Mark Gottfredson, Till Vestring and Manny Maceda
As the financial crisis spreads across the globe, businesses are recasting plans to deal with uncertainty. Recessions tend to shuffle the deck: When business slows, the opportunities to make mistakes or take advantage of weaker players increase. Companies make more dramatic gains and losses in recessions than in boom times, and those that make major gains are more likely to sustain them. The challenge is to anticipate where slowing momentum will hurt a business the most, then act to blunt the effect and position the company for a fast turnaround.
Some Asian companies have learned that by preparing for the worst, they can open new doors, improve market positions, and accelerate into the next up cycle. A prime example is Malaysian Airline Systems. A few years ago, government-owned MAS faced spiraling fuel costs and intensifying competition. By 2005, MAS was losing money so fast it only had three months' worth of cash left. Enter new CEO Idris Jala, who had spent much of his career turning around troubled business units at Royal Dutch Shell (RDSA). A little more than a year later, MAS was breaking profitability records—without a government bailout. In the first 29 months after he joined, the carrier reported six consecutive quarters of profits. In 2007 it earned $264 million.
Companies facing difficult times encounter four critical pressure points. The most obvious one is cost. In a downturn, price becomes more critical—and stands to benefit low-cost competitors. As sales decrease, companies that have carefully reduced their costs in good times and bad often discover that they have even more built-in advantages than usual. Cost laggards find that they are even further behind than they thought.
Winning the Auto Race
Toyota (TM) is such a cost leader. During the 2001-03 U.S. automotive downturn, the company leveraged its sizable cost advantage over Detroit's Big Three to price competitively and remain profitable. While rivals were laying off employees, Toyota invested to expand local production and increase its cost advantage. As a result, it was able to gain share and outperform the competition.
The company recently unveiled its remodeled Crown sedan, the first car produced under its latest cost-cutting initiative. Three years ago, with an eye on rising raw material costs, Toyota launched its "Value Innovation" program to ensure that the most profitable carmaker in the world would remain both innovative and competitive. Engineers looked for ways to combine components, such as powerful minicomputers, to reduce production costs while improving the features. By trimming costs and finding ways to consolidate expensive components, the carmaker was able to offer its advanced safety system on the Crown series as a standard feature. Now, Toyota hopes to generate $2.8 billion in savings by rolling out the cost-cutting/innovation program throughout its model lines. That's money Toyota can plow back into research and development.
Toyota has taken a thoughtful approach about where to cut and where to invest—a critical balancing act for managers. For example, it might seem counterintuitive to invest in safety while everyone else is cutting back, but safety is an important factor for many Toyota customers. This kind of decision-making can help market leaders stay out in front, or propel market followers ahead of the competition.
Market position is the second pressure point that companies encounter during a downturn. In ordinary times, well-managed market leaders generally outperform followers. In a downturn, the competition grows more intense, and existing positions may be vulnerable. Leaders can use their deeper pockets to dial up the pressure on followers, or to snap them up at bargain prices. But market followers can sometimes turn the pressure exerted by a downturn to their advantage and leapfrog into the No. 1 position.
Redrawing the Route Map
MAS reshaped its competitive position by seeking Malaysian government approval to stop flying unprofitable domestic routes. At the same time, the airline launched its own low-cost carrier, Firefly, to fly six domestic routes that had no air service. By redefining its market position, MAS made itself better prepared for the kind of intensifying competition that occurs in a slowdown.
Customer behavior is the third pressure point. It's well accepted that customers and profit pools never sit still. But in a downturn, both businesses and customers are likely to shift their buying patterns faster than ever. They seek out bargains. They do without some things altogether. These changes in behavior can substantially rearrange the pools of profits for which companies compete. Winning companies prepare for such shifts. Good times can hide major weaknesses. Companies that were thriving may find that, when the economy slows, customers turn to competitors with better prices, quality, and delivery.
One of the most dramatic modern-day examples of shifting customer behavior is the rise of middle-class consumers in China. It's a phenomenon that caught some multinationals by surprise. They abdicated China to domestic companies that traditionally focused on low-quality, no-name goods. As incomes rose, those local companies started catering to middle-class consumers with what we call "good-enough" brands—a step up from the low end, but cheaper than premium goods. Today, 8 out of every 10 washing machines and televisions sold in China are good-enough brands.
Because some multinationals were slow to enter the good-enough market, they allowed domestic companies to take advantage of a major customer segment shift. Catering to this market also helped position these Chinese companies to sell products on a global scale. This was the route taken by Haier, which started producing good-enough versions of its refrigerators to meet the explosive demand. It ultimately became one of China's best-known brands and went on to crack—then dominate—some foreign markets.
A Ford with 35,908 Configurations
Complexity is the fourth pressure point, and often the least recognized. Companies in good times tend to add features, variations, and line extensions, thereby complicating both their production processes and their organization. They may create too much operating complexity. Even in good times, this can raise costs and interfere with a company's agility. It's a tricky balance. The drawbacks of complexity are particularly noticeable in a downturn. Japanese carmakers not only enjoy a cost advantage over their competitors in Detroit but they also have a complexity advantage, with fewer models, fewer options, and fewer different parts.
A recent Bain analysis found that Honda (HMC) offered its popular, midsize Accord in a total of just 484 possible variations, including color, compa
red with Ford's (F) Fusion, a direct Accord competitor, which has 35,908 theoretical configurations, including color. While Honda would require half a day to build all possible Accords, it would take Ford 90 days to build all possible Fusions. In a downturn, can Detroit carmakers sell enough of these thousands of variations to cover the costs of the complexity?
Japanese automakers have kept complexity in check, but that's not the case with Asian companies in many other industries. We surveyed more than 900 global executives and found that 80% of Asian participants admitted that excessive complexity was raising costs and hurting profits. In North America and Europe, the number was closer to 70%. The reason: To spur growth in their diverse cultural and economic marketplace, Asian companies often rely on expanded product lines and acquisitions, both of which can bloat portfolios and add layers of processes and systems—particularly vexing during a downturn.
Companies improve their prospects of flourishing in a downturn by focusing on these four pressure points. Not only are they the areas where trouble can quickly spin out of control, but they also provide four useful gauges of a company's vulnerability. For example, a company knows it is taking the right steps if its costs are trending downward at least as fast as the competition's, and if its competitors' market positions are more at risk in a sales slowdown than its own. Managers also can tell if they are on track when their customers' loyalty increases (or at least holds steady), and when they can point to signs of greater simplicity in their products, business processes, and organizations.
Downturns aren't necessarily all bad news. Our research shows that changes in economic and strategic position are twice as likely in a slowdown as during other economic periods. Companies that focus on these pressure points can gain share over their competitors and substantially improve their positions in earnings and sales. As Malaysian Airlines, Toyota, and other Asian companies have learned, managing right in the worst of times can open more doors than it closes.
Mark Gottfredson, based in Dallas, leads Bain & Co.'s Global Performance Improvement Practice and is co-author of The Breakthrough Imperative: How the Best Managers Get Outstanding Results (HarperCollins, 2008).
Till Vestring is managing partner of Bain's Southeast Asia practice.
Manny Maceda is chairman of Bain Asia Pacific.
Copyright 2000-2008 by The McGraw-Hill Companies Inc. All rights reserved.
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