Sunday, December 14, 2008

Recession and Rigidity

Corporations the world over are concerned with and fearful about recession. Having been accustomed to years of unbridled growth which piggybacked on easy money, bloated assets and burgeoning demand, companies are finding the liquidity crunch, asset revaluations and frozen demand as indicative of a long, harsh recession. While a few companies may welcome periodic recessionary episodes as a much needed correction to profligacy and a reward for efficiency, most companies tend to be clueless and powerless in the wake of a recession.

It is surprising how even enlightened companies react typically to recession in terms of a three point formula: refusal, reduction and regression. Committed to a bandwagon of growth, CEOs universally at first refuse to recognize recession. As a result, companies build up huge inventories, which require painful adjustments in terms of slashed production. When recession stares one in the face and declining demand can no longer be brushed under the carpet, then follows an unthinking wave of reduction measures, from job and salary cuts to business and plant closures. By the time this cycle of compression is complete, companies would have regressed by a few years, unable to discover in time the silent revival of demand, much less respond to it.

The rigid mindsets of organizations ahead, in the midst and in the aftermath of recession lead to intriguingly counter-intuitive and counter-productive strategies, which tend to shrink their ability to fight recession even more. There are examples galore in the Indian business scene. A few months ago when consumer purchasing power was at its peak in India, a Rs 25000 (USD 500) mobile phone was considered a high end phone. Today, when every consumer is trying to avoid all discretionary expenditure, we have a host of mobile phones launched with a price tag of Rs 35000 to Rs 40000 (USD 700 to 800), with obviously little consumer enthusiasm for the usurious pricing! Low cost airliners were offering plenty of services when corporate and personal travels were at their peak. Today, when corporations and individuals seek to minimize or avoid travel costs, we have the low cost airliners either withdrawing their operations or increasing their prices. There was a great urgency in the Tata group to launch the ultra low cost Nano micro car in the midst of an automobile boom. In today’s recession, on the other hand, Nano is miles away from a mass launch.

The above paradoxical and market-inefficient business strategies of even reputed companies are a result of a corporate mindset which fails to absorb the ramifications of recession in a timely manner and come up with appropriate strategic revisions. Companies have to appreciate that recession affects different sectors differently. There are four basic realities of recession. Firstly, recession only distorts demand but does not destroy demand. Secondly, certain sectors tend to be recession-proof. Thirdly, governmental responses to recession often stimulate certain sectors differentially. And finally, if one domain needs increased investment in recession it is Research & Development (R&D).

Fundamentally, even in recessionary conditions demand does not disappear; it only migrates across market segments. The boom in WalMart sales in US is indicative of this. Demand has migrated in this case from high end malls to economy departmental stores. Had Indian telecom companies been appreciative of this, their product introduction strategies would have been more pro-consumer, packing more value for less money. Airlines would have persevered with their low-cost flying strategies for a few more months to woo the cash strapped companies and individuals. The Tata group would have substituted Indica and Indigo car production with Nano car production in all their plants to accelerate the Nano revolution on the Indian roads.

Secondly, sectors which are intertwined with the basic needs of a society will buck recession rather than succumb to it. Generic and innovative pharmaceuticals, healthcare, textiles, education, low and middle income housing, passenger transportation, basic consumer goods and household items are some industrial sectors which would survive most recessionary conditions. By enhancing product introductions across customer segments in such sectors and expanding scale and scope in such industrial segments, recession in other sectors can be compensated. Conglomerate groups such as Tatas, Birlas and Reliances would do well to realign their group business strategies accordingly.

Thirdly, in several countries with infrastructural stimulus packages, construction and capital goods sectors would see a major growth impetus. Cement, steel, earthmovers, heavy duty vehicles, power and transmission equipment and allied sectors could be the first victims of a recession but would also be the enduring beneficiaries of recession in government sponsored programs of stimulus. Bracing for capacity augmentation and cost competitiveness, such industries can qualify as preferred bidders in public and private works programs.

And finally, progressive companies would do well to accelerate their research activities and enhance their R&D investments to eventually beat recession. New products and services which provide greater value would help sustain demand in recession and trigger growth beyond recession. Examples are energy conserving automobiles, cost saving consumer goods, productivity equipment, recycling products and global connectivity services. Each domain would need to integrate electronics and information technology to create new generation goods and services.

In the overall, full-line manufacturers who offer multiple products at different price points, conglomerates which operate in different industrial sectors, companies which are committed to continuous R&D and more importantly companies and groups which have a flexible, proactive and strategic mindset would weather any recession successfully.

Posted by Dr CB Rao on December 14, 2008

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