Management magnified Strategies for revenue growth in an economic downturn A report from the Economist Intelligence Unit Sponsored by SAS Management magnified Strategies for revenue growth in an economic downturn Preface Management magnified: Strategies for revenue growth in an economic downturn is the second in a series of three reports written by the Economist Intelligence Unit and sponsored by SAS The first report, Management magnified: Getting ahead in a recession by making better decisions, was published in August 2009 The final report, on sustainability, will be published in October 2009 The Economist Intelligence Unit conducted the analysis and wrote the report The findings and views expressed in the report not necessarily reflect those of the sponsor The report is based on in-depth interviews with senior executives in the region and desk research The author is Madelaine Drohan and the editor is Katherine Dorr Abreu Mike Kenny is responsible for the layout The Economist Intelligence Unit would like to thank all those who contributed their time and insight to this project August 2009 © Economist Intelligence Unit Limited 2009 Management magnified Strategies for revenue growth in an economic downturn Executive summary I t is a rare company that puts together a growth strategy that considers the probability of a recession Yet recessions inevitably occur, and with each new downturn management is forced to grapple anew with the challenge of having to increase revenue amid tighter budgets and fewer resources “Great companies are defined in challenging periods,” says Devin Wenig, CEO of the Markets Division at Thomson Reuters “It takes a great company to have the courage to invest in a tough period, often with terrific results on the other side.” Whether a company can take advantage of a recession to grow depends crucially on its financial condition before the onset of the crisis This is particularly true in the current global recession, sparked by a crisis in the financial system that led to a freezing of credit in many parts of the world Companies that had their houses in order when the downturn began, with low levels of debt and a cushion of cash, are now best positioned to pursue opportunities for growth But where these opportunities exist? Despite the worst recession since the 1930s, there are still ways for companies to grow, even in some of the hardest hit industries, such as automotive manufacturing and banking It is a mistake simply to consider the overall picture when plotting a growth strategy Because each region, country, and sector, is affected differently by the downturn, corporate strategies must take these differences into account The choice for a well-funded company is whether to hunker down or to go on the offensive by buying competitors, grabbing their customers, or investing in new products and new markets The first option is appealing, based on the results of a survey on decision-making conducted in May 2009 by the Economist Intelligence Unit and sponsored by SAS The majority of executives are focusing on cutting costs and improving efficiency For firms without the cash to mount an offensive, playing defence may seem the Who took the survey? The online survey included 234 executives worldwide: 31% are located in Asia-Pacific, 31% in Europe, 24% in North America and 14% in the rest of the world The survey encompasses companies of every size: 44% are from companies with less than US$500m in annual sales, 11% with sales ranging from US$500m to US$1bn, 18% from US$1bn to US$5bn, and 27% with revenue of more than US$5bn Forty percent of respondents are C-level executives A broad range of functions are represented; the major ones are strategy and business development (44%), general management (36%) and finance (33%) © Economist Intelligence Unit Limited 2009 Management magnified Strategies for revenue growth in an economic downturn more realistic option Yet our research shows that firms focused on rapid growth are blending offensive and defensive tactics in their efforts to pass their competitors Embraer, a Brazilian aircraft maker, cut 20% of its staff and reduced production, but continues to invest in two new business jet programmes MakeMyTrip.com, an online travel service with 50% of the Indian market, reduced expenses by 7%, but brought out three new products in the last year Lenovo, a Chinese computer manufacturer, is focusing on profitability in its mature markets, but is spending heavily to penetrate emerging markets such as Russia and Turkey Toyota Motor Sales in the US reduced spending wherever it could, but still brought out a new version of the Prius hybrid and is investing in technologies to make cars more fuel-efficient Despite frequent sightings of “green shoots”, the global recession is far from over It will be months, perhaps years, before it is clear whether these moves have paid off What is certain is that it is possible to break away from the crowd at times of crisis, balancing short-term expediency against long-term goals, and so pursue a strategy for growth © Economist Intelligence Unit Limited 2009 Management magnified Strategies for revenue growth in an economic downturn Introduction “You cannot [only look at] global trends, regional trends, even country trends You have to de-average everything Every country, every market and every channel is reacting differently to the global crisis.” Jan Zijderveld, executive