Yinwen Jiang
Word count: 1974/ PIN-10159
Tide out, head up.
Yinwen Jiang
“You only find out who is swimming naked when the tide goes out.” --Warrant, Buffet. Berkshire Hathaway 2001 Chairman's Letter Since 2007, the finanical tide has been defunctioning global credit markets, choking the world economy via ripple effects, setting a hard brake on the spending spree and disastrously revealing a multitude of skinny-dippers. To help cover up their embarrassment, governments around the world kept pumping liquidity into the cash-starve financial systems, considering bail-outs of troubled industries and nationalizing financial institutions exposed to bank-run or default risks. Meanwhile, housing prices, oil and other commodities, currency values plunged sharply in UK, US, Spain and elsewhere while still showed no signs to rebound. Never before have we realized so closely bonded and networked, willingly or reluctantly. As consumption demand weakens and global economy slows, senior executives face a more profoundly uncertain management environment than any of them has previously experienced. Companies are expected to act to make themselves more resilient, flexible and sensitive by both operationally wise and financially sound. This is often easier said than done. However, companies prepared to flex their operational muscles and restructure their financial positions under current canopy-- a relatively low cost of reshuffle, good availability of talents, acceleration of M&A backed by governments, fragile market confidence and overcautious panic-- will be able to grab extraordinary oppportunities and identify quite some good deals. It was during the 1870’s recession that Rockfeller and Carnegie started to gain the dominant position in oil and steel industries by getting the upper hand in new refining technology and steel production skills, dwarfing the competitors ever who took a hard breath and were not lucky enough to witness the glory they brought. A century later, Warrant Buffet converted a textile company which lurched at the brink of bankruptcy into one of the most successful conglomerates so far in the world, known as Berkshire Hathaway. A limp bird can morph into a fully-fledged eagle, if its raiser, or potential raiser, is smart enough. Transitional woes There is way more to worry for Obama’s team. His words at the inauguration speech was sombre, gloomy, humble yet inspiring, trying to lower the public’s expectation. If Obama is the white knight for the rescue of global economy, he shall endure tons of pressure and conflicts among the Congress, the public, the interest groups, the lobbists, media and different countries at the stage by applying the beauty of diplomacy and word of art. The sudden bankruptcy of Lehman Brothers in September 2008 and failures of wall street major players since March 2007 pushed the entire economy to the down slope. All industries but infrastructure, health care and public utilities, relatively speaking, are
Yinwen Jiang
facing severe credit shortage from commercial banks which are deposits-starved and loan-phobia, shrinking demand from consumer and corporate purchase, loss in commodity derivative investment and hedging deals, drowning confidence for the gloomy future, idled factories, machines and equipments, no money for research, development and innovation, layoff spree to cut budget, devalued property prices etc. Banks until recently have kept scrambling for deposits to replace their source of funds such as direct-issue commercial papers, mid-term notes, and ABS.The financial lubricants can accelerate the vehicles but when it comes to a stop, the hard brake can be sorrowful for quite some time. We see an active role that governments and central banks across the countries have played in this crisis rescue though we still throw tons of criticism and blames on their over-optimistism in the early 1990’s. US treasury department and the central bank, acting like a hedge fund, dashed into the market, mended the hole with the money from taxpayers in their vaults by themselves, and relentlessly served as a matchmaker for giants in the deadlock. This again proved the prophecy that “Too big to fail” and “moral hazard” problem resulted from central banks, FDIC and government’s function as “a lender of last resort”. Financial institutions are currently experiencing a long and painful process known as “deleveraging”, which forces institutions including banks, bank holding companies, investment banks, brokerage houses, insurance companies, trust funds, financial companies affiliated to the large business conglomerates like GM to retrieve their receivables, cash in marketable securities, lower the debt-to-equity ratio and refinance by issuing more common stocks and prefered stocks. These actions taken now will dilute the annual dividend, if any, to the shareholders, which seemingly betrays the original corporation motive, but will do good to the company on a long term basis because for the sustainable development, a strong balance sheet is the platform for another take-off when the aftermath of this crisis scatters away, sipping further investment from both private and public investors. Atthe company level, senior executives are busy drafting the year plan for 2009. $800 billion TARP rescue fund is not the