Global Strategies for Uncertain Times
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I’ve spent the last few posts explaining why the world isn’t flat—and why that matters for business strategy. Adding to the complexity—but also to opportunities—is the fact that process of cross-border integration isn’t smooth: instead, it is punctuated by shocks, one of which we may be seeing right now. Thus, the outgoing head of the IMF, Rodrigo Rato warns of a significant worldwide slowdown in economic activity. Corporate leaders in the U.S. and Europe are less definite, but do generally agree that they face a very uncertain outlook.
One response to such economic weakness and ambiguity, of course, is to wait for economic growth to recover. But a better one, for most companies, is to try to think through what to do during the bad times. And here, history offers useful guidance—especially because there is limited memory, individually or institutionally, at many companies about how to handle economic downturns because it has been a while since they last experienced one.
History indicates that during previous business downturns, investment has tended to decline two to four times as fast as output. It is hard to rationalize such large cutbacks in investment as value-maximizing, which is why the economist John Maynard Keynes ended up invoking “animal spirits” to explain them. Herd behavior just reinforces this tendency.
Global investment in uncertain times is an enormous challenge-- even companies that are supposed to be sophisticated about investments trip up in these periods. Goldman Sachs--the leader in investment banking in most major markets, the first major Wall Street bank to commit resources to post-Soviet Russia, and one of the institutions responsible for popularizing BRIC (Brazil, Russia, India and China) as an opportunity set -- ranked 24th among investment banks in Russian equity and debt underwriting in 2005. Why so low? Because Goldman beat a hasty retreat from Russia after the 1998 financial crisis and the devaluation of the ruble, and let several years go by before trying to re-establish its foothold there.
The truth is, many companies could do better by treating downturns as times to lay the foundations of future growth—including additional globalization—rather than as times to turn off the investment spigot. Such a shift to a more countercyclical investment pattern is aided by the fact that many companies—although there are obviously exceptions in sectors particularly exposed to the property and credit crisis—are still sitting on large piles of cash. (Remember that just a year ago, what to do with these swelling cash stockpiles was treated as a key item on the corporate agenda). Also of help is the fact that so far, certain parts of the world have escaped the effects of the credit problems in some advanced economies. It is precisely such scenarios in the past that helped the global cement players, for example, to buy out local capacity cheaply (e.g., in Asia after the Asian crisis).
This is not meant, of course, as a blanket invitation to invest in globalization: there are also sectors (e.g., many natural resources) where investment spending, including cross-border acquisitions, still seem to be driven by excess liquidity rather than by careful consideration of the long-run fundamentals. But this does seem like a good time for companies to think of getting off the capital investment roller-coaster which, in the context of globalization, involves buying into markets at the top of cycles and exiting from or rationalizing within them at the bottom—a recipe for losing money over the entire cycle.
Read all of Pankaj Ghemawat's posts.
MORE ON GLOBAL STRATEGY AND MANAGING UNDER UNCERTAINTY:
Moving Upward in a Downturn (HBR Article)
Redefining Global Strategy: Crossing Borders in a World Where Differences Still Matter (Hardcover)
Five Missteps to Avoid in Volatile Times (HMU Article)
Ahead of the Curve: A Commonsense Guide to Forecasting Business and Market Cycles (Hardcover)
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Dear Prof. Ghemawat,
If we accept that economic downturns are a part of cyclical patterns and that inevitably, an upturn will come about, in relative terms, uncertain times probably present more opportunities than boom or stable times.
For instance, when the going is good, organizations do not in general focus on the fundamentals: operational efficiency, the
engine that drove the Japanese companies to the forefront during the '80s, is still not what it should be in America and in Europe, not to mention the rest of the world. Lean manufacturing, zero defects, no inventory are concepts that can be implemented with ease during a downturn. In fact, such measures which might lead to cost leadership may help an organization survive the difficult times.
A tempting approach for organizations is to resort to downsizing. Though this might reduce "labor" costs in the short-term, the loss of human capital could be devastating in the long-term. Downscoping may be a better option, lowering as it does debt costs and an improvement in performance.
Uncertain times may also provide a great window of opportunity for innovators. In fast-cycle industries, disruptive innovations have the potential of creating new demand. In stable or slow-cycle industries, incremental innovation may help an organization to be ahead of competition.