vicepresident, Unilever, South East Asia & Australasia A t first glance, the global economic crisis, which began in the US financial sector, does not seem propitious for growth Indeed, a survey on decision-making conducted by the Economist Intelligence Unit in May 2009 indicates that as demand for products and services dropped, a majority of companies cut spending and focused on efficiency Investment in new markets and products—prerequisites to organic growth—took a back seat to cost reductions Mergers and acquisitions—another avenue to growth—also fell, as funds dried up and companies became reluctant to borrow Midway through 2009, a few positive economic signs have made executives more optimistic about the future But the Economist Intelligence Unit expects the recovery to be both weaker and longer in coming than most analysts anticipate We forecast that real GDP at market exchange rates will contract by 2.6% this year Global growth will return in 2010, but it will be a pallid 1.8% However, these averages obscure the uneven impact of the financial and economic crisis When thinking about a growth strategy in these uncertain times, “you cannot [only look at] global trends, regional trends, even country trends,” says Jan Zijderveld, executive vice-president, South East Asia & Australasia, of Unilever, a consumer products group “Every country, every market and every channel is reacting differently to the global crisis.” We forecast that North America and especially Europe will limp along until 2013, with growth inching towards 2% Latin America, the transition economies in central and Eastern Europe, and the Middle East and North Africa will experience a somewhat stronger rebound Emerging Asia will be the fastest-growing region between 2010 and 2013, led by India and China The outlook for industries is a similar patchwork The automotive sector, office and housing How has the current downturn affected your business? (% respondents) Demand is Significantly higher 15 Slightly higher 14 14 Same as before 16 38 Slightly lower 37 24 Significantly lower 30 Overall expenditures are Source: Economist Intelligence Unit survey, May 2009 © Economist Intelligence Unit Limited 2009 Management magnified Strategies for revenue growth in an economic downturn World growth (%, forecast closing date: August 14th 2009) World summary 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Real GDP growth (PPP exchange rates) World 4.8 4.4 5.0 5.0 2.8 -1.4 2.7 3.4 3.9 4.1 OECD 3.2 2.7 3.1 2.7 0.6 -3.7 1.1 1.4 1.9 2.2 Non-OECD 7.7 7.4 8.1 8.7 6.1 1.8 4.9 5.9 6.3 6.4 4.0 3.5 4.0 3.8 1.7 -2.6 1.8 2.3 2.8 3.0 3.6 2.9 2.8 2.1 0.4 -2.4 1.8 1.3 2.3 Real GDP growth (market exchange rates) World North America Western Europe 2.5 2.1 3.1 2.7 0.6 -4.3 1.1 1.5 1.8 Transition economies 6.7 5.7 7.3 7.3 4.7 -5.7 1.5 3.5 4.1 4.7 Asia & Australasia 5.4 5.0 5.5 6.0 2.9 -0.7 3.5 4.3 4.4 Latin America 5.8 4.9 5.6 5.5 3.9 -3.4 2.4 3.4 3.7 3.7 Middle East & North Africa 6.7 5.6 5.6 5.8 4.3 4.4 4.8 4.8 Sub-Saharan Africa 5.7 6.5 6.5 6.3 4.5 -1.7 3.1 4.9 4.3 Source: Economist Intelligence Unit construction, and banking have all been severely battered, whereas digital technology and low-carbon businesses such as wind power have registered growth In industries where capacity was scrapped, such as banking, future growth potential has been damaged Overhanging the recovery is the dismal outlook for trade: we expect global trade in goods to contract by 9.4% this year and rise by only 2.9% in 2010 By the later years of our forecast period, the rate will edge up to more than 5% Here, again, there are deep divisions: developing countries as a group will see a stronger contraction in trade this year, but will recover more quickly than developed countries This somewhat gloomy outlook might persuade executives to leave hatches battened down until the storm has passed, but that would be a mistake While a purely defensive strategy might ensure shortterm survival, it is unlikely to produce long-term growth Just as the relative positions of economies and industries are changing, so too are the positions of companies within each sector Our research indicates that growth strategies are possible even now Those companies bold enough to seek growth while all around them are contracting are the most likely to emerge stronger from the downturn There is no one-size-fits-all strategy; solutions are as individual as the corporation, its operating region, and its products and services World trade in goods (%, forecast closing date: August 14th 2009) World summary 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 10.8 7.5 9.1 7.5 3.6 -9.4 2.9 4.6 5.2 5.7 Trade in goods World Developed countries 7.5 5.7 7.5 4.8 0.9 -9.9 1.9 3.2 4.4 Developing countries 17 10.7 11.8 11.6 7.8 -8.7 4.3 6.5 6.8 7.4 Source: Economist Intelligence Unit © Economist Intelligence Unit Limited 2009 Management magnified Strategies for revenue growth in an economic downturn Key points l Firms that put their financial house in order before the recession are best positioned to grab market share during a downturn l Flexibility is vital for companies to reposition themselves for new markets and new customers l Constant innovation is required, even in the most turbulent times On the offensive for growth O “If you are a good company, this is the best time in the world to grab share Figure out who’s vulnerable, because it’s hard to take share away from somebody when