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The economic downturn: Coping strategies and the way forward

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What the Indian industry did to cope with the downturn, and the strategies CEOs need to adopt going forward.

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The economic downturn: Coping strategies and the way forward

  1. 1. The Economic Downturn: Coping Strategies and the Way Forward Achal Raghavan I ndian industry started experiencing the real im- pact of the global financial meltdown from the last quarter of 2008. The rapidity with which the slowdown set in took many industry leaders by sur- prise. Demand plummeted, markets became unstable, Achal Raghavan takes an in-depth look at and credit dried up. The future looked murky and unpredictable. CEOs – especially the younger ones -- the manner in which various business found that their past experience had very little to of- leaders in the Indian manufacturing and fer in terms of ideas on what to do. IT sectors coped with the downturn that As this unsettling scenario unfolded, companies in hit the Indian economy from Q4 2008. both manufacturing and services sectors scrambled Faced with significant threats to sales, to take urgent defensive action. In this article, we take profit, and enterprise value, CEOs initi- a look at some of the coping strategies adopted by ated a slew of coping strategies – such as Indian industry leaders, and the challenges that they faced. We also outline what they can do to take ad- cost reduction, cash management, opera- vantage of the emerging opportunities when the tional excellence, people management, economy begins to turn the corner. and customer portfolio optimization. Implementing these strategies involved COPING STRATEGIES facing up to many challenges, both inter- Dr. Samuel Johnson, the English author from the 18th century, is credited with this insightful quotation: nal and external. With the economy “….when a man knows he is to be hanged in a fort- showing signs of recovery, now is the night, it concentrates his mind wonderfully.” Faced time for corporate leaders to retain the with a dramatically altered business landscape, a fu- gains made in operational efficiencies, ture filled with uncertainty, and restive sharehold- ers, Indian industry leaders have moved swiftly to and focus on emerging growth opportu- formulate and implement several coping strategies. nities in the marketplace. Let us now examine a few of these strategies. Cost Reduction and Focus on Cash Virtually all organizations started with cost reduc- tion as the single major initiative, in the face of drop- ping sales and lack of bank credit. “Hacking VIKALPA • VOLUME 34 • NO 3 • JULY - SEPTEMBER 2009 67
  2. 2. mercilessly at costs,” “Come down duction and quality management hard on cost,” and “Getting rid of Virtually all organizations systems, thereby reducing waste the old ways” were some of the ex- started with cost reduction due to defects. When a manufactur- pressions used by MDs, CEOs, and as the single major ing plant is running at close to full Presidents to describe what they capacity due to market pull, it is were forced to do. initiative, in the face of difficult to undertake detailed stud- dropping sales and lack of ies of tooling and manufacturing In many ways, these exercises went bank credit. “Hacking abnormalities, and decide on cor- much beyond the traditional moves mercilessly at costs,” rective action. When orders are to cut down on travel, communica- down, the resulting slack time cre- tion and discretionary expenses – “Come down hard on ates openings for such improve- though these options were exer- cost,” and “Getting rid of ment measures to be implemented. cised immediately. In one case, a the old ways” were some Operational excellence thus gets a business consulting and IT services of the expressions used by lasting boost. The downturn also firm achieved a significant cost re- provided opportunities to fine-tune duction by renegotiating the rent MDs, CEOs, and Presidents productivity, in terms of optimiz- for its office with the local govern- to describe what they ing layouts and operator deploy- ment which was the landlord – were forced to do. ment. while conventional wisdom would have you believe that these things In virtually all companies, capital are not possible with the government bureaucracy. expenditure of any kind was put on hold, or cancelled – unless there were firm orders in hand which needed In the context of cost reduction, one CEO made a spe- the investment to be made immediately. The gung- cial mention of what he saw as an inherent strength ho optimism of the previous year was replaced very that most Indians possess – of being “frugal to the quickly with a “wait and watch” approach. The same core”. In his view, this enabled his team to operate principle applied to mergers and acquisitions on the principle that no cost item is too trivial to take (M&A’s) also. up for reduction. In the manufacturing industry, the focus – predict- People ably — was on inventories and re- The downturn also saw, for the first ceivables. As the MD of an time, several organizations resort- In virtually all companies, engineering company put it, “There ing to pay cuts across the board as is always a lot of messy work pend- capital expenditure of any a preferred alternative to ing in the area of old outstandings, kind was put on hold, or headcount reduction. These cuts and this crisis forced us to go after cancelled – unless there were closely calibrated, with