By UDO JUNG, REINHARD MESSENBOCK and HAROLD L. SIRKIN
From Boston Consulting Group
According to many indicators, a recession is either looming or already here. Yet because the business landscape has changed so much since the last recession, in 2001, the defensive and offensive tactics that worked then may not work as well this time around.
Now is the time to get ready. Many executives believe that their companies are better equipped to tackle tough times than they actually are. In a recent BCG survey, fewer than half of the respondents said that they had taken any measures beyond basic cost cutting.
Such complacency is risky. Most companies that succeed do so by focusing on six actions: assessing their risk, sharpening their downturn radar, getting in shape, creating a prioritized action plan, thinking counter-cyclically and being ready for the unexpected.
Downturns should be viewed as opportunities: League tables are significantly changed during such times: On average, three out of the top 10 companies drop of the list in most industries and are replaced by competitors. Companies that are prepared will have the room to maneuver, to attack rivals and extend competitive advantage. The aspiration should be offensive -- "winning in a downturn" -- not defensive.
Here are six actions to take now:
1. Assess your risk. Start by analyzing how susceptible to a downturn your company would be, and the likely effect on sales, costs and margins. How cyclical is your business? Is the degree of cyclicality changing? Have you diversified your product lines, customer base, and target regions to balance out these fluctuations? Answering these questions will help identify and prioritize the actions you'll take if the economy sours.
To determine where potential risks lie, examine your different lines of business, the company as a whole, the links of the value chain and the resilience of your suppliers and customers. In essence, a company is a portfolio of products, industries, regions, markets, currencies, customers and suppliers. Each of these components may affect the others -- in positive or negative ways.
Assess your company's strengths and vulnerabilities. Are your production facilities efficient enough to be profitable in a downturn? What impact would a lower utilization rate have? How asset-intensive are your operations -- and how flexible? How global is your customer base? How vulnerable are you to exchange rate fluctuations? Have you matched the needs of your global customers with a global network of suppliers?
Evaluating your competitors is important, too. Analyze how well prepared they are for a downturn and how much relevant experience they have. Investigate key issues such as how sophisticated their planning approaches are, how much cash they have on hand to pursue opportunities that arise, how susceptible their business portfolios are to a downturn, how vulnerable they are to changes in supply or demand and how diversified they are overall.
2. Sharpen your downturn radar. Too often, companies ignore the first signs of a downturn, such as slower customer payments or rising inventory levels. An early-warning system can help you get a jump on the competition. By systematically monitoring the landscape for danger signs and establishing triggers for specific actions, companies can stay one step ahead of the competition.
On a regular basis, companies should monitor both domestic and global macroeconomic data, industry-specific indices, utilization and operating rates in downstream industries, and changes in the prices of raw materials. The key here is not to analyze every data point but to identify the information that really matters for your business or industry -- and to interpret it correctly.
3. Get in shape -- now. Flabby, inefficient companies face the greatest risk during tough economic times -- and are slower to recover. That's why winning companies adopt a lean mindset even in times of plenty. Such companies ask: Where can we trim operations, cut costs, release cash and add value? Can we outsource any processes to low-cost countries in order to reduce costs and diversify country and currency risks? Can we de-layer levels of management or personnel in order to create a leaner, more agile organization?
Take a big-picture approach to reducing costs rather than simply tinkering with your cost structure as it is currently configured. Develop collaborative partnerships, licensing agreements and outsourcing relationships. These actions reduce risk, streamline your cost structure, add flexibility and lead to new opportunities.
4. Create a prioritized action plan. Your company's level of risk and your objectives for the next downturn will shape your action plan. Formulate in advance the steps you'll take in order to minimize the impact of the tougher economy and to realize competitive wins. Actions that create value quickly should become top priorities, because your response time will be a critical success factor. Also, learn to develop a capability for more rapid change.
Companies should carefully balance the time, cost, effort and relative benefits of each action. Be very clear about what you'll do -- and what you won't do. Make sure that management is aligned around the plan and that roles and responsibilities are clearly defined.
5. Think counter-cyclically. Keep competitors off guard by avoiding the obvious. For instance, the usual reaction in a downturn is to tighten customer payment terms and increase collection efforts in order to boost cash flow. Instead, consider giving your most profitable customers or target accounts more lenient payment terms in order to capture more of their business. Make terms stricter for less attractive accounts.
Moreover, be prepared to go after your competitors' best, most profitable customers. While others are cutting back on customer service to reduce costs, strengthen your commitment to this critical area in order to make competitive inroads.
Increase investment in marketing or R&D during the downturn instead of cutting back. Still another approach is to identify and accelerate the projects that will deliver the biggest payback when the economy starts to recover.
Plan to buy when others are selling -- that is, buy in a buyer's market. Reducing debt and improving your cash position in advance will help ensure that you can take advantage of bargains when the economy softens.
6. Be ready for the unexpected. Finally, stay flexible -- both defensively and offensively. Don't be a slave to your plan. No matter how well prepared you are, the unexpected is bound to occur. Your competitors may make unanticipated moves that challenge your assumptions or threaten your strategy. Be ready to change course and move quickly as conditions change. To further enhance strategic flexibility, try to maintain a reserve of unallocated funds or improve working capital management to free up cash.
You can't plan for unexpected opportunities and competitive moves. But if you've done your basic homework in advance -- your operations are lean, you have an action plan in place and you've managed to get a head start on the downturn -- you'll be able to respond effectively and come out ahead.
Udo Jung is a senior partner in the Frankfurt office of The Boston Consulting Group. Reinhard Messenbock is a partner in BCG's Berlin office. Harold L. Sirkin is a senior partner in the firm's Chicago office and author of the new book, "Globality: Competing with Everyone from Everywhere for Everything."