Optimizing the Emerging Opportunities in the Downturn

1. Larry Ettah Group Managing Director/CEO UAC OF NIGERIA PLC Optimizing the Emerging Opportunities in the Downturn

2. Economic Hard Times • The Nigerian economy, no doubt is currently experiencing downturn. The Economic hard times are here. • Evidence of this abound around us: • Depressed demand for consumables and consumer durables and landed properties; • Capital market depression; • Closure of businesses, factories and work places • Gloom everywhere

3. Economic Hard Times (contd.) • In a downturn, the normal reaction of most business managers is to get fixated on the abundant bad news: • Demand is down; • Prices are falling; • Credit is scarce; and, • Layoffs are likely. • Consequently, the outlook for business is that of fear and depression for the present and immediate future.

4. Economic Hard Times (contd.) • Extreme obsession over threats during economic hard times obscures a surprising but crucial truth about downturns: “the worst of times for the economy as a whole can be the best of times for individual firms to create value for the long term”.

5. Heroes of past Downturns • In past downturns, some companies, including Toyota, Nokia, Cisco, Samsung and Emirates emerged from an economic crisis stronger than before. • These companies derived strength from economic hard times. • Many of their competitors, in contrast, languished or failed.

6. What did Toyota do? • Toyota introduced its popular “lean” production system in 1950 during a deep downturn that depressed automobile demand and forced most Japanese automakers into the red. • The system continuously reduces costs by identifying and eliminating activities or materials that do not add value for end users. • They used the downturn to negotiate changes in work practices. The new system required workers to man more machines, provide constant suggestions for improvement and move among stations as work flow dictated. • Toyota managers succeeded by extending the practices to their suppliers as they recognise that no company is an island.

7. Heroes of current Downturn • Even the current downturn has produced its own champions. • McDonald’s has recorded marvellous growth in its operations in the UK at more than 11 per cent in 2009 and 7.5 per cent growth in the number of customer visits, where most firms are failing or barely maintaining existence. • Part of the difference is down to having managers who understand how to create value during a downturn, as well as their effectiveness in acting on these insights.

8. What did McDonald’s do? • The firm has seen an upswing in consumers seeking out Extra Value Meals in the difficult economic environment. • It recognised that value was more important to customers and offered good food that is affordable to everyone. • According to the UK Chief Executive of McDonald’s, “the firm has seen growth across its menus, with particular demand for its Saver Menu and a new Little Tasters value offer. If you have just got a pound in your pocket you know there is always something for you in McDonald’s. • Thus, the firm gained share in a declining eating out market in 2009.

9. Opportunities in a Downturn • Every downturn opens a window of opportunity to adjust the status quo, and astute managers push through necessary changes while the window is open. • An economic crisis marks a sharp break with the past; and, observing the break, employees recognised that a company or firm cannot continue to do what it did in the past. • The downturn lowers their resistance to change and cuts through complacency. • A downturn often brings latent challenges to a head, and savvy managers can harness the resulting energy to infuse the organisation with a sense of urgency in fixing these problems.

10. Opportunities in a Downturn • A downturn provides a ready-made external rationale to justify painful decisions that would appear extreme in better times. • Also, an economic crisis provide managers with good opportunity to make decisions that incur short-term financial pain or long-term gain, such as pruning products, “firing” unprofitable customers or exiting money-losing businesses. • Investors, boards and bosses are typically more forgiving of short-term dips in sales and earnings during a downturn, when all competitors are suffering, than they are during a boom, when everyone else is thriving.

11. How can these opportunities be harnessed • We can harness the downturn to make any number of possible changes, but the following four actions in particular are likely to create long-term value. • Encourage ongoing cost discipline • Drive hard choices • Accelerate fundamental changes • Seize golden opportunities

12. Encourage ongoing cost discipline • Good times are often associated with undisciplined growth and permissiveness in terms of costs. • We must remember that companies exists to create economic value, which is the difference between revenue and the opportunity cost of all inputs (including capital). • As good managers, we must keep our hands on both levers at all times, looking for growth opportunities during downturns while maintaining cost discipline when the good time comes.

13. Encourage ongoing cost discipline (contd.) • Many companies oscillate between periods of undisciplined growth and brutal cost cutting. • During a boom, they press on with the growth agenda to increase revenues. • When the economic cycle turns, however, they slam on the brakes, abandon growth and focus on slashing expenses to free cash flow. • Once the economy picks up again, they abandon their new-found cost discipline to pursue revenue growth. • This stop-go approach is a mistake.

