Strategic flexibility: Your defense against the downturn

Originally published in Performance Perspectives, March 24, 2008

Are we headed for a recession?

Technically, the experts caution, we're not in a recession — yet.

The Economist Intelligence Unit found "sagging confidence" among the more than 1,000 executives it surveyed for its January 2008 Global Business Barometer."¹

CFO Magazine saw the same attitude reflected in its Global Business Outlook Survey, with "72 percent of [finance chiefs] less optimistic about the economy than they were last quarter."²

Technically, the experts caution, we're not in a recession — yet.

But technical definitions notwithstanding, many consumers and businesses feel as though the recession is here already.

The big question, however, is how long and how deep the recession will be.

"Shallow downturn" or "long slog"

Predictions among pundits and journalists range from a "brief, shallow downturn"³ to a "long slog."⁴

And while the macroeconomic issues can be abstract and theoretical, the question for finance leaders in business is anything but academic.

McKinsey & Company urged forward-looking companies to prepare ahead of time for the "eventual downturn."

Prudent finance leaders need to do their best to prepare for either eventuality.

And they need to look for the opportunities as well as the dangers that a recession presents.

A year ago, when the economy was stronger and the mood was more upbeat, a report from McKinsey & Company urged forward-looking companies to prepare ahead of time for the "eventual downturn."⁵

To determine which preparations would be the most effective, McKinsey looked back to the recession of 2000-01 to see which companies had faltered then, and which had taken advantage of sluggish times to make gains on their competitors.

Strategic flexibility

"15 percent of companies that had not been industry leaders prior to the last recession vaulted into those positions during it."

McKinsey noted that "nearly 40 percent of leading US industrial companies toppled from the first quartile in their sectors during the 2000-01 recession, and a third of leading US banks met the same fate."

But more interesting, perhaps, is the finding that "15 percent of companies that had not been industry leaders prior to the last recession vaulted into those positions during it."

McKinsey found that "the post-recession leaders in most of the sectors...had characteristics in common."

Those characteristics can be summed up in two words: "strategic flexibility."

Balance sheet, operations, and products

The strategic flexibility of the top performers during and after the last recession was exhibited in three primary areas: balance sheet, operations, and products.

Maintaining a strong balance sheet gave companies the ability to expand during the recession, in many cases through acquisitions or the purchase of assets at bargain prices.

Strategic flexibility of the top performers was exhibited in three primary areas: balance sheet, operations, and products.

The leading companies spend 15 percent more on capital expenditures and 7 percent more on mergers and acquisitions.

Operating flexibility was achieved by means such as replacing salaried employees who left through normal attrition with part-time employees.

Companies were thus able to cut costs quickly when the recession hit, without painful disruptions to their core workforce.

A greater diversity of product offerings across a broader geography allowed the leading companies to expand their customer base as competitors withdrew.

A large restaurant chain was able to avoid discounts and sustain growth by adding services and introducing gift cards.

A flexible strategy comes from flexible systems

How can other companies repeat that kind of success and not only weather the hard times but come out on top after a recession?

Strategic flexibility depends, in part, on visionary leadership.

Forecasting demo: Scenario modeling

But choosing the right strategy is a easier when management has tools that enable flexible scenario modeling and rapid decision making.

The financial performance management solutions that are available today, such as IBM Cognos 8 Planning and IBM Cognos TM1, are designed with flexibility as key attribute.

These products include powerful modeling capabilities that enable finance analysts to consider the consequences of different actions and different economic environments.

What happens if the recession is longer and deeper than expected, or shorter and shallower?

Scenario modeling allows you to create, in effect, a repertoire of responses to various situations.

Coupled with other capabilities, such as rolling forecasts, the office of finance is equipped to both accurately anticipate and effectively respond to whatever changes occur.

The McKinsey report concluded with the admonition that, "managers and boards... should be asking themselves today whether they are building the financial, operating, and product flexibility to make the most of the next downturn."

With the right tools from Cognos, seeing the full range of that flexibility, and seeing how to take advantage of any situation — even in a recession — is a lot easier.

Find Out More Forecasting demo: Build and test scenarios Virtual Finance Forum – Register now!

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Sources

¹ Global Business Barometer, The Economist, Jan. 3, 2008

² Kate O'Sullivan, By the Numbers—Business Outlook Survey, CFO, January 2008.

³ Maria Bartiromo, quoting Facetime, Haley Barbour: The GOP Insider on Election 2008, BusinessWeek, Feb. 25, 2008

⁴ A long slog, The Economist, Jan. 10, 2008

⁵ Richard Dobbs, Tomas Karakolev, Rishi Raj, McKinsey on Finance: Perspectives on Corporate Finance and Strategy, Number 23, Spring 2007, McKinsey & Company