Management magnified: Strategies for revenue growth in an economic downturn


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Management magnified: Strategies for revenue growth in an economic downturn is the second in a series of three reports written by the Economist Intelligence Unit and sponsored by SAS. The first report, Management magnified: Getting ahead in a recession by making better decisions, was published in August 2009. The final report, on sustainability, was published in November 2009.

The Economist Intelligence Unit conducted the analysis and wrote the report. The findings and views expressed in the report do not necessarily reflect those of the sponsor. The report is based on in-depth interviews with senior executives in the region and desk research.

The author is Madelaine Drohan and the editor is Katherine Dorr Abreu. Mike Kenny is responsible for the layout.

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Management magnified: Strategies for revenue growth in an economic downturn

  1. 1. Management magnifiedStrategies for revenue growthin an economic downturnA report from the Economist Intelligence UnitSponsored by SAS
  2. 2. Management magnified Strategies for revenue growth in an economic downturnPrefaceManagement magnified: Strategies for revenue growth in an economic downturn is the second in a seriesof three reports written by the Economist Intelligence Unit and sponsored by SAS. The first report,Management magnified: Getting ahead in a recession by making better decisions, was published in August2009. The final report, on sustainability, will be published in October 2009. The Economist Intelligence Unit conducted the analysis and wrote the report. The findings and viewsexpressed in the report do not necessarily reflect those of the sponsor. The report is based on in-depthinterviews with senior executives in the region and desk research. The author is Madelaine Drohan and the editor is Katherine Dorr Abreu. Mike Kenny is responsible forthe layout. The Economist Intelligence Unit would like to thank all those who contributed their time andinsight to this project.August 2009© Economist Intelligence Unit Limited 2009 1
  3. 3. Management magnified Strategies for revenue growth in an economic downturn Executive summary I t is a rare company that puts together a growth strategy that considers the probability of a recession. Yet recessions inevitably occur, and with each new downturn management is forced to grapple anew with the challenge of having to increase revenue amid tighter budgets and fewer resources. “Great companies are defined in challenging periods,” says Devin Wenig, CEO of the Markets Division at Thomson Reuters. “It takes a great company to have the courage to invest in a tough period, often with terrific results on the other side.” Whether a company can take advantage of a recession to grow depends crucially on its financial condition before the onset of the crisis. This is particularly true in the current global recession, sparked by a crisis in the financial system that led to a freezing of credit in many parts of the world. Companies that had their houses in order when the downturn began, with low levels of debt and a cushion of cash, are now best positioned to pursue opportunities for growth. But where do these opportunities exist? Despite the worst recession since the 1930s, there are still ways for companies to grow, even in some of the hardest hit industries, such as automotive manufacturing and banking. It is a mistake simply to consider the overall picture when plotting a growth strategy. Because each region, country, and sector, is affected differently by the downturn, corporate strategies must take these differences into account. The choice for a well-funded company is whether to hunker down or to go on the offensive by buying competitors, grabbing their customers, or investing in new products and new markets. The first option is appealing, based on the results of a survey on decision-making conducted in May 2009 by the Economist Intelligence Unit and sponsored by SAS. The majority of executives are focusing on cutting costs and improving efficiency. For firms without the cash to mount an offensive, playing defence may seem the Who took the survey? annual sales, 11% with sales ranging from US$500m to US$1bn, 18% from US$1bn to US$5bn, and 27% The online survey included 234 executives worldwide: with revenue of more than US$5bn. Forty percent of 31% are located in Asia-Pacific, 31% in Europe, 24% respondents are C-level executives. A broad range in North America and 14% in the rest of the world. of functions are represented; the major ones are The survey encompasses companies of every size: strategy and business development (44%), general 44% are from companies with less than US$500m in management (36%) and finance (33%).2 © Economist Intelligence Unit Limited 2009