they’ve got it.” Roger Martin, dean, Rotman School of Management ne of the hallmarks of the current recession is that it began in the financial services industry This created a sudden and severe credit freeze virtually worldwide, crippling those companies whose growth plan depended on raising funds In contrast, those with the foresight or good fortune to lighten their debt load and stock up on cash before the freeze saw a wealth of opportunities “If you are a good company, this is the best time in the world to grab share,” says Roger Martin, dean of the Rotman School of Management at the University of Toronto, and a member of the board of directors at both Research in Motion, the maker of the Blackberry, and Thomson Reuters, an information giant “Figure out who’s vulnerable, and grab share, because it’s hard to take share away from somebody when they’ve got it.” A determining factor of whether a company can go on the offensive is its financial strength at the onset of economic turbulence The “good” companies that Mr Martin mentions are those that had their financial house in order, with manageable debt and cash reserves “It’s like a disease,” says an executive with a global mining firm “If you were not in good physical and mental shape before, there is little you can to fight the disease It’s the same thing for companies in the face of an economic downturn If you are not financially strong and with a low-cost base, the odds are against you.” The availability of financing also depends on where you are operating Banks in China and in other countries in South-east Asia that saved while Western consumers spent during the late boom still have money to lend to the right company “We have a saying in China,” says Dr Weijiong Zhang, co-dean of the China Europe International Business School in Shanghai “If you are a good company, the banks are chasing you If you are a bad company, you are chasing the banks.” There is no single way to grab market share In these tough times, strategies range from the straightforward acquisition of a weakened rival to the adroit use of government stimulus packages Flexible companies are reorienting their products and services to appeal to markets that are still growing Investment in innovation, key to both exploiting short-term prospects and ensuring long-term growth, is a common theme in growth strategies © Economist Intelligence Unit Limited 2009 Management magnified Strategies for revenue growth in an economic downturn What ties these companies together is their belief in the opportunities to be seized despite—and in some cases because of—the global crisis To use the slightly hackneyed phrase, these firms have decided that the best defence is a good offence Targeting rivals Buyers in distressed markets know that those who purchase in a downturn tend to get more for their money Asset prices have dropped, making acquisitions both attractive and possible for firms that have the financing Although the hardest hit industries in the downturn, banking and automotive manufacturing are rife with acquisition possibilities Thus Fiat, an Italian car giant, was able to take over most of the assets of Chrysler (one of the US Big Three) in June 2009, using technology transfer instead of cash to seal the bargain In banking, TD Bank Financial Group in Canada and Banco Santander in Spain have both used a strong and stable retail market at home as a base from which to snap up weaker foreign competitors TD purchased Commerce Bancorp in the US, and Banco Santander bought Alliance & Leicester and the savings business of Bradford & Bingley in the UK In both cases, the purchases fit a long-term growth strategy that management continued to pursue in the downturn “We’d be interested in doing other Short term versus long term The paradox of downturns, according to a management guru, Michael E Porter, of the Harvard Business School, is that companies have to think short term without forgetting about the long term Firms listed on stock exchanges are already preconditioned to think in terms of the daily share price and the next quarter, as are the analysts who follow them Add crisis conditions, where cash is tight and management time is taken up fighting fires on a daily basis, and it is easy to see how long-term planning drops down the list of priorities Indeed, one-half of the executives responding to our survey on decision-making say that decisions at their firm have become more focused on the short term over the past year At best, this can be a temporary oversight, quickly rectified as panic recedes and the economic situation stabilises At worst, measures taken with only the short term in mind can prove unsustainable in the long run Can executives realistically juggle both? The answer appears to be a qualified “yes” “Recession should validate the long-term strategy,” says Drew Levine, © Economist Intelligence Unit Limited 2009 president of security services at G4S Wackenhut “If recession shakes a company’s long-term strategy, then it was not valid in the first place.” Executives consulted for this report acknowledge that dealing with the sudden onset, unexpected severity and continued volatility of the global recession takes up an extraordinary amount of management time “Recession should validate the long-term strategy, not shape it If recession shakes a company’s long-term strategy, then it was not valid in the first place.” Drew Levine, president of security