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Opportunities in Adversity

What leading companies are doing to find opportunities in the economic downturn

While reports suggest that the global economic downturn that began a little more than a year go is leveling off, perhaps even lifting, markets remain dampened. Yet, history suggests that the apparently new world in which businesses must now operate is actually an old story—one that may present as many opportunities as it does threats. 

“Business cycles like this clearly come and go,” Henry Fernandez, CEO of MSCI told CEOs gathered for a roundtable discussion held in partnership with Chief Executive and Ernst & Young. “This is worse than [many] but it’s also a cleansing process, challenging the establishment and creating an opportunity to take costs down. We have an expression in our company: A crisis is a terrible thing to waste.”

“Some companies are identifying and taking  steps to capture organizational benefits and market opportunities,” agreed Mark Manoff, vice chairman and Northeast managing partner of  Ernst & Young LLP, who cited findings of the firm’s June 2009 Opportunities in Adversity study. “There is a rich harvest of value to be gathered through management action.” 

Those not hindered by a lack of capital are particularly well positioned. “This is an opportunity for us to make lemonade out of lemons,” said Major General Keith Thurgood, CEO of the Army and Air Force Exchange Service. “It’s a great time for us to retune our strategy and our marketing so that when the pendulum swings the other way in the second or third quarter of 2010 we’ll be ready.”

Cost Control

Early into the downturn, companies in many industries were forced to focus on right-sizing operations. For example, Ethan Allen CEO Farooq Kathwari notes that the economic crisis hit  the retail industry hard and fast. “It was like a tsunami,” he says. “And generally anybody hit by a tsunami just disappears.”  

Reacting to the dramatically altered environment, the company quickly embarked on a drastic reorganization, trimming its cost structure by about 30 percent within seven months. “I told [our] people, ‘We’re at 20,000 feet and we can’t breathe,’” says Kathwari, who climbs mountains during his downtime. “We had to get down to 16,000 feet. And we had to do it carefully so we wouldn’t break our legs coming down.” 

Along the way, the company had to resist succumbing to short-term pressure. For example, athwari made an unconventional cost-conscious move: opting to keep 65 percent of its manufacturing in the U.S. The luxury furniture manufacturer and retailer transformed its domestic wood manufacturing operations to a custom business focused on creating individual pieces rather than large quantities. Because the value equation is different for custom pieces than for manufacturing large quantities, U.S. plants are better able to compete with overseas operations. What’s more, domestic production helps insulate Ethan Allen from rising costs.

“If we had just looked at hard financials like our $8,000-per-employee healthcare costs, we wouldn’t have even considered that,” says Kathwari. “But we don’t know what will happen with transportation and energy costs going forward. So we took the view that a combination of U.S. and overseas manufacturing will average our costs over the long term.” 

Financial pressure prompted a similar reinvention at Muzak, a company known for providing customized music and on-hold messaging. CEO Steve Villa says the company was spending tens of millions with licensing and record companies and felt it was getting very little in return.

“We started getting the word out to our clients and the music industry that we have 100 million listeners a day, and relationships with top brands, both regionally and nationally,” he says. “If you want face-time, in-store promotions, we can bring up-and-coming bands to play at your locations. So we took a cost center and turned it into a profit center and an opportunity to elevate our game with our account base.”

Harnessing History

While acknowledging that businesses have had to adapt to the change in climate, several CEOs pointed out that the economic picture may not be quite so dire.  Broadridge Financial Solutions CEO Rich Daly, for example, recounted finding a fresh perspective while preparing to give a college commencement speech. “I looked back at newspapers from when I graduated 34 years ago, and found headlines like ‘World Depression?’ and ‘Consumer Confidence the Lowest in the History of the Midwest Poll,’” he said. “I was supposed to be part of the first generation to live a lifestyle lower than that of the  previous generation— which meant less than one bathroom, less than one car and less than one TV.” 

That alarming prediction didn’t come to pass, which leads Daly to suspect that current gloom-and-doom forecasts are also faulty. “What we’re not factoring in here is that capitalism works,” he noted. “There will be another wave of opportunity and as long as we keep the sentiment of protectionism going on now in check, it will be great.” 

Rising enthusiasm for government regulation is also a concern for McDonald’s, said Ralph Alvarez, the company’s COO. “The biggest items that concern us today are government Interference and pressures from NGOs,” says. “It’s one thing to effect change gradually; it’s another to be told to change an ingredient or process overnight—particularly when it will  affect a product that people expect to taste the same way it has for 30 years.”  

