Interchange July09: Sustaining your future - Ernst & Young - United States

Sustaining your future

The trauma of the financial crisis and its aftershocks has affected most companies’ returns and projections. But while some companies are experiencing diminished sales, pressures on margins or outright insolvency, others boast strong balance sheets and solid performance. Such companies are in a powerful position to take advantage of this tough environment and emerge stronger when the economy turns north.

One of the primary factors determining whether a company is thriving or merely surviving is the amount of cash it has on hand. A good tool to help management choose the right path given its current cash circumstances is the “stress pendulum” (page 3). A clear understanding of where a company resides on the cash flow-to-cash burn continuum provides insight into available opportunities and helps identify steps to make the most of current circumstances.

Companies at the far left of the stress pendulum are in an enviable position. With healthy cash flows and low levels of debt, steady or rising demand for their products or services, operating flexibility and efficient functions and processes, these organizations can focus on “sustaining your future.” Their challenge is to assess strategic risks, maximize performance, establish a footprint in promising growth markets, make acquisitions and consider climate change, regulation and other future state issues that may affect their businesses.

How strategically these businesses respond today will position them for even greater success when markets recover. Indeed, the best time to exploit market growth opportunities is when competitors are weak. Ernst & Young and the Economist Intelligence Unit (EIU) found in a recent global survey of 500 C-suite and board level executives of $1-billion-plus corporations that 25% are actively planning for growth and 59% expect to increase or significantly increase their pursuit of new market opportunities during this recession. While every company’s needs and strategies will vary, maintaining a long-term competitive advantage in the future requires such companies to consider the following steps now:

Create a sustainable business model. Cash flow is the lifeblood of any company. Companies need to revisit their cash management procedures and review credit policies to improve cash collection and spot customer issues early. Indeed, 55% of the respondents in the global survey reported delays in cash collections from customers and have seen deterioration in the credit-worthiness of customers.

Be responsive to customers. Now is a good time for companies with healthy balance sheets and cash flow to improve customer loyalty. Companies can work to better understand their customers’ stress points. For example, where competitors may be tightening credit terms, a healthier company might work more closely with its customers. Companies also need to review their pricing strategy as customers demand more for less.

Navigate the supplier base. What would happen if a significant supplier were to collapse? Alternatively, consider the impact to your organization of a supplier-driven product recall or other breach of customer or public trust. Under duress, your suppliers may be thinning their own ranks or taking other steps to reduce costs. Both measures can seriously threaten your company’s health. In the EIU survey, 9% of the respondents reported a loss of a key supplier in the last 12 months. A review of supply chain risks and operations is a good move in any economy, but in a recession, it is essential.

Invest in innovation. Cost reduction programs may target investments in product development, technology and innovation. Doing so is shortsighted, especially for the company with a strong balance sheet and healthy cash flow. To avoid losing ground to competitors and to ensure an ongoing culture of innovation, these companies must invest in research and development.

Keep sustainability on the agenda. Companies at the left of the stress pendulum should also use their healthy position to investigate the meaning of sustainability and invest in it by shifting their cultures and acquiring technologies. Such steps can improve brand positioning and company reputation, increase business opportunities, enhance recruiting and promote resource savings and efficiency.

Develop talent. Although reducing headcount has been one of the most popular cost-saving strategies, it is essential to continue to recruit and develop leaders during the downturn. Companies that have the right people in place will gain competitive advantage and be in a position to thrive when the economy turns around.

Seek growth in emerging markets. According to the EIU survey, over 60% of respondents expect the best growth opportunities to come from overseas. Indeed, 36% plan to enter new geographies. That’s no surprise when you consider that projected GDP growth rates for emerging markets are projected at 3.3% in 2009, with India at 5% and China at 6.7%, compared to a negative 2% for the major developed countries. Companies in the “sustaining your future” position would do well to seek strategic investments in these markets.

Invest in opportunistic deals. Companies with cash are able to minimize the need for debt financing or bank loans amid a lingering credit crunch and can execute strategic acquisitions. Indeed, the global survey found that 31% of the respondents were looking to undertake strategic acquisitions in core businesses while 15% were looking to acquire in new business areas. There are opportunities to acquire or establish partnerships with smaller companies — particularly those with complementary products or services — that lack access to capital. Also, companies with lower valuations or in financial distress could have attractive operations.

Corporations that reside in this arena have a myriad of strategic opportunities. Where others must reshape their businesses or adopt a defensive posture, these strong companies are in a position to sustain their futures and become even stronger.

A corporation’s relative financial well-being can be plotted along a continuum from healthy to infirm. As companies move to the right on the stress pendulum, their decreasing cash levels direct their strategic priorities and actions.

Recession-resistant industries and companies buoyed by superior management inhabit the leftmost range of the arc, where “sustaining your future” is the strategic priority. Basically healthy companies threatened by competitive pressures and slowing demand find themselves under the heading of “reshaping your business,” with a mandate to transform mission and operations and, thus, their futures.

According to a new study by Ernst & Young and the Economist Intelligence Unit, cash is an issue for 82% of the 500 participating C-suite and board level executives of $1-billion-plus corporations. On the stress pendulum, those companies in the position of “improving your performance” have as their aims the execution of significant cost reduction programs and finding sources of cash flow.

The final two positions, “protecting your assets” and “securing your present,” require companies to focus on survival. Risk assessment and cash management are key areas of focus. At the extreme right of the stress pendulum, where companies face liquidation or court-supervised reorganization, essential initiatives include securing funding requirements and minimizing third-party defaults.