Why the worst of times can also be the best of times
On Wednesday, December 3, 2008 12:55 by Sudip BandyopadhyayThe world has changed. After years of benign economic conditions, the four horsemen of financial apocalypse – credit crunch, recession, volatility and uncertainty – are blazing a trail across the horizon. Executives must now reassess their organisation’s agenda and communicate it clearly. If history is a guide, most will frame the current conditions as a threat and take action to protect what they have. Mitigating threats in tough markets is prudent, but companies that adopt a defensive position ignore a counter-intuitive truth: the worst of times for an economy as a whole can be the best of times for individual companies to create value.These are probably occasions when a company can create value significantly in excess of the cost of the resources required to seize an opportunity, whether by acquisition, innovative product launches, expanding in new markets or buying resources.
Golden opportunities do not come along every day, and most people think they are more likely to arise when the good times are rolling. In fact, the moment when you can transform your fortunes often emerges during the toughest times. Companies can also use difficult trading conditions to drive a hard bargain on tangible assets. Emirates purchased Airbus A380s on favourable terms one month after the September 11 attacks, at a time when many airlines were reluctant or unable to make large commitments.
A crisis marks a clean break with the past and creates an external rationale to make unpopular but necessary changes. In a downturn, investors and Boards are more forgiving of short-term earnings dips that might result from actions to improve the organisation in the long term. Kun-Hee Lee, Samsung’s chairman, for example, welcomed the currency crisis that roiled Asian markets in the late 1990s. A decade earlier, Mr Lee had initiated a set of changes to transform Samsung from a competent Korean player to a global leader. Mr Lee harnessed the energy unleashed by the external crisis to reinvigorate the internal changes.
Many companies alternate between growth binges and periods of sober cost cutting. The better approach is to maintain cost discipline throughout the economic cycle. When considering cost cuts, managers should ask themselves how the process will help to maintain cost discipline in the future. The worst of times can be the best of times to create value for leaders alert enough to spot opportunities and courageous enough to seize them.
mahesh says:
December 3rd, 2008 at 3:12 pm
Sir, I totally agree with the statement that companies should strive to maintain cost discipline throughout the economic cycle and not only during the time of downturn or crisis.
Vivek Hegde says:
December 4th, 2008 at 6:40 pm
Sir - Very interesting thought, but could you also possibly highlight how a financial company - which is at the epicenter of the recession - could find opportunities here?
If I were to look for existing examples - would the recent takeover of several ailing institutions by bigger more secure institutions for a market price much much lesser than its potential market value, qualify as valid examples, or would these takeovers turn into non performing assets in the future?
Sudip says:
December 5th, 2008 at 4:18 pm
Under the current circumstances, many businesses and companies are available for acquisition at attractive valuations. A company having long term business interest and vision can cost-effectively acquire assets or businesses, provided it has liquidity. As in case of any acquisition, the acquiring company needs to assess the worth of the assets/business being proposed to be acquired, before concluding the deal.
In India, since the economic growth momentum is likely to continue in the foreseeable future, the above strategy of acquiring assets and businesses will pay handsome dividends in the future.
Shiv Kumar Lohia says:
December 6th, 2008 at 10:49 am
One cannot agree any less.There is silver lining in every crisis.There is end to the tunnel.Greater the crisis and accompanying despondency, greater will be resolve to fight the crisis and greater will be joy upon getting the desired results.However, in Indian context, every thing depends on our own resolve.While some section has been intrumental in taking India head during last 15 years, the greatest drag has been its politicians and beaurecrats, who do not want to loosen their stanglehold on the system.This is holding Indians from unleashing its all inherent strength and drive.
Just AS USA didi not need any other country to rise from its obscurity to the dizzy heights of economic super power, India can also do the same.The rise of China is another shining example.The basis difference is that China is not handicaaped by unneccessary intervention by the politicuans at every step due to its poliical system.
The time is ripe for Indains to believe in themselves and start thinking and doing in positive manner. They should visualise oppurtunity in every problems rather than searching problems in every oppurtunity.
Neeraj says:
December 12th, 2008 at 4:04 pm
Sir, it is rightly said that out of evil comes good. The trend is cyclic, and it is sure that the cycle will do take a positive turn so why not to take advantage of other end of cycle.
Regards
Neeraj Mittal
mohammad kareem says:
December 14th, 2008 at 6:56 pm
sir,
what is the position of the equity market in the next new year. and what is the positions of reliance natural resources limited (RNRL).
Sudip says:
December 16th, 2008 at 1:48 pm
Dear Mr.Kareem, The Equity market should start recovering during the next calendar year. Indian economy continues to grow and Indian companies by and large are fundamentally strong.
I would not like to comment on any Reliance ADA Group Company due to confidentiality reasons.