  4. 4. Management magnified Strategies for revenue growth in an economic downturnmore realistic option. Yet our research shows that firms focused on rapid growth are blending offensive and defensive tacticsin their efforts to pass their competitors. Embraer, a Brazilian aircraft maker, cut 20% of its staff andreduced production, but continues to invest in two new business jet programmes., anonline travel service with 50% of the Indian market, reduced expenses by 7%, but brought out three newproducts in the last year. Lenovo, a Chinese computer manufacturer, is focusing on profitability in itsmature markets, but is spending heavily to penetrate emerging markets such as Russia and Turkey. ToyotaMotor Sales in the US reduced spending wherever it could, but still brought out a new version of the Priushybrid and is investing in technologies to make cars more fuel-efficient. Despite frequent sightings of “green shoots”, the global recession is far from over. It will be months,perhaps years, before it is clear whether these moves have paid off. What is certain is that it is possible tobreak away from the crowd at times of crisis, balancing short-term expediency against long-term goals,and so pursue a strategy for growth.© Economist Intelligence Unit Limited 2009 3
  5. 5. Management magnified Strategies for revenue growth in an economic downturn Introduction“You cannot [onlylook at] global A t first glance, the global economic crisis, which began in the US financial sector, does not seem propitious for growth. Indeed, a survey on decision-making conducted by the Economist Intelligence Unit in May 2009 indicates that as demand for products and services dropped, a majority of companies cuttrends, regionaltrends, even spending and focused on efficiency. Investment in new markets and products—prerequisites to organiccountry trends. You growth—took a back seat to cost reductions. Mergers and acquisitions—another avenue to growth—alsohave to de-average fell, as funds dried up and companies became reluctant to borrow.everything. Every Midway through 2009, a few positive economic signs have made executives more optimistic about thecountry, every future. But the Economist Intelligence Unit expects the recovery to be both weaker and longer in comingmarket and every than most analysts anticipate. We forecast that real GDP at market exchange rates will contract by 2.6%channel is reacting this year. Global growth will return in 2010, but it will be a pallid 1.8%.differently to the However, these averages obscure the uneven impact of the financial and economic crisis. Whenglobal crisis.” thinking about a growth strategy in these uncertain times, “you cannot [only look at] global trends,Jan Zijderveld, regional trends, even country trends,” says Jan Zijderveld, executive vice-president, South East Asia &executive vice- Australasia, of Unilever, a consumer products group. “Every country, every market and every channel ispresident, reacting differently to the global crisis.”Unilever, South We forecast that North America and especially Europe will limp along until 2013, with growth inchingEast Asia & towards 2%. Latin America, the transition economies in central and Eastern Europe, and the Middle EastAustralasia and North Africa will experience a somewhat stronger rebound. Emerging Asia will be the fastest-growing region between 2010 and 2013, led by India and China. The outlook for industries is a similar patchwork. The automotive sector, office and housing How has the current downturn affected your business? (% respondents) 9 Significantly higher 4 15 Slightly higher 14 14 Same as before 16 Overall Demand is 38 Slightly lower 37 expenditures 24 Significantly lower 30 are Source: Economist Intelligence Unit survey, May 2009.4 © Economist Intelligence Unit Limited 2009
  6. 6. Management magnified Strategies for revenue growth in an economic downturnWorld growth(%, forecast closing date: August 14th 2009)World summary 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Real GDP growth (PPP exchange rates) World 4.8 4.4 5.0 5.0 2.8 -1.4 2.7 3.4 3.9 4.1 OECD 3.2 2.7 3.1 2.7 0.6 -3.7 1.1 1.4 1.9 2.2 Non-OECD 7.7 7.4 8.1 8.7 6.1 1.8 4.9 5.9 6.3 6.4Real GDP growth (market exchange rates) World 4.0 3.5 4.0 3.8 1.7 -2.6 1.8 2.3 2.8 3.0 North America 3.6 2.9 2.8 2.1 0.4 -2.4 1.8 1.3 2 2.3 Western Europe 2.5 2.1 3.1 2.7 0.6 -4.3 0 1.1 1.5 1.8 Transition economies 6.7 5.7 7.3 7.3 4.7 -5.7 1.5 3.5 4.1 4.7 Asia & Australasia 5.4 5.0 5.5 6.0 2.9 -0.7 3.5 4 4.3 4.4 Latin America 5.8 4.9 5.6 5.5 3.9 -3.4 2.4 3.4 3.7 3.7 Middle East & North Africa 6.7 5.6 5.6 5.8 6 1 4.3 4.4 4.8 4.8 Sub-Saharan Africa 5.7 6.5 6.5 6.3 4.5 -1.7 3.1 4.9 5 4.3Source: Economist Intelligence, and banking have all been severely battered, whereas digital technology and low-carbonbusinesses such as wind power have registered growth. In industries where capacity was scrapped, such asbanking, future growth potential has been damaged. Overhanging the recovery is the dismal outlook for trade: we expect