man- collecting those dues.” Since he saw agement staff taking a larger reduc- were firm orders in hand this as a one-time “clean up” opera- tion. tion, he outsourced the activity. In- which needed the investment to be made In a larger perspective, the recent ventories, which are the equivalent period of turmoil has seen the tacit of “fat” in the system, came under immediately. The gung-ho acceptance of salary cuts, significant focus for reduction. optimism of the previous headcount reduction and redun- Operational Excellence year was replaced very dancies in Indian companies as in- quickly with a “wait and evitable fallouts of the global crisis. The downturn also provided the This is in dramatic contrast to the time and the opportunity for manu- watch” approach. scenario barely 18 months back, facturing companies to refine pro- 68 THE ECONOMIC DOWNTURN: COPING STRATEGIES AND THE WAY FORWARD
  3. 3. when “attrition”, “retention” and reinforced, taking into account the “salary hikes” were the key con- Many companies used the risks associated with geographies, cerns in many sectors. Some com- downturn as an incentive markets, industry sectors, and cur- panies have also taken the step of to “expand the pond” that rencies. letting go of non-performers dur- ing this period. they operate in, by going LEADERSHIP CHALLENGES after new customers The global meltdown has forced At the same time, many leaders aggressively. At the same CEOs in India to make an abrupt have found it especially important time, some of them also transition from “riding a growth to recognize and reward the good took a hard look at wave” to “managing a downturn”. work being put in by some of the As could be expected, this has team members in these difficult product and account thrown up several interesting chal- times. One company has devised profitability – resulting in lenges at the leadership level. some special “rituals” for accord- ing such recognition – on the prin- decisions to drop some Finding a Balance ciple that rituals, once put in place, customer accounts that are difficult to discontinue. did not add any financial While coping strategies are mostly about managing the short term, sea- or strategic value. Customer Portfolio soned CEOs are acutely aware that they have to run a “parallel track” Many companies used the down- of strategies which will safeguard the long-term in- turn as an incentive to “expand the pond” that they terests of the company. This involves making finely- operate in, by going after new customers aggressively. calibrated decisions on: At the same time, some of them also took a hard look at product and account profitability – resulting in • people, where one has to balance the need to cut decisions to drop some customer accounts that did costs with longer term issues of morale and talent not add any financial or strategic value. This runs retention contrary to the normal expectation that companies in • new product development and R&D, where starv- a downturn would try and maximize sales to every ing these areas of funding will lead to the com- customer that they have, just to shore up the top line. pany being under-prepared when the inevitable This trend indicates the growing maturity of Indian upturn in the business kicks in, and organizations in terms of developing a balanced out- • capital expenditure, which is often the starting look towards their customer portfolio for the long point for making strategic moves for growth in the term. long term. The downturn also brought into Communication sharp focus the importance of the Operating in a crisis- domestic market for Indian compa- Uncertain times impact people nies, both in the short term and for recovery mode also calls negatively. In the absence of clear, the future. Companies with a for the CEO to “get his (or transparent, and frequent commu- skewed weightage for overseas her) hands dirty” with the nication from the leadership team markets (especially the US and Eu- on the state of the business, people daily nitty-gritty of the rope) have been forced to take a grow fearful and uncertain. This, in business, far more than turn, tells on their performance and hard look at their Indian market shares and strategies. The common- what is warranted in customer service. The CEO has a sense principle of “balanced normal times. major role to play in keeping the growth” for the long term stands company focused and aligned to- VIKALPA • VOLUME 34 • NO 3 • JULY - SEPTEMBER 2009 69
  4. 4. wards managing the downturn CEO’s playbook in the coming in the most effective way pos- Having reduced costs months. sible. internally and streamlined the Retaining the Gains In the current scenario, as one customer portfolio externally, Having reduced costs internally MD put it, he had to “keep talk- the biggest challenge ahead and streamlined the customer ing and talking” to his people – for companies is that of portfolio externally, the biggest far more than he had ever done “hanging on to the gains” challenge ahead for companies is in his entire career. In another once the business starts that of “hanging on to the gains” case, the CEO had to make sure picking up again. The normal once the business starts picking that he personally communicated up again. The normal tendency the company’s game plan and tendency to revert to earlier to revert to earlier behaviour has progress to all investors and behaviour has to be blocked, to be blocked, and the new lean other stakeholders at frequent and the new lean and frugal and frugal ways institutional- intervals. ways