services, G4S Wackenhut Yet all say senior managers have no choice but to keep both horizons in mind when plotting a growth strategy “You are always trying to win market share today, control your costs today, deliver good results today,” says Devin Wenig, CEO of the Markets Division of Thomson Reuters “But if that’s all you do, you don’t have a strategy.” He believes that really good management teams “are able to walk and chew gum at the same time” Management magnified Strategies for revenue growth in an economic downturn “You want to be offensive, but you have to be realistic.” Tim Thompson, senior vicepresident, TD Bank Financial Group acquisitions,” says Tim Thompson, senior vice-president of TD Bank Financial Group The garment industry in China, a sector rocked by the dramatic contraction in world trade, is also consolidating “Now is the time to merge with another company,” says Dr Zhang “The price is good There is little serious competition [for the asset] You have the time and the opportunity to enlarge your company.” Although buying a competitor gives a company an instant growth spurt, industry conditions, the high cost of a takeover or the difficulty acquiring financing may dictate another course “Consolidation is not a tradition in our industry,” says Luiz Carlos Siqueira Aguiar, CFO of Embraer He is keeping a watchful eye on rivals that have announced delays to new products or are experiencing financial difficulties in the hope that some clients may be persuaded to switch aircraft suppliers “All of those facts are sure to open up new opportunities for us.” For some firms, organic growth is still possible, although the rate might be slower They can still gain market share if competing firms stagnate “Typically, we build 30-35 new branches each year in Canada,” says Mr Thompson of TD Financial Group “This year, we anticipate we’ll only build 20 in Canada and 35 in the US You want to be offensive, but you have to be realistic.” Market and product positioning The crisis has prompted a return to basics, forcing companies to focus on their customers The survey results confirm this trend: 53% of executives say that they are giving more weight to information on shifts in customer attitudes when they make major decisions affecting operations and 57% believe they should make a greater effort to consult customers before making major decisions Flexible firms have quickly repositioned themselves and their products to appeal to new customers and growing markets, often taking advantage of information already available within the company to pinpoint areas of possible growth Customers are at the front and centre (% respondents) Given the changes in the economy over the past year, which of the following types of information or analysis have become more important than they were before when making major decisions? Shifts in customer attitudes 53 Trends in the market for your organisation’s products and services 47 Profitability of specific customers or groups of customers 47 Given the changes in the economy over the past year, which groups you believe need to be consulted more than in the past when making major decisions? Customers 57 Middle management 46 Providers of capital (eg, financial institutions, investors) 33 Source: Economist Intelligence Unit survey, May 2009 © Economist Intelligence Unit Limited 2009 Management magnified Strategies for revenue growth in an economic downturn In China, firms dependent on exports to North America and Europe were faced with a grim choice: stay oriented towards the export market and watch sales drop or stagnate for years, or reorient the company to the domestic market, which is still growing, albeit more slowly Dr Zhang cites, for example, Mindray Medical International, an instrument manufacturer that is now focusing on domestic sales To this, it has shifted production to instruments that are more affordable for its Chinese clients than the top-of-theline products sold in Western Europe A Chinese solar panel manufacturer made a similar turn towards the domestic market after sales to Germany, previously its most important market, faltered The global mining firm executive says his company is shifting its focus to emerging economies, where housing and infrastructure needs will keep demand growing for many years, and away from North America and Europe, which traditionally accounted for almost one-half of its sales Qingtong Zhou, CFO of Emerging Markets Group at Lenovo, says the company is targeting emerging markets, including Russia and Turkey, because that is where it expects most growth to take place There are opportunities in young markets where companies are still jockeying for position Even where the geographic focus stays the same, firms are repositioning their products and services to increase sales This can be as simple as lowering existing prices, marketing the low-cost attributes of a product that were not emphasised before, bringing out a low-cost version of a popular model, or repackaging consumer products into more affordable sizes Apple chose to bring out a cheaper version of its popular iPhone during the North American recession In India, Nokia introduced a less expensive mobile phone Also in India, Honda, which traditionally offered higher-priced sedans and sports utility vehicles, brought out a dramatically cheaper car In South-east Asia, Unilever repackaged many of its consumer products to lower their