global trade in goods to contractby 9.4% this year and rise by only 2.9% in 2010. By the later years of our forecast period, the rate willedge up to more than 5%. Here, again, there are deep divisions: developing countries as a group will see astronger contraction in trade this year, but will recover more quickly than developed countries. This somewhat gloomy outlook might persuade executives to leave hatches battened down until thestorm has passed, but that would be a mistake. While a purely defensive strategy might ensure short-term survival, it is unlikely to produce long-term growth. Just as the relative positions of economies andindustries are changing, so too are the positions of companies within each sector. Our research indicates that growth strategies are possible even now. Those companies bold enoughto seek growth while all around them are contracting are the most likely to emerge stronger from thedownturn. There is no one-size-fits-all strategy; solutions are as individual as the corporation, itsoperating region, and its products and services.World trade in goods(%, forecast closing date: August 14th 2009)World summary 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Trade in goods World 10.8 7.5 9.1 7.5 3.6 -9.4 2.9 4.6 5.2 5.7 Developed countries 7.5 5.7 7.5 4.8 0.9 -9.9 1.9 3.2 4 4.4 Developing countries 17 10.7 11.8 11.6 7.8 -8.7 4.3 6.5 6.8 7.4Source: Economist Intelligence Unit.© Economist Intelligence Unit Limited 2009 5
  7. 7. Management magnified Strategies for revenue growth in an economic downturn Key points l Firms that put their financial house in order before the recession are best positioned to grab market share during a downturn. l Flexibility is vital for companies to reposition themselves for new markets and new customers. l Constant innovation is required, even in the most turbulent times. On the offensive for growth O ne of the hallmarks of the current recession is that it began in the financial services industry. This created a sudden and severe credit freeze virtually worldwide, crippling those companies whose growth plan depended on raising funds. In contrast, those with the foresight or good fortune to lighten their debt load and stock up on cash before the freeze saw a wealth of opportunities. “If you are a good company, this is the best time in the world to grab share,” says Roger Martin, dean of the Rotman School of Management at the University of Toronto, and a member of the board of directors at both Research in Motion, the maker of the Blackberry, and Thomson Reuters, an information giant. “Figure out who’s vulnerable, and grab share, because it’s hard to take share away from somebody when they’ve got it.” A determining factor of whether a company can go on the offensive is its financial strength at the onset of economic turbulence. The “good” companies that Mr Martin mentions are those that had their financial house in order, with manageable debt and cash reserves. “It’s like a disease,” says an executive with a global mining firm. “If you were not in good physical and mental shape before, there is little you can do“If you are a good to fight the disease. It’s the same thing for companies in the face of an economic downturn. If you are notcompany, this is financially strong and with a low-cost base, the odds are against you.”the best time in The availability of financing also depends on where you are operating. Banks in China and in otherthe world to grab countries in South-east Asia that saved while Western consumers spent during the late boom still haveshare. Figure out money to lend to the right company. “We have a saying in China,” says Dr Weijiong Zhang, co-dean ofwho’s vulnerable, the China Europe International Business School in Shanghai. “If you are a good company, the banks arebecause it’s hard chasing you. If you are a bad company, you are chasing the banks.”to take share away There is no single way to grab market share. In these tough times, strategies range from thefrom somebody straightforward acquisition of a weakened rival to the adroit use of government stimulus packages.when they’ve got Flexible companies are reorienting their products and services to appeal to markets that are still” Investment in innovation, key to both exploiting short-term prospects and ensuring long-term growth, isRoger Martin, dean, RotmanSchool of Management a common theme in growth strategies.6 © Economist Intelligence Unit Limited 2009
