The global financial crisis of 2008 (GFC) has left many Western countries with an economy dominated by four types of zombie. These were the half-alive groups which survived the downturn, but were then unable to drive economic growth as we normally expect – zombie consumers reining back consumption, zombie banks lending less to business, zombie companies investing less in growth and zombie governments providing less stimulus to the economy. As a result, these zombies interacted to create an unstable economy with at best anaemic growth, and heightened susceptibility to shocks.
Three years later, many of the risks we described have not yet been resolved. Zombie consumers still exist in most Western economies: in the UK, for example, at the end of February, spending was down 1.7% year-on-year. Banks are still not lending and risks to the banking system are still seen as severe (the International Monetary Fund recently said that risks to stability have increased, despite steps to contain the eurozone debt crisis and banking problems).
The situation for companies is yet more complex, polarised between cash-rich multinationals and cash-strapped smaller businesses. But even the cash-rich remain cautious about investing while demand remains low. Some Governments are undeniably zombies, and most of the rest are acting as if they are. Austerity is now almost universal throughout EU, and the EU has re-entered recession.
Managers face the practical question: how can their companies prosper in this environment?
In an international survey of over 200 leading companies, we asked this very question. The response overturned received wisdom that it is best to trim costs and await a return to business as usual. Those who took this path through the GFC were slow to grow, too cost-focussed and too passive. A minority of companies, who performed far better, saw the crisis coming and understood that it was different in nature from a normal ‘inventory-cycle’ recession, and that while it would create enormous challenges (as it did), it would also create enormous opportunities . These companies had a total shareholder return an astonishing 10% per annum higher than those who responded conventionally.
Key to the difference was speed of response. The winners had explicit plans setting out which scenarios they would prepare against, how each scenario might unfold, the impact it would have on their business and its threats and opportunities. They were clear about the best options, who was responsible for monitoring the scenario, what would be the trigger-points and what the decision process was to allow rapid mobilisation. The losers waited for events to unfold and attempted to judge and respond to them in real-time.
Although the vast majority of companies did cut costs, the winners cut intelligently, in a focussed way which required pre-planning but ensured that the business would not be weakened. The losers started later, and were forced into rapid indiscriminate cuts across the board – attacking the easiest costs to control quickly: marketing, training, travel and staff. Those that cut staff costs most sharply performed worst.
Most importantly, the winners recognised that market share tends to shift more sharply in times of crisis and actively planned to come out of the GFC stronger than they went into it. There are two main ways of winning in a recession: the first is to note that a bad time to sell is a good time to buy; the second is to respond faster to changes in demand.
An example of the first approach is the way Berkshire Hathaway took advantage of the crisis by buying businesses and stakes in businesses at what now look like fire sale prices. Another success was seen by a leading consumer goods company that, reckoning that its competitors would slash marketing spend, decided to hold the level firm but to renegotiate every contract to get double the coverage for the same price. Both companies emerged far stronger as a result. There are many examples of the second approach, with alert companies spotting opportunities in the desire of zombie consumers to prioritise their spending, pare down on inessentials, postpone major purchases and pounce on bargains.
After the GFC, the winners were faster, more intelligent in cost cutting, and more active in planning to enhance market share. As we look ahead, we can see several scenarios for which the winning businesses will be ready: further contagion from the Greek default, an oil price shock or a hard landing or banking crisis in China. In each of these there are obvious challenges that companies should protect themselves from – but also exciting opportunities for those with the vision to see them and the courage to act.
The next few years are likely to see more economic turmoil, and significant shifts in market share – companies will again be polarised, and the winners will be those who are well-prepared to address the risks and capitalise on the opportunities.
Mark Thomas is a business strategy expert at PA Consulting Group