Management magnified strategies for revenue growth in an economic downturn

Management magnifi ed: 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..

in an economic downturn

A report from the Economist Intelligence Unit

Sponsored by SAS

Management magnifi ed: 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 fi rst report,

Management magnifi ed: Getting ahead in a recession by making better decisions, was published in August

2009 The fi nal report, on sustainability, will be published in October 2009

The Economist Intelligence Unit conducted the analysis and wrote the report The fi ndings and views

expressed in the report do not necessarily refl ect 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 The Economist Intelligence Unit would like to thank all those who contributed their time and

insight to this project

August 2009

Executive summary

It 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 defi ned 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 terrifi c results on the other side.”

Whether a company can take advantage of a recession to grow depends crucially on its fi nancial condition before the onset of the crisis This is particularly true in the current global recession, sparked by

a crisis in the fi nancial 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 fi rst 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 effi ciency For fi rms without the cash to mount an offensive, playing defence may seem the

Who took the survey?

The online survey included 234 executives worldwide:

31% are located in Asia-Pacifi c, 31% in Europe, 24%

in North America and 14% in the rest of the world

The survey encompasses companies of every size:

44% are from companies with less than US$500m in

annual sales, 11% with sales ranging from US$500m

to US$1bn, 18% from US$1bn to US$5bn, and 27% with revenue of more than US$5bn Forty percent of respondents are C-level executives A broad range

of functions are represented; the major ones are strategy and business development (44%), general management (36%) and fi nance (33%)

more realistic option.

Yet our research shows that fi rms focused on rapid growth are blending offensive and defensive tactics

in their efforts to pass their competitors Embraer, a Brazilian aircraft maker, cut 20% of its staff and

reduced production, but continues to invest in two new business jet programmes MakeMyTrip.com, an

online travel service with 50% of the Indian market, reduced expenses by 7%, but brought out three new

products in the last year Lenovo, a Chinese computer manufacturer, is focusing on profi tability in its

mature markets, but is spending heavily to penetrate emerging markets such as Russia and Turkey Toyota

Motor Sales in the US reduced spending wherever it could, but still brought out a new version of the Prius

hybrid and is investing in technologies to make cars more fuel-effi cient

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 to

break away from the crowd at times of crisis, balancing short-term expediency against long-term goals,

and so pursue a strategy for growth

At fi rst glance, the global economic crisis, which began in the US fi nancial 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 cut spending and focused on effi ciency Investment in new markets and products—prerequisites to organic growth—took a back seat to cost reductions Mergers and acquisitions—another avenue to growth—also fell, as funds dried up and companies became reluctant to borrow

Midway through 2009, a few positive economic signs have made executives more optimistic about the future But the Economist Intelligence Unit expects the recovery to be both weaker and longer in coming than most analysts anticipate We forecast that real GDP at market exchange rates will contract by 2.6% this year Global growth will return in 2010, but it will be a pallid 1.8%

However, these averages obscure the uneven impact of the fi nancial and economic crisis When thinking about a growth strategy in these uncertain times, “you cannot [only look at] global trends, regional trends, even country trends,” says Jan Zijderveld, executive vice-president, South East Asia & Australasia, of Unilever, a consumer products group “Every country, every market and every channel is reacting differently to the global crisis.”

We forecast that North America and especially Europe will limp along until 2013, with growth inching towards 2% Latin America, the transition economies in central and Eastern Europe, and the Middle East 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, offi ce and housing

“You cannot [only

look at] global

trends, regional

trends, even

country trends You

have to de-average

everything Every

country, every

market and every

channel is reacting

differently to the

global crisis.”

Jan Zijderveld,

executive

vice-president,

Unilever, South

East Asia &

Australasia

4 14 16 37 30

9 15 14 38 24

Significantly higher Slightly higher Same as before Slightly lower Significantly lower Demand is

Overall expenditures are

Source: Economist Intelligence Unit survey, May 2009.

How has the current downturn affected your business?