  8. 8. Management magnified Strategies for revenue growth in an economic downturn What ties these companies together is their belief in the opportunities to be seized despite—and insome cases because of—the global crisis. To use the slightly hackneyed phrase, these firms have decidedthat the best defence is a good offence.Targeting rivalsBuyers in distressed markets know that those who purchase in a downturn tend to get more for theirmoney. Asset prices have dropped, making acquisitions both attractive and possible for firms thathave the financing. Although the hardest hit industries in the downturn, banking and automotivemanufacturing are rife with acquisition possibilities. Thus Fiat, an Italian car giant, was able to take overmost of the assets of Chrysler (one of the US Big Three) in June 2009, using technology transfer instead ofcash to seal the bargain. In banking, TD Bank Financial Group in Canada and Banco Santander in Spain have both used astrong and stable retail market at home as a base from which to snap up weaker foreign competitors.TD purchased Commerce Bancorp in the US, and Banco Santander bought Alliance & Leicester and thesavings business of Bradford & Bingley in the UK. In both cases, the purchases fit a long-term growthstrategy that management continued to pursue in the downturn. “We’d be interested in doing other Short term versus long term president of security services at G4S Wackenhut. “If recession shakes a company’s long-term strategy, then it was not valid in the first place.” Executives The paradox of downturns, according to a management consulted for this report acknowledge that dealing guru, Michael E. Porter, of the Harvard Business with the sudden onset, unexpected severity and School, is that companies have to think short term continued volatility of the global recession takes up an without forgetting about the long term. Firms listed on extraordinary amount of management time. stock exchanges are already preconditioned to think in terms of the daily share price and the next quarter, as “Recession should validate the long-term are the analysts who follow them. Add crisis conditions, strategy, not shape it. If recession shakes a where cash is tight and management time is taken up company’s long-term strategy, then it was fighting fires on a daily basis, and it is easy to see how long-term planning drops down the list of priorities. not valid in the first place.” Drew Levine, president of security services, G4S Wackenhut Indeed, one-half of the executives responding to our survey on decision-making say that decisions at their firm have become more focused on the short term Yet all say senior managers have no choice but to over the past year. At best, this can be a temporary keep both horizons in mind when plotting a growth oversight, quickly rectified as panic recedes and the strategy. “You are always trying to win market share economic situation stabilises. At worst, measures today, control your costs today, deliver good results taken with only the short term in mind can prove today,” says Devin Wenig, CEO of the Markets Division unsustainable in the long run. of Thomson Reuters. “But if that’s all you do, you Can executives realistically juggle both? The answer don’t have a strategy.” He believes that really good appears to be a qualified “yes”. “Recession should management teams “are able to walk and chew gum at validate the long-term strategy,” says Drew Levine, the same time”.© Economist Intelligence Unit Limited 2009 7
  9. 9. Management magnified Strategies for revenue growth in an economic downturn“You want to be acquisitions,” says Tim Thompson, senior vice-president of TD Bank Financial Group.offensive, but The garment industry in China, a sector rocked by the dramatic contraction in world trade, is alsoyou have to be consolidating. “Now is the time to merge with another company,” says Dr Zhang. “The price is good.realistic.” There is little serious competition [for the asset]. You have the time and the opportunity to enlarge yourTim Thompson, senior vice- company.”president, TD Bank FinancialGroup Although buying a competitor gives a company an instant growth spurt, industry conditions, the high cost of a takeover or the difficulty acquiring financing may dictate another course. “Consolidation is not a tradition in our industry,” says Luiz Carlos Siqueira Aguiar, CFO of Embraer. He is keeping a watchful eye on rivals that have announced delays to new products or are experiencing financial difficulties in the hope that some clients may be persuaded to switch aircraft suppliers. “All of those facts are sure to open up new opportunities for us.” For some firms, organic growth is still possible, although the rate might be slower. They can still gain market share if competing firms stagnate. “Typically, we build 30-35 new branches each year in Canada,” says Mr Thompson of TD Financial Group. “This year, we anticipate we’ll only build 20 in Canada and 35 in the US. You want to be offensive, but you have to be realistic.” Market and product positioning The crisis has prompted a return to basics, forcing companies to focus on their customers. The survey results confirm this trend: 53% of executives say that they are giving more weight to information on shifts in customer attitudes when they make major decisions affecting operations and 57% believe they should make a greater effort to consult customers before making major decisions. Flexible firms