“In the U.S., regulatory risk is not something that can be ignored,” agreed Dennis Wheeler, CEO of Coeur d’Alene Mines. “It’s clearly growing and will continue to grow.”

Optimistic Outlook

Several CEOs pointed to signs that the U.S. economy is on the rebound. “Savvy investors watch values drop and pick up shares when they believe in the market, and if you look at the market lately, it seems that they do,” said Dennis Garritan, managing director of WITAN Group. “We’re waiting for a resurgence of mergers and acquisitions, which is coming. We don’t know exactly when, but it will happen.”  

“Among the 46 small companies in our portfolio things are definitely getting better,” agreed Leonard Tannenbaum, CEO of Fifth Street Finance. “I’m pretty bullish on what’s going to happen. People have been talking about growth at the end of 2010 but I think we’ll see a real rebound in earnings sooner—as early as first quarter.”  

But others are not quite so sanguine. “I think the economy, globally, has hit control-alt-delete,” says Bill Nuti, CEO of NCR, who says companies will need to adjust to the “new norm.” “People have to deal with the world the way it is now versus the way they want it to be or the way it once was.”  

Ultimately, however, CEOs agree that companies with both the financial wherewithal to act and a sound competitive strategy will not only survive, but thrive. “If you’re on the right side of this, if you’ve been fiscally responsible with your assets, it’s like being a kid in a candy store,” noted Fernandez. “Everything, every tenet of business, is up for grabs.” 

 ADVERSITY ACTION PLANS

“Evidence suggests that the fall has slowed, maybe even halted: but whether the next direction is up or farther down is still not clear,” reports the Ernst & Young study, Opportunities in Adversity. “What we do know is that the speed of our recovery depends on the actions we take—as companies and as individuals—during the coming weeks and months.”

Based on interviews with thousands of executives from around the world, the study identified five key areas deserving of management attention:

  •  Securing your present—taking action to secure the immediate position faster so that the business can look to the future
  •  Protecting your assets—addressing a wider set of risk issues on both tangible and nontangible assets to ensure that problems are not accentuated and mistakes are not repeated
  • Improving your performance—leveraging performance and cost-efficiency programs to achieve maximum efficiency with existing assets
  • Reshaping your business—reviewing your operations and business model to align with the new market situation
  • Sustaining your future—exploiting the opportunities that the downturn may provide to drive sustainable growth

Identified in January 2009, those five focus areas remain valid today, says Ernst & Young’s Mark Manoff. “We’ve gone back to the market to test our perspectives and see the progress and new priorities,” he notes. “Our findings suggest that the dominant trend in the past six months has been an acceleration of efforts to improve business performance across the five focus areas described above.” Following are excerpts from Ernst & Young’s research* on how businesses have been affected by the global downturn and what steps are being taken to adapt to—and even benefit from—the new business environment in each of the five areas.

Securing your present:

  •  82% of businesses said “cash is now an issue”
  •  Only 18% said access to affordable credit had improved

Protecting your assets:

  •  73% reported more scrutiny of profitability
  •  More focus on pricing strategy (55%) and managing customer/supplier relationships (52%)
  •  Investment is growing in risk management (38%) and internal audit (22%)
  •  Future key risk management areas: regulation (35%); economic liquidity (30%); reporting and auditing standards (20%)
  •  Just 20% believe that internal controls are up to date; 29% have sped up corporate governance reviews

 Improving your performance:

  •  Nine in 10 companies are looking to cut costs
  •  But only 67% are successfully doing so
  •  Four in 10 are accelerating employee reduction and capital investment reviews
  • More cost cuts are foreseen:
    • operations (60%)
    •  supply chain (50%)
    •  IT, sustainability, M&A, and sales and marketing (30%)

Reshaping your business:

  •  34% plan strategic acquisitions in core business
  •  29% are using more outsourcing and co-sourcing
  •  29% plan to divest noncore assets
  •  32% plan to sell businesses to increase liquidity

Sustaining your future:

  •  25% companies in the study are actively planning for growth
  •  34% seek strategic alliances
  •  36% plan to enter new geographic areas
  •  Priorities: improving profitability (69%), sales (51%), customer loyalty (30%)

 

*Findings are based on The Ernst & Young Opportunities in Adversity survey, polls conducted in June 2009 by the Economist Intelligence Unit with 569 C-suite and board level executives at global companies across multiple industry sectors with a global revenue turnover in excess of $1 billion.

About Jennifer Pellet

As editor-at-large at Chief Executive magazine, Jennifer Pellet writes feature stories and CEO roundtable coverage and also edits various sections of the publication.