price points and changed distribution to include smaller shops that were winning business away from hypermarkets In the Philippines, for example, many of its products were resized so they could be sold for pesos (about 10 US cents) “The way you win is a little bit different than in good times,” says Mr Zijderveld “It’s about going back to the consumer, offering better value for money, making sure our portfolio covers all different prices and segments, and making sure we are available where the consumer is shopping.” Innovation There are limits to what can be done with existing products Those companies that can afford to are continuing to innovate as part of their growth strategy Indeed, in all of the companies interviewed, innovation programmes had been spared the knife MakeMyTrip.com, a fast-growing online travel service in India with around 1.5 million customers and million visitors to its website each month, launched three new products over the past year that offer customers new options “All of these products require a fair amount of either contracting or product development,” says Deep Kalra, CEO of MakeMyTrip.com “We went ahead with the product strategy because we considered it key to our growth.” In the US, even though automotive sales have plummeted, Toyota Motor Sales brought out a new version of its Prius hybrid vehicle, and is continuing work on new models to fit changing fuel economy and environmental demands In another direct response to the economic crisis, Toyota has made its © Economist Intelligence Unit Limited 2009 Management magnified Strategies for revenue growth in an economic downturn manufacturing plants more flexible, building more than one model at a single plant Bob Daly, senior vice-president of Toyota Motor Sales USA, compares the company’s response to driving along the road and running into traffic “You have to put on the brakes,” he says “But you have to remember that your original purpose was to get home, so you adjust your speed and continue to drive home.” Government stimulus packages Although traditional sources of funding all but dried up in some regions in the early stages of the crisis and remain constrained as of mid-2009, the massive stimulus packages, particularly in the US and China but also in at least 30 other countries, have benefited companies Firms in sectors targeted by governments have rapidly worked the new financing into their growth strategy The Chinese government’s programme to support rural entrepreneurs opened up opportunities for Lenovo According to Mr Zhou, Chinese farmers are buying personal computers with the help of a government subsidy Similarly in the US, resources meant to spur sustainability have helped green technology firms Government stimulus in the US opened a different set of doors for G4S Wackenhut, which provides security services The firm secured a contract from the US Customs and Border Protection to transport detainees, freeing 700 federal officers to focus on tasks that required law enforcement powers Drew Levine, president of security services at G4S Wackenhut, says this dovetails with the firm’s long-term strategy of adding value to security services so that they are less of a commodity Outsourcing is one of the opportunities that the recession has created, notes Mr Levine “When times are tough, when benefits are squeezed, all kinds of organisations are looking to shed full-time employees.” There are risks to pursuing a growth strategy, especially during a period of deep uncertainty An acquired company may have hidden problems An innovation may fail or an investment underperform Potential customers may be too panicked to consider valuable solutions being offered The global downturn could last longer than even the grimmest forecasters anticipate Yet risk-taking is inevitable if a company wants to grow, confirms Mr Wenig of Thomson Reuters “If you are not taking risks, you certainly don’t have the right strategy.” 10 © Economist Intelligence Unit Limited 2009 Management magnified Strategies for revenue growth in an economic downturn Key points l A judicious mix of offensive and defensive measures is needed to maintain growth l A downturn opens doors for transformational change based on cutting non-strategic areas and focus on higher priorities l Solutions must be weighed for their short-term impact and fit with the long-term growth strategy Protecting assets and resources: on the defensive F or many firms, going on the offensive in a downturn is neither realistic nor financially feasible These companies have more limited options, but they can still position themselves for growth if they use the global recession as an opportunity to make tough, transformational changes The bottom line, always important, has become even more so Our survey on decision-making indicates that the finance division at a majority of companies is providing the most input when major decisions are made In a crisis, according to Freek Vermeulen, professor of strategic management at the London Business School, management normally goes through a period of denial or paralysis, followed by a round of cost-cutting Nevertheless, many of the measures considered defensive—including cutting staff and expenses—are being combined with an offensive strategy Companies are spending money to gain advantage, but cutting in non-priority areas or where efficiencies have been identified “You have to be very tough on areas that are