have quickly repositioned themselves and their products to appeal to new customers and growing markets, often taking advantage of information already available within the company to pinpoint areas of possible growth. Customers are at the front and centre (% respondents) Given the changes in the economy over the past year, which of the following types of information or analysis have become more important than they were before when making major decisions? Shifts in customer attitudes 53 Trends in the market for your organisation’s products and services 47 Profitability of specific customers or groups of customers 47 Given the changes in the economy over the past year, which groups do you believe need to be consulted more than in the past when making major decisions? Customers 57 Middle management 46 Providers of capital (eg, financial institutions, investors) 33 Source: Economist Intelligence Unit survey, May 2009.8 © Economist Intelligence Unit Limited 2009
  10. 10. Management magnified Strategies for revenue growth in an economic downturn In China, firms dependent on exports to North America and Europe were faced with a grim choice: stayoriented towards the export market and watch sales drop or stagnate for years, or reorient the companyto the domestic market, which is still growing, albeit more slowly. Dr Zhang cites, for example, MindrayMedical International, an instrument manufacturer that is now focusing on domestic sales. To do this, ithas shifted production to instruments that are more affordable for its Chinese clients than the top-of-the-line products sold in Western Europe. A Chinese solar panel manufacturer made a similar turn towards thedomestic market after sales to Germany, previously its most important market, faltered. The global mining firm executive says his company is shifting its focus to emerging economies,where housing and infrastructure needs will keep demand growing for many years, and away from NorthAmerica and Europe, which traditionally accounted for almost one-half of its sales. Qingtong Zhou, CFOof Emerging Markets Group at Lenovo, says the company is targeting emerging markets, including Russiaand Turkey, because that is where it expects most growth to take place. There are opportunities in youngmarkets where companies are still jockeying for position. Even where the geographic focus stays the same, firms are repositioning their products and servicesto increase sales. This can be as simple as lowering existing prices, marketing the low-cost attributesof a product that were not emphasised before, bringing out a low-cost version of a popular model, orrepackaging consumer products into more affordable sizes. Apple chose to bring out a cheaper versionof its popular iPhone during the North American recession. In India, Nokia introduced a less expensivemobile phone. Also in India, Honda, which traditionally offered higher-priced sedans and sports utilityvehicles, brought out a dramatically cheaper car. In South-east Asia, Unilever repackaged many of its consumer products to lower their price points andchanged distribution to include smaller shops that were winning business away from hypermarkets. In thePhilippines, for example, many of its products were resized so they could be sold for 5 pesos (about 10 UScents). “The way you win is a little bit different than in good times,” says Mr Zijderveld. “It’s about goingback to the consumer, offering better value for money, making sure our portfolio covers all different pricesand segments, and making sure we are available where the consumer is shopping.”InnovationThere are limits to what can be done with existing products. Those companies that can afford to arecontinuing to innovate as part of their growth strategy. Indeed, in all of the companies interviewed,innovation programmes had been spared the knife., a fast-growing online travel service in India with around 1.5 million customers and4 million visitors to its website each month, launched three new products over the past year that offercustomers new options. “All of these products require a fair amount of either contracting or productdevelopment,” says Deep Kalra, CEO of “We went ahead with the product strategybecause we considered it key to our growth.” In the US, even though automotive sales have plummeted, Toyota Motor Sales brought out a newversion of its Prius hybrid vehicle, and is continuing work on new models to fit changing fuel economyand environmental demands. In another direct response to the economic crisis, Toyota has made its© Economist Intelligence Unit Limited 2009 9