Customer responsiveness is another key area that organizations could address during uncertain times. Since service is going to form an ever-increasing proportion of any offering, this vital aspect, that is often given a short-shift by organizations, can prove to be a differentiator (Ex. Ryanair)
In other words, uncertain times provide a great opportunity for organizations to focus on long-neglected areas and to become competitive and thus successful when the upturn begins. Of course, this requires visionary leadership and the confidence that characterizes winners.
Warm regards
- Posted by B V Krishnamurthy
October 23, 2007 4:00 AM
One very old definition of profit: It is an reward of taking the Risk.
Business is always Risky: Combating the risk is also a smart businessman ship.
For a Global Business operation different type of risk and uncertainty which are as follows
1. Economic Risk
2. Envoirnmental
3. Geo Political.
4. Societal
5. Technological.
Obviously all these thing are to be taken in to consideration and how business is being done.
Question is what to do if any the above things happen and business slows down even it may come to a halt.
Uncertain times can be very productive too and can give lot of oppertunity.
Answer to this question can be very ambiguous and very complex depending upon the complexity of the of the business problem.
De risking or minimization of risk is very important for every business but the exit berries are very high for all global business
Reducing the Exit Barriers:
a) Out sourcing 70 %of the activities. Manufacturing and Inbound/Outbound Logistics are to be out sources.
2. Core Activities like R&D should be kept in hand the hand of the firm that’s develops the technology.
3. Process: Business Process should be kept in own hand and continuous working and
innovation and evolution should be made.
Confidence Creation in the mind of the Vendors:
1.All vendors who are supplying products or services has to have a great confidence and on the right side, they should be equally aware about by business and the ultimate customers who are buying my product and services where vendors plays an important role.
2. Commercial transparency should be maintained with the vendor.
3. Multiple vendors’ creation must be a continuous activity keeping in mind the price point without compromising the quality of service or product.
Confidence Creation in the mind of the Customers:
1. The customer is the ultimate Boss, they should not shy away from taking my services or product, firm must be very much aware of the business the customers are doing and about the customer’s customers.
2. Bad times stays for a limited period and again good time comes , so even at customers bad times the firm may have to stand by side of old customers with lower margins. If you loose a US$ 1 Mn customer today just tomorrow you can’t create another US$1 Mn customers. New customer creation is a difficult and expensive task.
3. It is during the recession period the hyper activity of the marketing dept should start scouting for new markets new opportunities.
Right time for Business Acquisition:
1. Cash Rich firms can utilize their excess reserves in buying out firms which ate aligned in their line of business activity, or acquisitions of small firms which can come at a very cheap rate.
Confidence Creation in the mind of your Employees:
1. The employee of the firm should be taken in to confidence they are the firms real assets, during bad times they may tend to leave you or instead you want to get rid of them, in the whole process you may loose out many of your best internal customers.
2. Proper counseling by the top manager should be done, listen to their grievances and anxiety and make them know about the external situation, even they may come forward and may willfully ready for pay cuts. Here The HR Depts. challenge is to retain the workforce and holding them intact.
Confidence Creation in the mind of your Investors:
1. Here is the real smartness of the firm’s management .Firm’s stock values may melt but the management has to be smart enough to do all positive corporate communication with the retail investors ,FII, VC,and the Bankers. Firm’s past financial track records should be highlighted, go ahead and say you can repeat the performance once again and even better.
2. Resilience: Economic resilience of a firm is very important .Time bound plan must be made to fight back the adversities.
If winter comes can summer be far behind.
- Posted by Debashish Brahma
November 12, 2007 2:15 AM
It is clear that if all companies were to follow your views, they can easily rise the recessionary trends in the coming months.
- Posted by Museebat Phataphat
February 6, 2008 10:34 PM
What holds for the "turtle" reflex in investment -- imagine, if you will, herding turtles -- holds equally true for cutting back in R&D and product/service innovation. After all, markets revive, customers come back, and brands must be maintained. It's hard to imagine Apple, or any other innovative company, significantly reducing their commitment to or level of innovation. True the type of innovation must be tuned to the times, but that's a far cry from going turtle.
- Posted by James Ransdall
March 25, 2008 5:18 PM