Opportunity lies in Adversity:
History has been testimonial to the fact that adverse times have been stepping stone to companies who have seized the moment and made it big. Economic turmoil creates more opportunities for companies to move into position of a leader from a laggard position. A study done by Bain & Company that analyzed the net profit margins and sales growth of more than 2,500 companies clearly indicated that 24% more firms moved from laggards to leaders in the 2001 downturn compared with the subsequent period of economic calm. Also around 20% of those in the top quartile of financial performance (based on Net Profit) in their sectors dropped to the bottom quartile during the period.
Corporate India has navigated through rough weather exceedingly well, and almost through an era where doing business was a crime, and when India had a more socialist outlook. In the year 1998-99 Cement Industry was going through some tough times, and Gujarat Ambuja cement was not immune from the crisis, instead of retreating into a shell, India’s then fifth-largest cement maker by sales acquired an ailing Modi Cement Ltd, taking advantage of the target’s low valuation. It then turned Modi Cement around. Today, Ambuja Cements is India’s second largest cement manufacturer by profits, and one of the country’s most efficient cement producers. Thus indicating the fact if calculated financial risks are taken one can get into leadership position.
Let consider the case of Intel, it was an organization built in a recession ( to the stature we see it at); Advanced Micro Devices Inc, its rival in the chip business, prior to the 2001 recession had made heavy investment in product design and this strategy was paying off, with AMD’s top-line growing three times faster than that of Intel’s. Then the recession hit, catching the entire industry with too much capacity. As AMD’s lack of profitability prevented it from investing in capex, Intel seized the advantage.
It invested in new facilities with state-of-the-art production capability and spent heavily to advertise its P4 processors. In coming years the cost proposition of Intel was much better than AMD, and AMD had to axe 15% of its workforce. The momentum AMD had built quickly vanished and Intel emerged as undisputed king of the Chipset business.
How can Indian companies take advantage of turbulence and a slowing economy, as Intel did? First, they need to realize that conventional approaches often don’t work. Many industry leaders fall from the top during downturns or turbulent times because they assume that a strong market position is an insurance policy against trouble. That approach breeds overconfidence.
The better approach: slow in, fast out — like a good driver heading into a sharp curve. Winners in turbulence tend to brake quickly heading into a downturn by managing costs carefully and consistently. They focus on what the company does best, reinforcing the core business and spending to gain share. That allows them to speed up at the top of the curve, when the economy starts to turn for the better.
PS:
This post is inspired from the research done by Bain & Company. I would personally like to thank Mr Vivek Gambhir and Darrell Rigby, a Bain partner in Boston and the head of Bain’s Global Retail Practice