14. Encourage ongoing cost discipline (contd.) • Golden opportunities to increase sales often emerge in downturns. • The best opportunities to cut costs often arise in good times. • During a boom, many managers tend to overlook the inefficiencies that sprout like weeds throughout the organisation, sapping resources from more productive uses. • During a downturn, good managers weed their overgrown gardens, but great ones also build processes to nip these costs in the bud as they crop up in the future.

15. Encourage ongoing cost discipline (contd.) • As managers we must look for ways to build ongoing cost discipline into resource allocation processes. • In many companies, the budgeting process takes the previous year’s expenditures as given, and then incrementally augments or decreases them to calculate the next year’s budget. • We encourage zero-based budgeting that required managers to develop budgets from scratch and justify each item.

16. Encourage ongoing cost discipline (contd.) • To retain ongoing cost discipline, we should ask ourselves a few questions: • What processes do we have in place to systematically identify and eliminate waste? • Could we improve these procedures? • Are there promising best practices in parts of our organisation that we could disseminate more widely?

17. Drive hard choices • Even in good times, no company has enough resources to pursue all its growth objectives. Hence, managers tend to spread resources evenly to preserve a sense of fairness and minimise conflict. • This means promising opportunities receive fewer resources than they require while others get more than they deserve. • In the worst of times, it is even more harmful, dissipating scarce cash. • Many managers, for example, try to spread the pain of downsizing evenly, demanding an identical percentage reduction in headcount or expenditure across all units regardless of their merits.

18. Drive hard choices (contd.) • A downturn provides the ideal opportunity to force hard choices throughout the organisation. • A downturn can also be harnessed to prioritise which corporate initiatives really matter. Proliferation of “strategic priorities” during boom not only consume cash, but also diverts managerial attention from what truly matters. • Key priorities should be communicated throughout the entire organisation, and also a list of initiatives that are no longer objectives to ensure everyone gets the message.

19. Drive hard choices (contd.) • To drive hard choices, we can ask ourselves a series of questions: • What initiatives, businesses, products, markets and so on, consume a greater part of our resources? • Can we rank order them in terms of value creation potential? • Where should we draw the line that marks the truly critical from the nice to have?

20. Accelerate fundamental changes • Prior to the current downturn, your company was undergoing large-scale changes to refocus and reorganise it. • The changes were initially difficult even though they happened during the best of times; many are beginning to ask if the downturn will not reverse all the gains made so far. I beg to disagree. • Downturns provide an ideal opportunity to re-invigorate an ongoing transformation, renew the sense of urgency, justify unpopular decisions and overcome complacency or resistance to change.

21. Accelerate fundamental changes • You need to ask and proffer right answers to the following questions: • What large-scale changes did we start prior to the downturn? • Which do we still consider critical to our long-term success? • What changes would we have to make even if this crisis had never occurred? • How can we harness the crisis to accelerate these changes?

22. Seize golden opportunities • All the economic bad news can eclipse the crucial reality that every downturn has an upside. • To make the most of that upside, managers must recognise opportunities during hard times and muster the courage to seize them. • Golden opportunities refer to occasions when a company can create value significantly in excess of the cost of the resources required to seize the opportunity. • Most managers look for golden opportunities when the good times are rolling. This is a mistake.

23. Seize golden opportunities (contd.) • The best opportunities often arise during downturns when distressed sellers are forced to offload valuable assets at bargain prices. • To conserve cash, companies may be forced to retreat from attractive propositions, thereby creating an opportunity for rivals. • Competitors may have to pass on new opportunities to conserve cash. • Sometimes, seizing the opportunity requires a creative deal to help ease another company’s pain.

24. Seize golden opportunities (contd.) • In a downturn, it is easy for most managers to focus exclusively on managing threats, and thereby lose sight of golden opportunities. • To counterbalance this, we should ask ourselves the following questions: • Are competitors retreating from opportunities that we can seize? • Should we double down in growth markets rather than retrenching to our core? • Does our customers’ or competitors’ pain create an opportunity for us? • Can we snap up key resources at bargain prices?

25. Final Word • As we move into the final phase of the period of economic downturn, hopefully, it is expedient we are prepared for the worst economic times and hope for the best. • In the midst of all these, we should: • Avoid the profligacy of the past and make cost consciousness a way of life henceforth; • Erase the abundance mentality: work to create value to appropriate rather than being entitlement driven; • Continuously search for manifest and latent opportunities that a time such as we are in can throw up.

26. Final Word • As you set the agenda for 2010, you must remind yourselves that you need to ‘walk the talk’ by living our values. That is what can sustain a business even at bad times. • Be professional in all that you do. Your project evaluation and management processes must be sharpened to ensure profitable project execution. • Seek market opportunities out of your customers’/competitors’ pain or disability. • Build your brand for the greater future ahead.