institutionalized. ized. The CEO has a large role to Leadership Style play in ensuring that this hap- pens, since people look to the Operating in a crisis-recovery mode also calls for the leader for cues. The best way is for the management CEO to “get his (or her) hands dirty” with the daily to hold frequent reviews of operating costs – possi- nitty-gritty of the business, far more than what is bly weekly – so that any drift can be spotted quickly warranted in normal times. One MD saw that his HR and corrected. One firm has taken this concept for- and Finance functions were just not equipped to deal ward to the extent of publishing weekly P&L state- with the uncertain business scenario. Consequently, ments. he had to get involved in those functions on a day-to-day basis, The Role of the Board and make sure that their daily Organizations which have The Board of Directors has to actions were in tune with the cop- pulled through the recent play an increasingly aggressive ing strategies. In spite of such economic crisis with varying role in setting strategic direction pressures, many leaders also for the company, and reviewing found the time to go across and degrees of difficulty are now subsequent progress. Assuming meet key customers frequently, entering a period of cautious that the Board is staffed with to “show the flag” and keep the optimism and opportunity. members who possess relevant relationship energized in difficult Balanced growth is very much and rich experience, the com- circumstances. bined wisdom that they bring to on the cards – provided the THE WAY FORWARD the table would be of great value companies equip themselves in the days ahead. The Board will Having got past possibly the with four essentials for the also have to push hard for con- worst of the downturn, it is now journey: a clear view of the tinuous improvement in the area time to look at the way forward. customer and his emerging of ethics and governance, given How do companies make the the hard knocks suffered by some most of emerging opportunities, needs, a motivated team of famous corporate names in re- and accelerate their own growth employees, a well-thought out cent times around the globe. in a sustainable fashion? We now strategy, and a steady hand at take a look at a few key manage- Looking beyond the Numbers ment initiatives and responsibili- the wheel. Richard Rumelt, Professor of ties that should be a part of the 70 THE ECONOMIC DOWNTURN: COPING STRATEGIES AND THE WAY FORWARD
  5. 5. Strategy at the Anderson School of ment (DFE), a tool for designing Management, UCLA says, “Com- Companies looking to products that are easier to recover, petent management always looks mitigate long-term risk, reuse or recycle, is assuming in- beyond the numbers, deeper than while growing at a healthy creasing prominence in this space. the current measures… you cannot manage by just looking at the re- pace, would be well M&A Opportunities sults meter.” This view is based on advised to look for Mergers and acquisitions are still the fact that the operating results opportunities in the space powerful avenues available to or- of corporations around the world of “green” businesses – ganizations to fulfill their long-term gave absolutely no prior warning strategic goals. If the target compa- renewable energy, of the impending meltdown. nies are located in economies which recycling, lower carbon are yet to bounce back, valuations To follow Professor Rumelt’s ad- emission, and clean are likely to be attractive. The key vice, leaders have to develop the technologies. question is still that of strategic fit ability to keep track of key eco- and synergy, assuming that the nomic drivers and market forces company on the lookout for acqui- that are pertinent to their industry, and spot approach- sitions has a reasonably healthy balance sheet. ing turbulence ahead of time. Additionally, as one CEO put it, “Business is all about risk”. Companies CONCLUSION have to incorporate risk mitigating approaches in their strategic planning exercises. Scenario planning is an Organizations which have pulled through the recent effective tool that can be deployed in this context. economic crisis with varying degrees of difficulty are now entering a period of cautious optimism and op- Green Businesses portunity. Balanced growth is very much on the cards – provided the companies equip themselves with four Companies looking to mitigate long-term risk, while essentials for the journey: a clear view of the customer growing at a healthy pace, would be well advised to and his emerging needs, a motivated team of employ- look for opportunities in the space of “green” busi- ees, a well-thought out strategy, and a steady hand nesses – renewable energy, recycling, lower carbon at the wheel. emission, and clean technologies. Design for Environ- Achal Raghavan is a strategy and business excellence consult- Systems, India and Ingersoll-Rand (India) Limited. He teaches ant based in Bangalore. A graduate of the Indian Institute of as guest faculty at IIM Ahmedabad and IIM Bangalore, and Technology (IIT) Madras and the Indian Institute of Manage- also writes for management journals and business newspa- ment (IIM) Ahmedabad, Raghavan brings with him over 34 pers. years of work experience in the automotive and engineering industries. During this period, he has held Board-level posi- e-mail: achalraghavan@yahoo.co.in tions for 10 years in organizations such as Delphi Automotive VIKALPA • VOLUME 34 • NO 3 • JULY - SEPTEMBER 2009 71

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