  11. 11. Management magnified Strategies for revenue growth in an economic downturn manufacturing plants more flexible, building more than one model at a single plant. Bob Daly, senior vice-president of Toyota Motor Sales USA, compares the company’s response to driving along the road and running into traffic. “You have to put on the brakes,” he says. “But you have to remember that your original purpose was to get home, so you adjust your speed and continue to drive home.” Government stimulus packages Although traditional sources of funding all but dried up in some regions in the early stages of the crisis and remain constrained as of mid-2009, the massive stimulus packages, particularly in the US and China but also in at least 30 other countries, have benefited companies. Firms in sectors targeted by governments have rapidly worked the new financing into their growth strategy. The Chinese government’s programme to support rural entrepreneurs opened up opportunities for Lenovo. According to Mr Zhou, Chinese farmers are buying personal computers with the help of a government subsidy. Similarly in the US, resources meant to spur sustainability have helped green technology firms. Government stimulus in the US opened a different set of doors for G4S Wackenhut, which provides security services. The firm secured a contract from the US Customs and Border Protection to transport detainees, freeing 700 federal officers to focus on tasks that required law enforcement powers. Drew Levine, president of security services at G4S Wackenhut, says this dovetails with the firm’s long-term strategy of adding value to security services so that they are less of a commodity. Outsourcing is one of the opportunities that the recession has created, notes Mr Levine. “When times are tough, when benefits are squeezed, all kinds of organisations are looking to shed full-time employees.” There are risks to pursuing a growth strategy, especially during a period of deep uncertainty. An acquired company may have hidden problems. An innovation may fail or an investment underperform. Potential customers may be too panicked to consider valuable solutions being offered. The global downturn could last longer than even the grimmest forecasters anticipate. Yet risk-taking is inevitable if a company wants to grow, confirms Mr Wenig of Thomson Reuters. “If you are not taking risks, you certainly don’t have the right strategy.”10 © Economist Intelligence Unit Limited 2009
  12. 12. Management magnified Strategies for revenue growth in an economic downturnKey pointsl A judicious mix of offensive and defensive measures is needed to maintain growth.l A downturn opens doors for transformational change based on cutting non-strategic areas and focus on higher priorities.l Solutions must be weighed for their short-term impact and fit with the long-term growth strategy. “You have to beProtecting assets and resources: very tough onon the defensive areas that are not strategic priorities, because they have to contribute toF or many firms, going on the offensive in a downturn is neither realistic nor financially feasible. These companies have more limited options, but they can still position themselves for growth if they usethe global recession as an opportunity to make tough, transformational changes. The bottom line, always areas that are.” Devin Wenig, CEO, Markets Division, Thomson Reutersimportant, has become even more so. Our survey on decision-making indicates that the finance division ata majority of companies is providing the most input when major decisions are made. In a crisis, according to Freek Vermeulen, professor of strategic management at the London BusinessSchool, management normally goes through a period of denial or paralysis, followed by a round ofcost-cutting. Nevertheless, many of the measures considered defensive—including cutting staff andexpenses—are being combined with an offensive strategy. Companies are spending money to gainadvantage, but cutting in non-priority areas or where efficiencies have been identified. “You have to bevery tough on areas that are not strategic priorities, because they have to contribute to areas that are,”says Mr Wenig of Thomson Reuters.Finance has the most imput in major decisions during downturn(% respondents)When major decisions are made – decisions that result in a change in the organisation’s business objectives – which functions provide themost input?Finance 68Sales 38Strategy 36Customer service 34Marketing 34 Source: Economist Intelligence Unit survey, May 2009.© Economist Intelligence Unit Limited 2009 11
  13. 13. Management magnified Strategies for revenue growth in an economic downturn Staff and salary cuts Rising global unemployment shows that staff reductions are being widely used to cut costs. Since the crisis began, the ranks of jobless workers worldwide have swelled by an estimated 40 million to 60 million people, according to the International Labour Organisation. The Economist Intelligence Unit expects unemployment to continue to rise in North America and Europe until 2010. Embraer exemplifies a two-track approach. The company laid off 4,000, or 20%, of its workforce in early 2009 and trimmed production levels. Yet it maintained investment in new products and continues to develop two new business jet programmes launched in 2008. “When