Opportunities in the threats!

I have been reading a number of articles on the present world financial crisis and the looming recession the countries are going through.

How deep into the recession shall we have to go before we are back to growth? How long will it last? What should be done during this period to experience minimum damage? What should be the behaviour of an enterprise or and individual during the recession?

Since the expansion is not prevailing, there is little use in trying to expand your market. Would it be proper to take the time to review your internal operation in seeking savings and improvement of your efficiency? Innovate and seek better ways of performing. More output with less input.

In every threat there is an opportunity. In time of recession, cash is King. The shake of the economy may probably bring down the fragile enterprises. There might be opportunities in taking over enterprises with future potential which have not resisted the wake.

I have extracted from the Quarter review of Mc Kinsey, the interesting and relevant article to the crisis:

What does the future hold?

Despite the shared features of the past century’s financial crises—usually, excess leverage somewhere in the financial system and then a breakdown in confidence—the recessions following them were quite different. What determined the length and severity of those recessions was how governments responded: in particular, whether they managed to restore confidence among consumers, companies, investors, and lenders.

An economic crisis becomes a catastrophic recession only if it blocks the provision of capital to businesses long enough to generate widespread corporate failures. This blockage is what made the Asian financial crisis so devastating. Net capital inflows to the region, $93 billion in 1996, turned into net outflows of $12 billion in 1997. Local banking systems just couldn’t provide the capital to plug this gap, foreign banks weren’t prepared to extend credit, and the International Monetary Fund (IMF) moved too slowly. As a result, businesses couldn’t finance working capital, let alone investment, and failed to obtain the export financing these countries needed given the high share of exports in their GDPs. Once the flow of credit had been restored, the economies affected by the crisis recovered quickly.

Similar dynamics were at work during the Great Depression, when a combination of bank runs and limited federal controls undermined the financial economy. From 1929 to 1933, almost half of the banks operating in the United States before 1929 either failed or needed government assistance, as a result of falling prices, the doubling of the country’s debt-service ratio, and the default of more than half of US farm debt.¹² Many of the companies with the strongest credit couldn’t obtain long-term debt capital in the years after the crisis. Moreover, capital had minimal cross-border mobility in the 1930s. With businesses starved of funding, corporate investment fell by more than 75 percent from 1929 to 1933, according to Bureau of Economic Analysis data.

Under less extreme conditions, with the right kind of government intervention, economies can weather even sizable credit crises. From 1981 to 1983, for example, Federal Deposit Insurance Corporation (FDIC) data show that 258 US banks failed or required assistance. Nonetheless, nonresidential US investment fell by less than 1 percent in all. During the entire 1980s, almost 750 banks failed and more than 1,500 required assistance, as opposed to 35 during the preceding decade. Yet corporate investment increased by an average of 4.5 percent a year in the ’80s.

Today, the real economy goes into the recession surprisingly well prepared: US industrial companies had lower leverage and higher interest coverage than they did going into the dot-com bust, the S&L crisis, or even the oil shocks of the 1970s. How the real economy fares will depend greatly on the way the current policy debate plays out over the next few quarters.

What should companies do?

We do not yet know how the current crisis will evolve. The confidence of consumers, corporations, and investors—a key factor—cannot be forecast. Nor can government policy. Yet research shows that in past recessions, companies pursuing a purely defensive strategy fared less well than their more active counterparts.¹³ As the economy enters what will probably be a difficult downturn, companies should prepare to seize their opportunities.

Examine the patterns

Although recessions differ, it’s worth understanding how different industries performed during past downturns and what factors determined the speed of recovery. In coming months, as the focus of government policy shifts from fire fighting to economic stimulus, this kind of research will help companies understand the implications for themselves and assess how the evolving macroenvironment will affect them in the next few years.

Overprepare

Most companies already have contingency plans, but few plan as aggressively as they should. It’s worth preparing for the worst—for example, major customers filing for bankruptcy, capital expenditures needing to be cut in half quickly, or a country sales operation losing access to local-currency working capital. What seems improbable now could become a reality sooner than you expect.

Scan for opportunities

Managing downside risk shouldn’t blind executives to potential upsides. Despite the current turbulence, in most industries it isn’t hard to identify either the companies that will find themselves under pressure or which consolidation and reshaping scenarios might emerge. Instead of reacting to situations on short notice as they arise, invest time now to understand how such forces might affect your industry and what role you want your company to play.

About the Authors

David Cogman is an associate principal in McKinsey’s Shanghai office, and Richard Dobbs is a director in the Seoul office.