panacea but how it will be allocated partly guides the direction of different industries. For US, banking system and automobile are the most severely attacked industries so far and these two traditionally strong pillar industries are expected to enjoy a piece of cake. More bailouts, nationalization, active or passive merges and acquisitions will reshuffle these arenas and distinguish several giants, which make the strong stronger and the weak weaker, the Matthew Effect, and enjoy the monopoly strength when the market rebounds. Besides direct capital injection, companies will also probably enjoy tax relief, employment incentive plans and reduced borrowing cost from credit market, money market and direct finance channels both public and private etc. As long as companies keep a good pace with the business cycle and tone of the government, it is possible to Global Initiatives Symposium in Taiwan 2009
gain the winning chips in this chilly cold winter season. Know the unknowns It is always easier to retrospect than to project. We still have plenty of questions marks lingering in our mind so what we always do is just to ride along with the tide, wherever it leads. For example, how will the $800b fund be allocated? When will the global economy stop slumping, commodity prices rebound, currency value regain, bankruptcy and bailouts no longer in vogue? How will the central banks, FOMC, FDIC, government agencies throughout the world apply the gadgets on their hands such as monetary policies, fiscal policies, open market operations, government bond and repos issuance, sovereign funds investment etc. to meet their immediate and operational targets? Will the different economic entities cooperate on a regional or cross-continental level regardless of the historical and political enmity, just as the regional currency swap plan launched by China, Korea and Japan to immunize themselves against the sudden currency fluctuation? New strategies in the shell The crisis grants us more to think over how to cope with the risks—both externally and internally—for a business entity, especially those in the eye of the tornado. New business strategies take risk of implementation. However, improvement in corporation decision making process, information transparency, operational efficiency, financial soundness and innovation plus creativity is the motto for success. We need changes to eliminate the bias and the disasters on hand. Not a single firm can survive without adapting its strategy to the current market trend and moral suation. Strategies take time to be realized though, of course. ♦ Decision making process Hard business benefits of several decision making disciplines including booming profits and rapid implementation are insuring that people with right skills and experience are included in the decision making process and brain-storm discussion sessions, making decisions based on transparency criteria and a solid data support evidence base, making sure the person who will be implementing the new decisions is involved in the decision drafting process as well as the feasibility, cost-benefit analysis, duration of taking effect and other post implementation concerns. Democracy may sometimes yield to autocracy, which leads to a higher efficiency. According to Mckinsey Global Results survey launched in January, 2009, as for the goals of strategic decision making, “Expansion into new producs, services or geographies” accounts for 34% of total respondents while “organiational change for other reasons” 21%. 78% of respondents place attention to “revenue growth” over “cost savings” in corporate decisions while in human-resource decisions, 57% fall into the category of “improved efficiency/ productivity” over “revenue growth” and “cost savings”. A majority of decisions were undertaken at the behest of CEO or the executive committee, with only 23% driven by immediate threat. Besides, nearly two-thirds of respondents say
Find the Next Wave to Ride On - New Business Strategies in the Changing World
Yinwen Jiang
they expected their decisions to pay off within two years of implementation. A good decision should bypass some basic mistakes such as decisions initiated and approved finally by the same person which leads to lackluster financial performance and indicates the importance of discussion and decisions that clash with the overall long term strategy for the company with immediate benefits. As for the decision implementation process, accountability of the person who is in charge of the implementation matters in the final financial performance exhibited. 67% of the respondents believe this took an active part in the results delivery versus their expectations previously. Therefore, four scenarios can be addressed after taking these elements into consideration： financial success, speed of project completion, cost to carry out and enhanced efficiency and productivity brought by the newly born decisions. 