the market comes back, we need to have new products to offer to clients,” says Mr Aguiar, the company’s CFO. “We did not change one single cent of our investment in new products.” Salary freezes or cuts are also a popular measure, sometimes taken in tandem with redundancies, and sometimes as a way to avoid them. In China, many export-oriented small and medium-sized companies have kept their employees on at much reduced pay and working hours in the expectation that eventually the market will improve and workers will be hard to find. Finding efficiencies Firms are seeking ways to make internal operations more efficient, but are looking for cost savings from suppliers as well. This is also a tactic used both by companies in distress and those looking for ways to finance their growth strategy. At its operations in South-east Asia, Unilever looked closely at all its suppliers. “We are one of the world’s biggest advertising buyers,” says Jan Zijderveld, executive vice-president for the region. “Media costs have risen continuously. Now we are expecting them to go down, and to pay less for advertising this year than we did last year.” Even firms paying the same amount for marketing are restructuring how they do it, discarding methods that do not have immediate benefits, such as sponsorship of sports and cultural events, in favour of those where the value for money is more immediately obvious, such as paying for cost per acquisition in online marketing rather than cost per click. Risks of defensive strategies The obvious risks to a purely defensive strategy, especially if it is not done in combination with offensive“You can cut costs. moves, is that a company stripped of people and resources loses the capacity to reach out to newYou can reduce customers and offer better products and services. This is particularly dangerous at a time when customerstaff. You can tastes and needs are increasingly volatile. “You can cut costs. You can reduce staff. You can reduce debt,”reduce debt. But says Dr Zhang. “But what happens if opportunities come along? It takes time to increase staff and growwhat happens if your debt again [to fund expansion]. And by then you’ve missed your opportunity.”opportunities come Still, it can be equally risky to ignore the opportunity provided by the recession to take a hard lookalong?” at operations and remove some of the fat that accumulated during good times. Trimming unpromisingDr Weijiong Zhang, China products or divisions, reining in a salary structure that has ballooned out of control, abandoning marketsEurope InternationalBusiness School with no growth potential—all are more palatable to stakeholders when they are seen as part of a well-12 © Economist Intelligence Unit Limited 2009
  14. 14. Management magnified Strategies for revenue growth in an economic downturn CASE STUDY: chooses profitability, to pay,” says Mr Kalra. but also gets growth also scrutinised the price hotels and airlines charged when it sold rooms and flights to its clients. The company’s size—it has an estimated 50% of the online travel market in India— While no company was perfectly prepared for the global recession, gave it clout with its suppliers, and it was able to negotiate much executives at, one of India’s largest online travel better terms. “We had a great year,” says Mr Kalra of the financial year agencies, were better placed than most, having weathered and that ended on March 31st 2009. “We grew revenue by 88%.” One-half survived a series of harsh blows just after the company was created in of that growth came from an increase in transactions. The Indian April 2000. They were still struggling to establish the company when economy is still growing, albeit more slowly because of the world the dotcom bust occurred, followed by the 2001 terrorist attacks on recession, and online travel is a growth industry. The other half came the US. The spread of the SARS (severe acute respiratory syndrome) from an increase in margins the company was able to negotiate with virus starting in late 2002 further undermined the travel market. “As its suppliers and other cost reductions. a company, as a team, we had actually seen a tough time,” says Deep While the company made these defensive moves, it continued a Kalra, the company’s CEO. “So I don’t think anyone panicked.” slimmed-down offensive strategy. Mergers and acquisitions were The team decided that, in this recession, the company would put on hold, but investment in new products continued. In the last focus on profitability rather than revenue growth, and began year it has launched three new services that allow users to book and looking for ways to reduce costs. Marketing was an obvious target. purchase long-distance bus travel, buy packages that combine flights “We decided that pure brand spend, as opposed to transaction and hotels, or buy railway tickets online. spend, should come down,” says Mr Kalra. Sponsorships, and print The best part of