OPINION: Leveraging a downturn

OPINION: Leveraging a downturn

Companies always have a choice as to how they will confront a stagnant economy: they can pull in the horns and cut budgets to survive, or they can transform their businesses and thrive in a new competitive environment. The smart ones will choose the latter, the transformative path.

Consider the very different approaches that some companies are taking to tackle downturn pressures: to cut costs, the short-sighted firms are laying off workers and focusing on reducing their operating and administrative expenses. The long-sighted ones are moving to acquire or merge with other companies to maximise return on assets and resources, and divest non-core processes to reduce their cash-burn rate.

For generating cash, incremental tactics are to increase revenue at the expense of margin, sell deeper by rebundling products and services, seek short-term credit, and aggressively pursue outstanding receivables. Transformative opportunities are to divest non-core businesses to generate cash, or to merge with a cash-rich company.

Incremental tactics ease short-term pressures, enough for most businesses to survive the downturn. But companies that pursue transformative opportunities will benefit when the economy eventually rebounds.

A few other ways a company can transform itself include the following.

Form a value network. To do this, companies must divest non-core businesses to partners to cut cost and gain flexibility. In doing so, they'll create a value network of partners that will fulfil the same demand, but with a smaller asset and resource base. As businesses choose this route, a critical mass of capable business service providers emerges. The result? The company benefits from its partners' growth and capabilities. Successful value networks excel largely through their technology and information-sharing practices.

Take advantage of a newcomer opportunity. Companies should seek a merger or acquisition by a major corporation in another industry or geography - one with a formidable brand, cash and an ability to bring economies of scale. The acquirer must provide different capabilities.

Create an e-business hybrid. Companies should partner with or acquire a company with a proven e-business model and channel. For competitive advantage, firms going this route must focus on areas that have challenged their industry - for example, e-channel fulfilment or establishing private marketplaces. The key advantage is the opportunity to get a jump-start with a proven e-business model. A main disadvantage is the lack of control of customer demand in a Web channel.

A lot of companies will survive the downturn by hunkering down. But if they wish to leverage this period of economic uncertainty, companies must be prepared to reinvent themselves.

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