Too few companies have taken or plan to take the long-term, defensive measures necessary to survive and thrive in the wake of the Great Recession.
Although businesses around the world are entering 2010 with an appropriately sober view of the business climate, only 28 percent say that reducing labor costs is a priority for 2010, only 26 percent have made managing cash flow a priority, only 16 percent say that balance sheets and debt restructuring are a priority, and only 13 percent have put exiting noncore businesses on the list of priorities.
These findings are drawn from a Boston Consulting Group (BCG) survey of 434 executives at companies with more than $1 billion in annual revenues in seven countries, released today. The survey was fielded in conjunction with the forthcoming book "Accelerating Out of the Great Recession: Winning in a Slow-Growth Economy" (McGraw-Hill, January 2010) by BCG senior partners David Rhodes and Daniel Stelter.
"The slow-growth world that we're in, and should expect to be in for some time, fundamentally changes the nature of competition. Life is going to be harder," said Rhodes. "From now on, every day should be treated as if it were a World Series game -- because there will be no more regular season games. What will distinguish long-term winners from also-rans is the resolve to fundamentally rethink and rework business models and, at the same time, be courageous enough to invest in the future of the business."
Observed Stelter, "According to our survey, leaders recognize the need both to be defensive and to attack. But when it comes to action, they are poised to attack and invest but seem only to be playing around the edges of cost-cutting. We're concerned that they're skirting true, long-term defensive actions."
Short-Term Defensive Moves Are Taken Care Of; Deeper, More Significant Changes Are Left Undone
The vast majority of executives see significant changes in the economic order:
-- 69 percent believe there will be negative attitudes toward Western capitalism
-- 68 percent project lower profit levels
-- 64 percent believe growth will be more difficult
-- 71 percent anticipate an increase in labor protection
-- 81 percent anticipate an increase in regulation
-- 87 percent see increased consumer price sensitivity
In the face of these trends, executives have taken, or intend to take, short-term defensive actions. Between 50 and 70 percent of surveyed executives have made the easier, more obvious moves such as increasing their focus on key customers; reducing administrative and travel spending; renegotiating supplier contracts; and reducing inventory levels, marketing budgets, and wages. But far fewer have made, or plan to make, more wrenching, longer-term moves. Only 44 percent plan selective exits from product lines, only 39 percent plan selective exits from customer segments, and only 43 percent have taken or plan to take actions that involve divesting businesses and exiting sales channels.
"Smart companies will have acted quickly and restructured around profit centers and projects," said Rhodes.
Greater Proclivity to Attack the Market Than to Strengthen the Company's Core
The reluctance to take more definitive defensive steps is particularly evident in the comparison between executives' plans for expansionary, or "attack," measures and their plans for more core-strengthening activities aimed at cost structures. For 2010, 37 percent of executives have made prioritizing expanding capacity, building sales presence, and making acquisitions a priority. In addition, 32 percent said that R&D and innovation investing are priorities, and 30 percent are focusing on retaining and hiring talent.
However, as noted earlier, significantly smaller percentages are giving high priority in 2010 to reducing labor costs, managing cash flow, addressing their balance sheets, restructuring debt, and exiting noncore businesses.
And it's not as if these companies had planned to take defensive, strengthening actions in 2009: their answers regarding their 2009 priorities in a March 2009 edition of the survey were nearly the same.
"Companies seem quick to jump, but not to do the tough stuff," said Stelter. "It is telling that the organizations most likely to be planning the hard, defensive measures are the market leaders, not the middle-level players. This is true even though market leaders' businesses generally fared better during the Great Recession."
The Root of Defensive Inaction: An Unrealistic View of the Shape of the Recovery
One reason that companies are not going to the lengths they should to rethink cost structures and core strengths seems to be a view that the new economic order -- characterized by slower growth, lower profits, more protectionism, and greater consumer savings rates and price sensitivity -- will not be long-lived. Fewer than 50 percent of the surveyed executives said that these new realities will still be relevant in the medium term -- in other words, the next two to three years.
Rhodes and Stelter believe that this perception of the potential duration of the recovery is too optimistic. The underlying dynamics of the financial crisis remain in place; it's a very-best-case scenario that U.S. unemployment will return to 5 percent by 2014; and China's capacity to save the global economy is overstated.
Said Stelter, "There's enough evidence that growth will be slow and also that smart companies will prepare for slow growth and then take advantage of anything that turns out to be better. Companies that place their bets on a return to the old reality will be shut out if slow growth is the order of the day, as we expect. In fact, there's enough compelling evidence of a prolonged slow-growth economy that it strikes us as somewhat rash not to prepare for that eventuality."
Additional Survey Insights
Among the other findings from the survey:
-- Executives became more pessimistic as 2009 progressed. In March, only 17 percent expected an "L"-shaped (that is, slow and difficult) recovery, versus 46 percent in September.
-- Japanese executives are the most pessimistic. Worldwide, most executives (62 percent) predicted GDP growth for their country in the near term -- but only 40 percent of Japanese executives predicted GDP growth in Japan, and 45 percent expect shrinkage.
-- On a positive note, most executives (62 percent) believe that the new realities of the Great Recession and a slow recovery will lead to increased innovation.
-- Companies believe that the change in consumer behavior -- more savings, less spending -- will be the biggest challenge to business in 2010: 81 percent say that customers will be more price sensitive, 63 percent say that customers will "trade down," and 52 percent say that customers will face bankruptcy.
-- Executives in the following industries are most likely to expect lower profit levels: energy, transportation, auto, consumer products, hotels and restaurants, and health care.
-- According to 55 percent of executives, government fiscal stimulus will be an important business opportunity in their industry -- and half believe that government policies aimed at reducing the impact of climate change will spur growth and investment.
-- Two-thirds of executives expect greater public scrutiny of business ethics, and 61 percent expect increasingly negative commentary on personal excesses.
-- The vast majority of executives believe that nonexecutive board directors will play more important roles in companies, with greater responsibility for strategy, risk management, and management accountability.
-- More than half believe that quarterly earnings will become a less important gauge of company performance.
-- More than three-quarters believe that executive compensation will be lower over the next five years compared with the previous five, and 69 percent believe it will be more closely linked to shareholder value creation.
-- Half of the companies whose sales dropped in 2009 expect sales to increase in 2010.
Survey results are based on an online questionnaire of 434 business managers in seven countries. All respondents represented companies with at least $1 billion in global revenues in 2008, from all industries except financial services. The survey was commissioned by the Boston Consulting Group and administered by Grail Research from the 24th of August to the 1st of September 2009.
About the Authors
David Rhodes is a senior partner and managing director at The Boston Consulting Group and the global leader of the firm's Financial Institutions practice. Since joining BCG in 1985, he has worked primarily on projects involving major strategy and organizational change in large financial institutions, working with clients in Europe, Asia-Pacific, the Middle East, and the United States.
Daniel Stelter is a senior partner and managing director at The Boston Consulting Group and the global leader of the firm's Corporate Development practice. He is also a member of BCG's Executive Committee. During his 19 years with BCG, he has participated in and directed many projects throughout Europe with a focus on corporate finance (including M&A, IPOs, due diligence, strategic alliances, and joint ventures) and strategy (including portfolio strategy and value management).