(% respondents)

construction, and banking have all been severely battered, whereas digital technology and low-carbon

businesses such as wind power have registered growth In industries where capacity was scrapped, such as

banking, future growth potential has been damaged

Overhanging the recovery is the dismal outlook for trade: we expect global trade in goods to contract

by 9.4% this year and rise by only 2.9% in 2010 By the later years of our forecast period, the rate will

edge up to more than 5% Here, again, there are deep divisions: developing countries as a group will see a

stronger 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 the

storm has passed, but that would be a mistake While a purely defensive strategy might ensure

short-term survival, it is unlikely to produce long-short-term growth Just as the relative positions of economies and

industries 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 enough

to seek growth while all around them are contracting are the most likely to emerge stronger from the

downturn There is no one-size-fi ts-all strategy; solutions are as individual as the corporation, its

operating region, and its products and services

World growth

(%, forecast closing date: August 14th 2009)

World summary 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Real 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

Real 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

Middle East & North Africa 6.7 5.6 5.6 5.8 6 1 4.3 4.4 4.8 4.8

Source: Economist Intelligence Unit.

World trade in goods

(%, forecast closing date: August 14th 2009)

World summary 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Trade in goods

World 10.8 7.5 9.1 7.5 3.6 -9.4 2.9 4.6 5.2 5.7

Source: Economist Intelligence Unit.

On the offensive for growth

One of the hallmarks of the current recession is that it began in the fi nancial 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 fi nancial strength at the onset

of economic turbulence The “good” companies that Mr Martin mentions are those that had their fi nancial house in order, with manageable debt and cash reserves “It’s like a disease,” says an executive with a global mining fi rm “If you were not in good physical and mental shape before, there is little you can do

to fi ght the disease It’s the same thing for companies in the face of an economic downturn If you are not

fi nancially strong and with a low-cost base, the odds are against you.”

The availability of fi nancing also depends on where you are operating Banks in China and in other countries in South-east Asia that saved while Western consumers spent during the late boom still have money to lend to the right company “We have a saying in China,” says Dr Weijiong Zhang, co-dean of the China Europe International Business School in Shanghai “If you are a good company, the banks are chasing you If you are a bad company, you are chasing the banks.”

There is no single way to grab market share In these tough times, strategies range from the straightforward acquisition of a weakened rival to the adroit use of government stimulus packages Flexible companies are reorienting their products and services to appeal to markets that are still growing Investment in innovation, key to both exploiting short-term prospects and ensuring long-term growth, is

a common theme in growth strategies

“If you are a good

company, this is

the best time in

the world to grab

share Figure out

who’s vulnerable,

because it’s hard

to take share away

from somebody

when they’ve got

it.”

Roger Martin, dean, Rotman

School of Management

Key points

l Firms that put their fi nancial 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

What ties these companies together is their belief in the opportunities to be seized despite—and in

some cases because of—the global crisis To use the slightly hackneyed phrase, these fi rms have decided

that the best defence is a good offence

Targeting rivals

Buyers in distressed markets know that those who purchase in a downturn tend to get more for their

money Asset prices have dropped, making acquisitions both attractive and possible for fi rms that

have the fi nancing Although the hardest hit industries in the downturn, banking and automotive

manufacturing are rife with acquisition possibilities Thus Fiat, an Italian car giant, was able to take over

most of the assets of Chrysler (one of the US Big Three) in June 2009, using technology transfer instead of

cash to seal the bargain

In banking, TD Bank Financial Group in Canada and Banco Santander in Spain have both used a

strong 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 the

savings business of Bradford & Bingley in the UK In both cases, the purchases fi t a long-term growth

strategy that management continued to pursue in the downturn “We’d be interested in doing other

Short term versus long term

The paradox of downturns, according to a management

guru, Michael E Porter, of the Harvard Business

School, is that companies have to think short term

without forgetting about the long term Firms listed on

stock exchanges are already preconditioned to think in

terms of the daily share price and the next quarter, as

are the analysts who follow them Add crisis conditions,

where cash is tight and management time is taken up

fi ghting fi res on a daily basis, and it is easy to see how

long-term planning drops down the list of priorities

Indeed, one-half of the executives responding to

our survey on decision-making say that decisions at

their fi rm have become more focused on the short term

over the past year At best, this can be a temporary

oversight, quickly rectifi ed as panic recedes and the

economic situation stabilises At worst, measures

taken with only the short term in mind can prove

unsustainable in the long run

Can executives realistically juggle both? The answer

appears to be a qualifi ed “yes” “Recession should

validate the long-term strategy,” says Drew Levine,

president of security services at G4S Wackenhut “If recession shakes a company’s long-term strategy, then it was not valid in the fi rst place.” Executives consulted for this report acknowledge that dealing with the sudden onset, unexpected severity and continued volatility of the global recession takes up an extraordinary amount of management time

“Recession should validate the long-term strategy, not shape it If recession shakes a company’s long-term strategy, then it was not valid in the fi rst place.”