downturns, according to Mr Kalra, is that they and television advertising were cut and search engine marketing force a company to look at its internal processes and products was reconfigured. Instead of paying companies like Yahoo when and decide which ones are key to the business and which can be customers clicked on their online advertisement, MakeMyTrip. eliminated or fine-tuned. “These are things people talk about, but com renegotiated its contracts so that payment was made when an frankly I don’t think you do them until you are really pushed to the online user made a purchase. “We get the transactions, we’re happy wall.”considered crisis response. “You want to take advantage of the downturn to do things that are hard to dootherwise,” says Mr Martin of Rotman School of Management. There are more subtle risks to massive cost-cutting programmes as well. Companies turn inward,become more hierarchical in their decision-making and narrower as they focus on core competencies. Thefocus is too often on cutting costs rather than seeking new revenue. “In a crisis, you want to open up andlook for new revenue streams,” says Professor Vermeulen of the London Business School. “As a lone topmanager or top management team, you’re not going to have all the ideas and all the information.” Professor Vermeulen cites the example of a British firm that made software for the automotive sector.The chief executive invited staff to submit new ideas, and one group of employees noted that, althoughthe automotive sector overall was in the doldrums, the spare parts divisions were doing well becausepeople were keeping their old cars longer. Their suggested software program for spare parts inventorycontrol is now a major new source of revenue for the firm. Companies that have become more top-down intheir approach would have missed that opportunity, believes Professor Vermeulen.© Economist Intelligence Unit Limited 2009 13
  15. 15. Management magnified Strategies for revenue growth in an economic downturn Conclusion G rowth is possible in an economic downturn, even one as severe as the current crisis. The financial health of a company at the outset of the crisis will determine whether it can go on the offensive and use the downturn as a growth opportunity, or whether it will be forced to play defensively and risk losing market share. Going on the offensive in an uncertain economy is not for the faint-hearted. It takes confidence and courage to spend money in a recession, when the timing of recovery is uncertain. Yet there are companies that are sticking with existing growth plans, or taking advantage of new opportunities produced by the crisis. Some of their tactics are tried and true techniques used in prosperous times, while others are new to this recession. Offensive strategies include: l acquisitions and mergers; l targeting the clients of weakened competitors; l reorienting the company or its products to new geographic markets and new customer groups; l continuing to develop new products and processes; and l taking advantage of government stimulus packages, especially for infrastructure and green technology. Growth strategies are always risky, but even more so now. Yet standing still or contracting is likely to result in a loss of market share. For firms whose financial foundations were shaky at the onset, there is little choice. Their options include: l cutting staff and salaries; l reducing production to bring inventories in line with demand; l pressuring suppliers to drop prices; l reducing marketing efforts; and l lowering prices on products and services.14 © Economist Intelligence Unit Limited 2009
  16. 16. Management magnified Strategies for revenue growth in an economic downturn Purely defensive moves may well ensure short-term survival, provided nothing crucial is cut that willundermine long-term sustainability. However, that survival will have been bought at a high price if themeasures taken have left the firm so pared down that it is unable to take advantage of new opportunitieswhen the economy rebounds. Focusing entirely on offensive moves can be just as risky as a wholly defensive mindset. “Those areboth bet-the-company strategies,” says Professor Vermeulen. To survive, a company has to look for newavenues of growth. A judicious mix of the two—cutting costs in non-priority areas in order to use thesavings to develop new products and enter new markets—is the best way to ensure that a firm comes outof the great recession of 2008-09 in better shape than it went in.© Economist Intelligence Unit Limited 2009 15
  17. 17. Cover images: iStockphoto.comWhilst every effort has been made to verify the accuracyof this information, neither the Economist IntelligenceUnit Ltd nor the sponsors of this report can accept anyresponsibility for liability for reliance by any personon this report or any other information, opinions orconclusions set out herein.
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