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Published: February 10, 2009

 
 

Why Some Companies Are Making the Wrong Moves

A new survey reveals a disconnect between what managers should be doing and what they are doing.

How well are top corporate executives handling the global economic crisis? Are managements and governments collaborating effectively to bring the turmoil to an end? What kinds of companies will emerge from the downturn stronger? What actions should companies be taking?

These questions have arisen for many businesses since the worldwide financial crisis erupted in the fall of 2008. But most of the debate has been led by policymakers, academics, and journalists. To understand the corporate perspective, Booz & Company in December 2008 surveyed 828 business leaders, both in developed markets such as the U.S. and Germany, and in emerging markets such as Brazil and India. Their replies offer insight into how businesspeople worldwide view the crisis and are responding to it.

It is a decidedly mixed picture. Many managers believe their companies are strong and well positioned competitively. But a remarkably high number of managers at hard-hit companies said they are not accelerating their efforts to preserve cash, which experience in former downturns suggests is the first thing they should be doing. Moreover, one-quarter of financially healthy companies surveyed are not taking advantage of opportunities the crisis affords them. And at many companies, there is a lack of confidence in leadership, with 40 percent of managers unsure whether their senior leadership has a credible plan and almost half unsure whether the leadership can carry out the plan, credible or not.

Optimism That Doesn’t Compute
Despite the depth of the challenges and the odds they face, many of the managers responding to the December survey described their companies as being in an advantageous position vis-à-vis their competitors. Three-quarters, for instance, said their companies are financially strong and not in need of immediate external financial support; only 13 percent said their companies are not strong. Most respondents also ranked their companies as better than the competition in the areas of cost control, product positioning, technology capabilities, and management.

Contrary to most recent newspaper headlines, more than half of all respondents — CEOs and lower-level executives alike — believe that the crisis will ultimately have a positive impact on their companies’ competitive positions. This sense of optimism was even higher among managers in emerging markets, which generally have seen almost nothing but growth in recent years. Fifty-nine percent of respondents in emerging markets said they expected their companies to emerge stronger from the crisis, versus 53 percent in North America and 52 percent in western Europe.

Whether those positive self-assessments are realistic is another question altogether. The crisis will certainly create real opportunities for some companies, and it is not surprising that many respondents chose to see their own companies as potential beneficiaries. Given the severity of the downturn, however, some of this “glass half full” perspective will inevitably change as the impact is felt in more industries.

The survey shows that many business decision makers have not yet come to terms with the troubling reality of the global recession. Respondents were asked to assess both their financial and competitive strengths: Financial strength depended on their company’s ability to carry on without immediate external financial support, and competitive strength was determined by whether they were better or worse than the competition on five dimensions (costs, product/brand positioning, technology/capabilities, leadership/management, and ability to influence/collaborate with regulatory authorities). The answers made it possible to identify four categories: Strong companies (characterized by both financial and competitive strength), Stable companies (strong financially but weak competitively), Struggling companies (weak financially but strong competitively), and Failing companies (weak in both areas). For each of the four clusters, there is a clear and obvious course of action.

Questionable Actions
Unfortunately, many companies are still not following the course that is best for them. The disconnect between what companies should be doing during the crisis and what they actually are doing came through clearly in the answers to a series of questions about cash preservation. One would expect both Struggling and Failing companies, given their lack of financial strength, to accelerate their efforts to generate near-term cash, either by disposing of assets or securing new funding. Yet only 33 percent of Struggling companies and 43 percent of Failing companies are picking up the pace of their asset disposals, and only 46 percent of Failing companies are trying harder to secure external funding.

 
 
 
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Resources

  1. Shumeet Banerji, Neil McArthur, Cesare Mainardi, and Carlos Ammann, “Recession Response: Why Companies Are Making the Wrong Moves” (PDF), Booz & Company white paper, January 2009: The feature-length article from which this piece is drawn, including more-detailed analysis and results of the survey.
  2. Paul Branstad, Bill Jackson, and Shumeet Banerji, “Rethink Your Strategy: An Urgent Memo to the CEO” (PDF), Booz & Company white paper, December 2008: Outlines the need for bold action on the part of decision makers in the face of the downturn.
  3. Peter Heckmann, Fabienne Konik, Edouard Samakh, and Robert Weissbarth, “Restructuring in 2009: Understanding and Responding to the Crisis,” Booz & Company white paper, February 2009: An overview of improvement actions for managers to help weak companies survive and strong companies take advantage of their position.
  4. Booz & Company Web site, “Managing in a Recession”: A selection of articles on the downturn by Booz & Company experts for industries, management functions, and regions.