1. Sensitivity analysis and financial risk modelling for the new project by digging deeper into the sensitive factors analysis, such as interest rates—long term or short term, discount rate, year of effective duration, projected future free cash flow, corresponding Capex, EBITDA etc. 2. Comparable analysis both vertical and horizontal. Examing the comparable situations and scenarios with companies similar to the current situation, how the outcome was, what the improvements could be to lift the result, why they failed etc. Besides, studying the previous experience of the company itself helps to identify the specific company character, sensitivity to the external market fluctuations, risk tolerance level etc. 3. Establish a detailed model of decision making. Building up and standardizing the decision making mechanism takes time and efforts of several generations via trials and error. However, this model can largely reduce the friction among different apartments if with due flexibility as well. 4. Quantifying the risk of this project with the combination of risk exposures of other projects in the firm’s portfolio. 5. Encouragement of participation and reliance on transparent approval criteria for the decision are recommended to be included as part of the firm’s whole portfolio of decisions. However, this seems to be paradox because who should set the criteria for selection of the decision makers who set these rules? What is the motif mechanism building criteria behind them? ♦ Operational efficiency Global Initiatives Symposium in Taiwan 2009
Most companies acted immediately in the fall of 2008 when credit markets started to freeze: they cut discretionary spending, shut down idled factories and machines, massive layoffs, slowed down the investment in productivity, geographic expansion, product diversity, branding, advertisement, strategic consulting expenses and R&D. They battled severely for cash flows to build up a cash war chest for the firm, cut dividends, raised capital through common stock and preferred stock issuance to lower the debt-to-equity ratio, shored up financing sources and even turned to government for help. Quarterly performance is no longer the objective. Rather to ensure the long-term survival and health of the enterprise becomes the top priority on the executives’ agenda. Experience shows that streamlining an organization can improve its effectiveness and decision making. When jobs have to be eliminated, the cuts mostly reduce unproductive complexity rather than valuable work. As Matthew Guthridge, John R. McPherson, and Willian J. Wolf point out in “Smart cost-cutting in the downturn: Upgrading talent” (available on December 4), Cisco took that approach in shedding 8,500 jobs in 2001. Talented employees were more satisfied in a more collaboartive workplace since then. Besides, if the firm is highly operational leveraged, which indicates a higher fixed cost in production, such cuts might be of little help when inventory control, cash flow management including receivables and payables, marketing and sales models alteration do not work. Customers preference changes with the tide. When the market is low, consumers tend to downgrade their spending level while upgrade it in a booming market. This reminds the enterprise of shifting their production focus and adapting their product mix to the market focus. How rapid, sensitive, flexible and resilient in changes can also be determinative to gain the edge. ♦ Innovation and creativity Is innovation and creativity less important in the financial turmoil? Maybe. But to some industries such as Information Technology, media, telecom etc., you can never be too innovative and creative. Marginal production costs in these areas are always on the decline, close to zero or exactly zero. That stirs up Google’s strategy: free. As the leader in search, Google is now the Internet’s premier brand and the planet’s most potent free service provider. In Schmidt’s early years with the company, Google’s CEO, he has introduced new products from the popular web-based e-mail service Gmail to the recently unveiled G1 mobile phone. Staffers devote 20 percent of their work time to special projects of their own design, an inventive and effective policy that is the core of its innovation efforts.
Companies are expected to be subject to more regulations, stricter financial boundaries and further information disclosure requirement with the aid of the government and Find the Next Wave to Ride On - New Business Strategies in the Changing World
Yinwen Jiang
regulators. Globalization poses problems such as copyright law, information transparency, staff loyalty, consumer taste catering and internal control issues for the multi-national firms worldwide. Hopefully when the next tide comes, swimmers no longer need water to cover their embarrassment, even if not armored.
References: 1. A fresh look at strategy under uncertaint….………..Dec.2008 Mckinsey Quarterly 2. Financial crises past and present……..Dec.2008 David Cogman, Richard Dobbs 3. Financial crisis and reform, looking back for future clues…………Dec.2008 Robert E.Wright 4. From risk to opportunity: how global executives view sociopolitical issues……………………………………….2009 Mckinsey Global Survey Results 5. Google’s view on the future business……….………….Nov.2008 James Manyika 6. How companies make good decisions……………...Jan.2009 Mckinsey Quarterly 7. Leading through uncertainty……………..Dec.2008 Lowell Bryan, Dianna Farrell 8. Managing regulation in new era………..Dec.2008 Scott C. Beardsley Luis Enriquez, Robin Nuttall 9. Strategy in structural break…………………………...Jan.2009 Richard P. Rumelt
Global Initiatives Symposium in Taiwan 2009