Leveraging a downturn

Companies always have a choice as to how they will confront a stagnant economy: they can pull in the horns and cut budgets to survive, or they can transform their businesses and thrive in a new competitive environment.

Companies always have a choice as to how they will confront a stagnant economy: they can pull in the horns and cut budgets to survive, or they can transform their businesses and thrive in a new competitive environment. The smart ones will choose the latter, the transformative path.

Consider the very different approaches that some companies are taking to tackle downturn pressures: To cut costs, the shortsighted firms are laying off workers and focusing on reducing their operating and administrative expenses. The longsighted ones are moving to acquire or merge with other companies to maximise return on assets and resources, and divest noncore processes or businesses to reduce their cash burn rate.

For generating cash, incremental tactics are to increase revenue at the expense of margin, sell deeper by rebundling products and services, seek short-term credit, and aggressively pursue outstanding receivables. Transformative opportunities are to divest noncore businesses to generate cash, or to merge with a cash-rich company.

Incremental tactics ease short-term pressures, enough for most businesses to survive the downturn. But companies that pursue transformative opportunities will benefit when the economy eventually rebounds.

A few other ways a company can transform itself include the following.

Form a value network. To do this, companies must divest non-core businesses to partners to cut cost and gain flexibility. In doing so, they'll create a value network of partners that will fulfill the same demand, but with a smaller asset and resource base. As businesses choose this route, a critical mass of capable business service providers emerges. The result? The company benefits from its partners' growth and capabilities. Successful value networks excel largely through their technology and information-sharing practices.

Take advantage of a newcomer opportunity. Companies should seek a merger or acquisition by a major corporation in another industry or geography -- one with a formidable brand, cash and an ability to bring economies of scale. The acquirer must provide different capabilities and practices. Examples include USA Networks' foray into the travel industry through the planned purchase of online travel agency Expedia and Sears Canada's entry into the consumer phone business.

Create an e-business hybrid. Companies should partner with or acquire a company with a proven e-business model and channel. For competitive advantage, firms going this route must focus on areas that have challenged their industry -- for example, e-channel fulfillment or establishing private marketplaces. The key advantage is the opportunity to get a jump-start with a proven e-business model. A main disadvantage is the lack of control of customer demand in a web channel.

A lot of companies will survive the downturn by hunkering down. But if they wish to leverage this period of economic uncertainty, companies must be prepared to reinvent themselves.

Barb Gomolski is a research director at Gartner, a research firm in Connecticut.

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