How Managers Add Destroy Value
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This document discusses how managers can create and destroy value during times of crisis. It provides background on the current economic crisis and its causes such as risky derivatives and short-term compensation structures. It also examines the impacts on Central and Eastern Europe. While initial reactions tend to focus on defensive restructuring, the document argues that companies must also defend and grow their business through actions like managing their top line, reconsidering their business model, and reducing customer risks. It stresses that effective crisis leadership requires facing reality, adopting a positive mindset, and building trust.
How Managers Add Destroy Value
- 1. How managers create and destroy value in times of crisis Nenad Filipović IEDC –Bled School of Management
- 2. Many things are matter of perception When the storm comes, some build walls, the others build windmills. IEDC - Bled School of Management Doing business from / to Slovenia 2
- 3. Current economic crisis was fairly easy to predict and direct causes can be clearly traced Introduction of non-transparent high-risk derivatives was not matched with appropriate internal risk management systems and procedures External risk and fraud control mechanisms were too loose Dogmatic liberalism believed in self-regulatory capacity of markets Managers (particularly in financial institutions) had huge bonuses based on the revenues rather than sustainable (risk-adjusted) profits Fast moving international careers and deviant compensation systems stimulated short-term thinking IEDC - Bled School of Management Doing business from / to Slovenia 3
- 4. What is less obvious are background changes in social and economic setting Obsession with growth regardless of price to pay for it IT technology running out of steam as productivity increase driver Managers enjoy extremely low levels of trust in companies and society Shareholders gained excessive power over other stakeholders Unclear long-term policy towards global energy balance Globalization opening more questions than providing answers “Consumer mentality” pushed at all levels of society, with spending beyond current means becoming a norm IEDC - Bled School of Management Doing business from / to Slovenia 4
- 5. Consequences for our region are creating more damage than in the West Central and Eastern Europe practically stopped growing and significantly deteriorated its risk rating National budgets became unsustainable, high levels of indebtedness difficult to service Governments have problems in acting as sources of liquidity, focus on banking sector, raise of protectionism Huge drop in orders for B2B industries, huge drop in sales of durable goods, some drop even in FMCG and services In countries with more consolidated retail, this is the source of next wave of liquidity problems Media portrait political and business leaders as incapable, but dependence on global economy limits space for action IEDC - Bled School of Management Doing business from / to Slovenia 5
- 6. Practically all companies are impacted by the crisis No access to external financing Huge drop in equity value distorted all performance indicators Drop in revenues and liquidity problems fought mostly with production stoppages and labor cost reductions, but effects limited (possible wave of bankruptcies) Company climate at lowest level since 1998 (in some countries since 1993) Drop in product / service quality Practically no capital investments, huge drop in R&D / educational expenses IEDC - Bled School of Management Doing business from / to Slovenia 6
- 7. Although crisis could have been predicted, most companies were “taken by surprise” Why? Lack of competence Immediate Defensive Conflict of interest restructuring Fear Perceived Strategic Weakly restructuring need aligned What to do? No change Distant change Corporate governance Low Perceived High Selection feasibility and emotions Supervision Stimulation Support IEDC - Bled School of Management Doing business from / to Slovenia 7
- 8. “Surgery” is the typical first reaction to crisis: it is needed, but requires balance Centralize Stop the cash bleeding Get rid of non-core assets Focus on cost cutting Downsize Focus on core business efficiency … …but be aware that 25% of revenue drop cannot easily be compensated by cost decrease IEDC - Bled School of Management Doing business from / to Slovenia 8
- 9. Even though surgery might be successful, it may well happen that the patient dies Short term thinking develops, need for operational efficiency eliminates other priorities Inward focus makes the company lose sight of customers and markets Some of the eliminated assets prove to be critical for long- term development Centralization stiffens the company, creates bottlenecks, lack of initiative taking and imagination Survivors„ syndrome develops, along with cynicism, fear and lack of trust Company loses readiness and ability to learn IEDC - Bled School of Management Doing business from / to Slovenia 9
- 10. Along with efforts to control the bleeding, focus must be turned to defending and growing the business Actively manage the top line Make sure to chose wining partnerships Defend the pricing (even if that requires extra reduction of volumes), give discounts in kind rather than money Signal to competitors that price wars are “lose-lose” game Reconsider the business model, look for opportunities to boost the service fast If reasonable, move office staff to sales, expand your sales portfolio, increase bundling and cross-selling Reduce risks for customers Selectively attack customers of weakened competitors If in B2B, consider going after renovations / spare parts market Share best sales practices across organization Source: Simon-Hucher & Partners IEDC - Bled School of Management Doing business from / to Slovenia 10
- 11. In times of crisis people turn to trustful, inspirational leaders Face reality, tell the truth and ask for truth Be ready for worst case scenario, understand what is needed to survive it Adopt positive mindset, turn crisis into opportunity, communicate “positive future” to all stakeholders Have time for your (best) people, involve them Actively support learning, out-of-box thinking and search for new value added Act as a role model (e.g. make sacrifice yourself before asking it from others) Use all opportunities / good practices to build trust IEDC - Bled School of Management Doing business from / to Slovenia 11