not strategic priorities, because they have to contribute to areas that are,” says Mr Wenig of Thomson Reuters “You have to be very tough on areas that are not strategic priorities, because they have to contribute to areas that are.” Devin Wenig, CEO, Markets Division, Thomson Reuters Finance has the most imput in major decisions during downturn (% respondents) When major decisions are made – decisions that result in a change in the organisation’s business objectives – which functions provide the most input? Finance 68 Sales 38 Strategy 36 Customer service 34 Marketing 34 © Economist Intelligence Unit Limited 2009 Source: Economist Intelligence Unit survey, May 2009 11 Management magnified Strategies for revenue growth in an economic downturn Staff and salary cuts Rising global unemployment shows that staff reductions are being widely used to cut costs Since the crisis began, the ranks of jobless workers worldwide have swelled by an estimated 40 million to 60 million people, according to the International Labour Organisation The Economist Intelligence Unit expects unemployment to continue to rise in North America and Europe until 2010 Embraer exemplifies a two-track approach The company laid off 4,000, or 20%, of its workforce in early 2009 and trimmed production levels Yet it maintained investment in new products and continues to develop two new business jet programmes launched in 2008 “When the market comes back, we need to have new products to offer to clients,” says Mr Aguiar, the company’s CFO “We did not change one single cent of our investment in new products.” Salary freezes or cuts are also a popular measure, sometimes taken in tandem with redundancies, and sometimes as a way to avoid them In China, many export-oriented small and medium-sized companies have kept their employees on at much reduced pay and working hours in the expectation that eventually the market will improve and workers will be hard to find Finding efficiencies Firms are seeking ways to make internal operations more efficient, but are looking for cost savings from suppliers as well This is also a tactic used both by companies in distress and those looking for ways to finance their growth strategy At its operations in South-east Asia, Unilever looked closely at all its suppliers “We are one of the world’s biggest advertising buyers,” says Jan Zijderveld, executive vice-president for the region “Media costs have risen continuously Now we are expecting them to go down, and to pay less for advertising this year than we did last year.” Even firms paying the same amount for marketing are restructuring how they it, discarding methods that not have immediate benefits, such as sponsorship of sports and cultural events, in favour of those where the value for money is more immediately obvious, such as paying for cost per acquisition in online marketing rather than cost per click Risks of defensive strategies “You can cut costs You can reduce staff You can reduce debt But what happens if opportunities come along?” Dr Weijiong Zhang, China Europe International Business School 12 The obvious risks to a purely defensive strategy, especially if it is not done in combination with offensive moves, is that a company stripped of people and resources loses the capacity to reach out to new customers and offer better products and services This is particularly dangerous at a time when customer tastes and needs are increasingly volatile “You can cut costs You can reduce staff You can reduce debt,” says Dr Zhang “But what happens if opportunities come along? It takes time to increase staff and grow your debt again [to fund expansion] And by then you’ve missed your opportunity.” Still, it can be equally risky to ignore the opportunity provided by the recession to take a hard look at operations and remove some of the fat that accumulated during good times Trimming unpromising products or divisions, reining in a salary structure that has ballooned out of control, abandoning markets with no growth potential—all are more palatable to stakeholders when they are seen as part of a well© Economist Intelligence Unit Limited 2009 Management magnified Strategies for revenue growth in an economic downturn CASE STUDY: MakeMyTrip.com chooses profitability, but also gets growth While no company was perfectly prepared for the global recession, executives at MakeMyTrip.com, one of India’s largest online travel agencies, were better placed than most, having weathered and survived a series of harsh blows just after the company was created in April 2000 They were still struggling to establish the company when the dotcom bust occurred, followed by the 2001 terrorist attacks on the US The spread of the SARS (severe acute respiratory syndrome) virus starting in late 2002 further undermined the travel market “As a company, as a team, we had actually seen a tough time,” says Deep Kalra, the company’s CEO “So I don’t think anyone panicked.” The team decided that, in this recession, the company would focus on profitability rather than revenue growth, and began looking for ways to reduce costs Marketing was an obvious target “We decided that pure brand spend, as opposed to transaction spend, should come down,” says Mr Kalra Sponsorships, and print and television advertising were cut and search engine marketing was reconfigured Instead of paying companies like Yahoo when customers clicked on their online advertisement, MakeMyTrip