The global economic crisis -- and the failure of many companies to tackle it in a fast and effective way -- is giving companies already dominant in their industry the chance to stretch their lead over their competitors, according to a paper published today by The Boston Consulting Group (BCG).
In "Collateral Damage, Part 6: Underestimating the Crisis," which is based on a survey of 439 companies with sales of at least $1 billion from seven of the world's leading economies, BCG found that top companies -- those ranked first in their industry -- have been growing revenues and profitability throughout the downturn. By contrast, those companies ranked outside the top three have been heavily affected by the economic crisis and have suffered declines in revenues and profitability.
BCG found that the contrasting fortunes of the "haves" and "have-nots" are no accident. The chief executives running top companies have recognized the seriousness of the crisis and have been deploying some of the tactics more commonly used by companies undergoing turnaround transformations. The leaders of their weaker rivals, however, have taken an overly optimistic view of their prospects -- and if some are finally starting to take action, it is too little, too late.
David Rhodes, global leader of the firm's Financial Institutions practice and a coauthor of the report, said, "Although market leaders have been less affected by the downturn so far, they are doing more to tackle the worst effects of the crisis -- both for short-term protection and to benefit in the long term. In contrast, middle-of-the-market players are now running the risk of losing even more ground: they have been more severely affected, yet they are doing less to counter the downturn."
In the survey, conducted in March, BCG found the following:
-- 55 percent of market leaders grew revenues in 2008, compared with 40 percent for the second and third players in a market and only 22 percent of companies outside the top three
-- 58 percent of market leaders increased profitability in 2008, with less than a third seeing declining profits, compared with only 21 percent of companies outside the top three seeing improvements
The optimism of many companies -- despite the calamitous impact of the economic downturn on the world economy -- suggests that their CEOs are struggling to come to terms with what BCG has elsewhere called the "new realities" of the world in crisis. (See Part 5 of the "Collateral Damage" series, "Confronting the New Realities of a World in Crisis.")
More than 60 percent of companies thought that the International Monetary Fund had overstated the seriousness of the crisis in its January forecast of global GDP. When the IMF subsequently revised its forecast downward in March -- projecting the first global economic contraction since World War II -- these companies were even more badly out of line.
In another sign of corporate misjudgment, more than two-thirds described as "satisfactory" or "very satisfactory" the speed of their company's reaction, the quality of their action plan, and the capability of both senior and middle management to address the economic challenges effectively.
In addition to misreading the signals from the wider economy, a high proportion of top executives insist that the prospects of their own company are better than those of their competitors:
-- While nearly two-thirds said that the profitability of their industry as a whole would decline, more than 40 percent forecast higher profitability for their own companies
-- While more than 70 percent predicted increased price sensitivity in their customer population, more than one-third admitted that they were budgeting for increased selling prices; only a third expected their own prices to decline
-- Some 55 percent expected their company to emerge stronger from the crisis; only 15 percent expected to emerge weaker
Daniel Stelter, global leader of BCG's Corporate Development practice and the other coauthor of the report, said, "We find it astonishing that companies are still underestimating the size and scope of the economic crisis. They are generally too optimistic about their own performance and believe that they have taken sufficient steps to respond to the crisis. Consequently, although taking action, companies have not adopted adequate measures either to protect themselves from the worst effects of the downturn or to prepare for the upturn."
Market Leaders' Secrets: Ten Actions for Beating the Downturn
In the BCG survey, market-leading companies identified the following actions as key to their success:
-- Undertaking more frequent reviews of their budgets and plans, typically every quarter
-- Tracking the external environment -- both macroeconomic and industry indicators -- with far greater seriousness
-- Preparing for the downturn by acting early to reduce operating costs and overhead while optimizing working capital -- even though they have typically been less affected than their lower-ranked rivals
-- Aggressively acting to protect cash by reducing working-capital requirements, postponing capital expenditures, and paying down debt
-- Variabilizing fixed costs and reducing breakeven levels by reevaluating outsourcing and opportunities to increase shared services
-- Cutting costs more decisively by reducing production capacity and more aggressively laying off employees
-- Actively exiting underperforming businesses and divesting assets
-- To a greater degree than other companies in the survey, trying to secure future growth by investing in R&D and innovation
-- Protecting and growing their existing revenue base by increasing marketing expenditures and focusing on key accounts
-- De-averaging the actions they are taking by simultaneously cutting costs or capacity or increasing expenditures or capacity in different parts of their portfolios, depending on potential, as well as opportunistically seeking attractive acquisition opportunities while not shying away from difficult decisions about underperforming businesses
BCG's Collateral Damage Series
Based on its long history of helping companies survive and thrive during global economic downturns, BCG created its "Collateral Damage" series, which explains the background to the current troubles, analyzes the impact of government actions around the world, explores likely economic scenarios, and examines the challenges facing companies outside the financial sector. The series provides a big-picture analysis of the crisis as it has evolved in different regions, countries, and sectors. It also offers senior executives practical guidance for protecting their companies from the worst of the crisis and for preparing them for economic recovery. Current titles in the series include the following:
-- "Collateral Damage, Part 1: What the Crisis in the Credit Markets Means for Everyone Else"
-- "Collateral Damage, Part 2: Taking Robust Action in the Face of the Growing Crisis"
-- "Collateral Damage, Part 3: Asia, Advantage, and Action"
-- "Collateral Damage, Part 4: Preparing for a Tough Year Ahead: The Outlook, the Crisis in Perspective, and Lessons from the Early Movers"
-- "Collateral Damage, Part 5: Confronting the New Realities of a World in Crisis"
To receive a copy of the latest paper or arrange an interview with one of the authors, please contact Alexandra Corriveau at +1 212 446 3261 or corriveau.alexandra@bcg.com.
About The Boston Consulting Group
The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients in all sectors and regions to identify their highest-value opportunities, address their most critical challenges, and transform their businesses. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 66 offices in 38 countries. For more information, please visit www.bcg.com.
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