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KIM Keun-Young

What Companies Must Do in a Crisis

KIM Keun-Young

Dec. 19, 2008

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The fallout from the global financial crisis is ripping through the real economy, creating difficulties for companies. Though the degree of difficulty may vary, no company will be completely spared from the grave situation.

Yet, during a crisis, “strong” companies step forward and show their true potential. In this sense, “strong” does not refer to corporate size or powerful resources. Rather it is about the ability to devise an appropriate strategy that fits the business climate and to execute it resolutely.

In “The Art of War,” a Chinese military treatise that was written during the 6th century BC, there is a famous story about the importance of strategy that is instructive today. More than 2,000 years ago General Tian Ji, a senior official living in the State of Qi , raced horses against young noblemen and the king, often with sizeable bets. A contest consisted of three races. Sun Bin, who later became one of the Tian's top strategists, told the general that he was losing because he always pitted his best, middle and worst horse against the opponent's similar horse.

Sun advised Tian to use his worst horse to race against his rival's finest in the first round (Tian lost). In the second round, Tian would use his finest to race against the opponent's regular (Tian won). And in the third round, Tian would use his middle horse to race against his opponent's worst (Tian won). The general would win the contest and his bet.

Applied to business today, Sun Bin's strategy implies that even a company with inferior resources can win by accurately gauging its resources and deploying a superior strategy. A Samsung Economic Research Institute analysis (See Joongang Daily Dec. 15, 2008) of companies during the 1997 currency crisis attests to this.

SERI found that two-thirds of the companies in the top 25% in terms of sales revenue and return on assets before the 1997 crisis, fell out of the top tier. Meanwhile, lower-tier companies ascended. The crucial determinant was that these companies depended on their strategy, not their resources.

McKinsey & Company, the global management consulting firm, conducted similar research on US companies few years ago. The study revealed that around 40% of companies ranked in the top 25% before the US recession in 2000-2001 fell out of the group and 15% of the companies moved up. The lower-ranked companies rose because they first closely examined their resources and their true market position.

During a recession, strategy options naturally shrink. Typically, a defensive mode, i.e. cost control, is adopted rather than aggressive action. However, uncertain times can be an opportunity to companies that take a different view. While rivals only focus on survival thus being negligent in preparing for the future, one can conduct aggressive strategy to seek changes in the landscape of the market.

For example, Corning , a US manufacturer of glass and ceramics, suffered from massive losses in its fiber optics unit after the dotcom bubble burst in 2000. Its share price plunged to US$1 in 2002 from US$100 in October 2000, and half of its workforce was laid off. The situation was similar with other IT-related companies, but Corning invested 10% of its sales to R&D, aggressively investing and strengthening core competency. That came after it had already injected US$10 billion toward its fiber optics operation. Corning 's proactive approach bore fruit, solidifying market leadership.

Another example is an aggressive strategy through acquisitions. Falling stock prices and other asset values could be considered an opening for new investments. These movements are a part of strategies to strengthen core competencies. Examples this year are Japanese financial companies that emerged from Japan 's “lost decade” to grab parts of stricken Wall Street counterparts. In September, Mitsubishi UFJ Financial Group bought stakes in weakened Morgan Stanley and Nomura Holdings acquired Asia, Europe and Middle East operations of bankrupt Lehman Brothers.

A recession is simply the right time to secure asset values, global brand, source technologies and key talent. As rivals slash marketing expenditures, investments, and their workforce and undergo restructuring, a company can gain ground even if it invests less than in a boom period. Companies that boast financial strength by weak intangibles, i.e. brand power, are positioned to benefit. Acquisitions by Korean companies in June this year are cases in point. Snack maker Lotte Confectionary acquired Guylian, a global brand of luxury Belgium chocolate, in June this year, and Dongwon Industries purchased Starkist, the top U.S. canned tuna brand, from Del Monte Foods.

Spring comes after a brutal winter. Many companies are already preparing for this. What will determine new power after the crisis? The answer starts with identifying what a company does best.

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