com renegotiated its contracts so that payment was made when an online user made a purchase “We get the transactions, we’re happy to pay,” says Mr Kalra MakeMyTrip.com also scrutinised the price hotels and airlines charged when it sold rooms and flights to its clients The company’s size—it has an estimated 50% of the online travel market in India— gave it clout with its suppliers, and it was able to negotiate much better terms “We had a great year,” says Mr Kalra of the financial year that ended on March 31st 2009 “We grew revenue by 88%.” One-half of that growth came from an increase in transactions The Indian economy is still growing, albeit more slowly because of the world recession, and online travel is a growth industry The other half came from an increase in margins the company was able to negotiate with its suppliers and other cost reductions While the company made these defensive moves, it continued a slimmed-down offensive strategy Mergers and acquisitions were put on hold, but investment in new products continued In the last year it has launched three new services that allow users to book and purchase long-distance bus travel, buy packages that combine flights and hotels, or buy railway tickets online The best part of downturns, according to Mr Kalra, is that they force a company to look at its internal processes and products and decide which ones are key to the business and which can be eliminated or fine-tuned “These are things people talk about, but frankly I don’t think you them until you are really pushed to the wall.” considered crisis response “You want to take advantage of the downturn to things that are hard to otherwise,” says Mr Martin of Rotman School of Management There are more subtle risks to massive cost-cutting programmes as well Companies turn inward, become more hierarchical in their decision-making and narrower as they focus on core competencies The focus is too often on cutting costs rather than seeking new revenue “In a crisis, you want to open up and look for new revenue streams,” says Professor Vermeulen of the London Business School “As a lone top manager or top management team, you’re not going to have all the ideas and all the information.” Professor Vermeulen cites the example of a British firm that made software for the automotive sector The chief executive invited staff to submit new ideas, and one group of employees noted that, although the automotive sector overall was in the doldrums, the spare parts divisions were doing well because people were keeping their old cars longer Their suggested software program for spare parts inventory control is now a major new source of revenue for the firm Companies that have become more top-down in their approach would have missed that opportunity, believes Professor Vermeulen © Economist Intelligence Unit Limited 2009 13 Management magnified Strategies for revenue growth in an economic downturn Conclusion G rowth is possible in an economic downturn, even one as severe as the current crisis The financial health of a company at the outset of the crisis will determine whether it can go on the offensive and use the downturn as a growth opportunity, or whether it will be forced to play defensively and risk losing market share Going on the offensive in an uncertain economy is not for the faint-hearted It takes confidence and courage to spend money in a recession, when the timing of recovery is uncertain Yet there are companies that are sticking with existing growth plans, or taking advantage of new opportunities produced by the crisis Some of their tactics are tried and true techniques used in prosperous times, while others are new to this recession Offensive strategies include: l l l l l acquisitions and mergers; targeting the clients of weakened competitors; reorienting the company or its products to new geographic markets and new customer groups; continuing to develop new products and processes; and taking advantage of government stimulus packages, especially for infrastructure and green technology Growth strategies are always risky, but even more so now Yet standing still or contracting is likely to result in a loss of market share For firms whose financial foundations were shaky at the onset, there is little choice Their options include: l l l l l 14 cutting staff and salaries; reducing production to bring inventories in line with demand; pressuring suppliers to drop prices; reducing marketing efforts; and lowering prices on products and services © Economist Intelligence Unit Limited 2009 Management magnified Strategies for revenue growth in an economic downturn Purely defensive moves may well ensure short-term survival, provided nothing crucial is cut that will undermine long-term sustainability However, that survival will have been bought at a high price if the measures taken have left the firm so pared down that it is unable to take advantage of new opportunities when the economy rebounds Focusing entirely on offensive moves can be just as risky as a wholly defensive mindset “Those are both bet-the-company strategies,” says Professor Vermeulen To survive, a company has to look for new avenues of growth A judicious mix of the two—cutting costs in non-priority areas in order to use the savings to develop new products and enter new markets—is the best way to ensure that a firm comes out of the great recession of 2008-09 in better shape than it went in © Economist Intelligence