Wednesday, April 4, 2012

Some companies are not well prepared for a possible economic crisis in 2012. Gold Advice: Take the MODERATE & STEADY approach; Not a DRASTIC approach. Identify crisis early. Respond quickly.

From the link:

Please read the whole article from the link above. It is very interesting!

The conventional response of companies to recession: Shutting down and waiting for business as usual to return – is a formula for failure. Most companies were too cost focused, too slow and too passive. 

Those companies that cut costs drastically performed worse than those that adopted a moderate approach to cost cutting; many companies took 18 months to respond and they performed worse than those who acted quickly; while the minority who saw the crisis as a time to gain market share performed very strongly.

Companies that made drastic cuts to their costs did not do better than those that took a more moderate approach – in fact the survey demonstrates that those who cut costs so extensively that they slashed staff had a 10 per cent lower TSR than those that contained or avoided staff cuts.  Most companies had the wrong overall approach to the crisis; these companies need to change their mind set now to prepare for the emerging crisis.

“Just as politicians are beginning to realise that their natural response to the financial crisis has been inadequate, many companies are discovering that the conventional response to recession guarantees that a business will lose. The reason for the failure of these conventional management strategies is that they are designed for conventional inventory-cycle recessions – and a balance-sheet recession is a completely different beast.

“The highest-performing companies identified the crisis early and responded quickly. They had a moderate approach to cost reduction, and they looked beyond this to focus on the opportunities to get ahead. A fundamentally different approach is what produces the highest performance and this needs to be heeded by companies in this economic downturn.”

Losers in the 2008 recession have been too cost focused, too slow to respond and too passive. So what should companies do in a balance-sheet recession? 

Four key lessons:
  1. Avoid drastic, panic reaction cost cutting; cut costs in a focussed and measured way
  2. Prepare ahead of time: develop contingency plans and secure financing – if possible, ‘offensive liquidity’, but at least ‘defensive liquidity’
  3. Make sure that your business is not carrying baggage – don’t be forced to make fire sales at the lowest point of the economic cycle
  4. Take the opportunities – acquisitive and organic – to gain share in key markets.

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