Drew Levine, president of security services, G4S Wackenhut

Yet all say senior managers have no choice but to keep both horizons in mind when plotting a growth strategy “You are always trying to win market share today, control your costs today, deliver good results today,” says Devin Wenig, CEO of the Markets Division

of Thomson Reuters “But if that’s all you do, you don’t have a strategy.” He believes that really good management teams “are able to walk and chew gum at the same time”

acquisitions,” says Tim Thompson, senior vice-president of TD Bank Financial Group

The garment industry in China, a sector rocked by the dramatic contraction in world trade, is also consolidating “Now is the time to merge with another company,” says Dr Zhang “The price is good There is little serious competition [for the asset] You have the time and the opportunity to enlarge your company.”

Although buying a competitor gives a company an instant growth spurt, industry conditions, the high cost of a takeover or the diffi culty acquiring fi nancing 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 fi nancial diffi culties 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 fi rms, organic growth is still possible, although the rate might be slower They can still gain market share if competing fi rms 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 confi rm 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 fi rms 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

“You want to be

offensive, but

you have to be

realistic.”

Tim Thompson, senior

vice-president, TD Bank Financial

Group

Shifts in customer attitudes Trends in the market for your organisation’s products and services Profitability of specific customers or groups of customers

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?

Customers Middle management Providers of capital (eg, financial institutions, investors)

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?

Source: Economist Intelligence Unit survey, May 2009.

53

47

47

57

46

33

In China, fi rms dependent on exports to North America and Europe were faced with a grim choice: stay

oriented towards the export market and watch sales drop or stagnate for years, or reorient the company

to the domestic market, which is still growing, albeit more slowly Dr Zhang cites, for example, Mindray

Medical International, an instrument manufacturer that is now focusing on domestic sales To do this, it

has 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 the

domestic market after sales to Germany, previously its most important market, faltered

The global mining fi rm 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 North

America and Europe, which traditionally accounted for almost one-half of its sales Qingtong Zhou, CFO

of Emerging Markets Group at Lenovo, says the company is targeting emerging markets, including Russia

and Turkey, because that is where it expects most growth to take place There are opportunities in young

markets where companies are still jockeying for position

Even where the geographic focus stays the same, fi rms are repositioning their products and services

to increase sales This can be as simple as lowering existing prices, marketing the low-cost attributes

of a product that were not emphasised before, bringing out a low-cost version of a popular model, or

repackaging consumer products into more affordable sizes Apple chose to bring out a cheaper version

of its popular iPhone during the North American recession In India, Nokia introduced a less expensive

mobile phone Also in India, Honda, which traditionally offered higher-priced sedans and sports utility

vehicles, brought out a dramatically cheaper car

In South-east Asia, Unilever repackaged many of its consumer products to lower their price points and

changed distribution to include smaller shops that were winning business away from hypermarkets In the

Philippines, for example, many of its products were resized so they could be sold for 5 pesos (about 10 US

cents) “The way you win is a little bit different than in good times,” says Mr Zijderveld “It’s about going

back to the consumer, offering better value for money, making sure our portfolio covers all different prices

and segments, and making sure we are available where the consumer is shopping.”

Innovation

There are limits to what can be done with existing products Those companies that can afford to are

continuing to innovate as part of their growth strategy Indeed, in all of the companies interviewed,

innovation programmes had been spared the knife

MakeMyTrip.com, a fast-growing online travel service in India with around 1.5 million customers and

4 million visitors to its website each month, launched three new products over the past year that offer

customers new options “All of these products require a fair amount of either contracting or product

development,” says Deep Kalra, CEO of MakeMyTrip.com “We went ahead with the product strategy

because we considered it key to our growth.”

In the US, even though automotive sales have plummeted, Toyota Motor Sales brought out a new

version of its Prius hybrid vehicle, and is continuing work on new models to fi t changing fuel economy

and environmental demands In another direct response to the economic crisis, Toyota has made its