India and China, turning to large phone companies for growth, a shift from its earlier focus on banks and manufacturing companies. Maruti Suzuki India Ltd’s turnaround in 2002 was the result of a complete strategy revamp — based on increased productivity, reduction in the workforce, fewer vehicle defects and a refocus on cheaper Indian parts suppliers. Under new leadership, Canon India Pvt. Ltd junked old strategies post-2001 and introduced new and aggressive branding and product plans, overhauling its entire distribution framework. Another success story has been Essar Steel Holdings Ltd, which beat depressed steel prices in 2001 and 2002 thanks to dexterous financial engineering by its senior management.
True leaders realize that managing risk does not mean avoiding it altogether — and that by understanding the dynamics of the new environment and braving the odds, they will be able to turn unfortunate circumstances into the opportunity of a lifetime for their companies.
Anjali Bansal heads the India practice of Spencer Stuart,an executive search consulting firm, and is based in the firm’s Mumbai office.
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