Unit Limited 2009 15 Cover images: iStockphoto.com Whilst every effort has been made to verify the accuracy of this information, neither the Economist Intelligence Unit Ltd nor the sponsors of this report can accept any responsibility for liability for reliance by any person on this report or any other information, opinions or conclusions set out herein LONDON 26 Red Lion Square London WC1R 4HQ United Kingdom Tel: (44.20) 7576 8000 Fax: (44.20) 7576 8476 E-mail: london@eiu.com NEW YORK 111 West 57th Street New York NY 10019 United States Tel: (1.212) 554 0600 Fax: (1.212) 586 1181/2 E-mail: newyork@eiu.com HONG KONG 6001, Central Plaza 18 Harbour Road Wanchai Hong Kong Tel: (852) 2585 3888 Fax: (852) 2802 7638 E-mail: hongkong@eiu.com [...].. .Management magnified Strategies for revenue growth in an economic downturn manufacturing plants more flexible, building more than one model at a single plant Bob Daly, senior vice-president of Toyota Motor Sales USA, compares the company’s response to driving along the road and running into traffic “You have to put on the brakes,” he says “But you have to remember that your original purpose... offensive and use the downturn as a growth opportunity, or whether it will be forced to play defensively and risk losing market share Going on the offensive in an uncertain economy is not for the faint-hearted It takes confidence and courage to spend money in a recession, when the timing of recovery is uncertain Yet there are companies that are sticking with existing growth plans, or taking advantage of... offered The global downturn could last longer than even the grimmest forecasters anticipate Yet risk-taking is inevitable if a company wants to grow, confirms Mr Wenig of Thomson Reuters “If you are not taking risks, you certainly don’t have the right strategy.” 10 © Economist Intelligence Unit Limited 2009 Management magnified Strategies for revenue growth in an economic downturn Key points l A judicious... especially for infrastructure and green technology Growth strategies are always risky, but even more so now Yet standing still or contracting is likely to result in a loss of market share For firms whose financial foundations were shaky at the onset, there is little choice Their options include: l l l l l 14 cutting staff and salaries; reducing production to bring inventories in line with demand; pressuring... top-down in their approach would have missed that opportunity, believes Professor Vermeulen © Economist Intelligence Unit Limited 2009 13 Management magnified Strategies for revenue growth in an economic downturn Conclusion G rowth is possible in an economic downturn, even one as severe as the current crisis The financial health of a company at the outset of the crisis will determine whether it can go on... judicious mix of offensive and defensive measures is needed to maintain growth l A downturn opens doors for transformational change based on cutting non-strategic areas and focus on higher priorities l Solutions must be weighed for their short-term impact and fit with the long-term growth strategy Protecting assets and resources: on the defensive F or many firms, going on the offensive in a downturn is neither... are made In a crisis, according to Freek Vermeulen, professor of strategic management at the London Business School, management normally goes through a period of denial or paralysis, followed by a round of cost-cutting Nevertheless, many of the measures considered defensive—including cutting staff and expenses—are being combined with an offensive strategy Companies are spending money to gain advantage,... demand; pressuring suppliers to drop prices; reducing marketing efforts; and lowering prices on products and services © Economist Intelligence Unit Limited 2009 Management magnified Strategies for revenue growth in an economic downturn Purely defensive moves may well ensure short-term survival, provided nothing crucial is cut that will undermine long-term sustainability However, that survival will have been... 11 Management magnified Strategies for revenue growth in an economic downturn Staff and salary cuts Rising global unemployment shows that staff reductions are being widely used to cut costs Since the crisis began, the ranks of jobless workers worldwide have swelled by an estimated 40 million to 60 million people, according to the International Labour Organisation The Economist Intelligence Unit expects... hierarchical in their decision-making and narrower as they focus on core competencies The focus is too often on cutting costs rather than seeking new revenue In a crisis, you want to open up and look for new revenue streams,” says Professor Vermeulen of the London Business School “As a lone top manager or top management team, you’re not going to have all the ideas and all the information.” Professor Vermeulen .. .Management magnified Strategies for revenue growth in an economic downturn Preface Management magnified: Strategies for revenue growth in an economic downturn is the second in a series... Big Three) in June 2009, using technology transfer instead of cash to seal the bargain In banking, TD Bank Financial Group in Canada and Banco Santander in Spain have both used a strong and stable... strategy and business development (44%), general management (36%) and finance (33%) © Economist Intelligence Unit Limited 2009 Management magnified Strategies for revenue growth in an economic downturn