The Actions Being Taken by Companies to Cope with the Downturn in the Economy - Case Study Example

THE ACTIONS BEING TAKEN BY COMPANIES TO COPE WITH THE DOWNTURN IN THE ECONOMY 11th DECEMBER, 2008 INTRODUCTION The current market scenario reveals that most of the companies all over the world are facing a serious critical issue to cope up with the recent economic downturns. Australia being of such affected economies has probably enjoyed many years of sustained economic growth. Most of the businesses especially those which are not related to the mining industry are facing serious threats to survive and sustain in the difficult market situations. Combating multiple issues such as higher interest costs, rising oil prices, falling consumer demand, tighter credit and generally a slowing economy have affected the company’s rate of return to a massive extent. The following discussion aims to highlight the current market trends in Australia and other countries and the various strategies and actions which are being taken by companies globally to cope up with the adverse market movements. An economic downturn in general is a particular phase of the business cycle which leads to a further decline of the entire economy in terms of growth and prosperity. The particular characteristic feature of economic downturns is a decreased level of consumer purchases and in turns a reduced levels of production by the businesses due to decrease in demand. A company which has a prior established strategy to combat such threats does have numerous opportunities to capture the market share by attracting the customers from their competitor firms. Development of alternate and appropriate strategies can certainly help to cope up with the economic crisis. A realignment of the business structures with the current economic conditions can facilitate the movement of the business in the positive direction. Impact of Market downturn in Australia since last few years Australia has been facing dificult condition from the last few years for instance in the year 2005, Australian Bureau of Statistics (ABS) labour force has released figures in September, which clearly show that the official unemployment rate in the country has soared upto 5.1 percent for the first time in the last five months. The data reflected on the enormous number of jobs which are lost due to the economic crisis , 25,900 full-time and 16,500 part-time. The total number of people in work has also been reduced by 42,300 to 10.022 million, with the largest drop of 25,600 in Victoria (Cook T, 2005). The current market position has revealed completely different figures from the past years. The latest Australian Bureau of Statistics figures support that there has been a strong rise in part-time employment but at the cost of full-time work. The full-time work fell by 9,200 people, while part-time has increased to 43,500 people. Though the unemployment rates are constant at 4.3 percent and the number of people searching for work has risen up from 7,000 to a massive jump to 487,900. (Post Tagged, 2008). The current trends are explored by the Australian Prime Minister Kevin Rudd where he stated that fact that the entire world is facing the vicious cycle of deteriorrating economic growth and has urged the importance and dire need of taking major strategical measures to cope up with the situation. It has been forecasted by the Australian government that economy would continue to suffer slower growth and rising unemployment in the near future and also that to overcome the situation the government has decided to spend A$10.4 billion ($6.6 billion) on a stimulus package so as the economy keeps growing and does not land to a static state (Post Tagged, 2008). A growth rate as slow as 2 percent in 2008-2009 is predicted in comparison to 2.75 percent earlier, with unemployment rates rising to 5.75 percent by mid 2010 from 30-year lows of fewer than 4 percent earlier in the previous year. Rudd in his speech clearly emphasized on the role of G20 as the most important mechanism in reviving up the fallen economies (Post Tagged, 2008). According to the MYEFO, Mid-Year Economic and Fiscal Outlook (MYEFO) forecasts, the Australian economy seems to be well-placed in order to confront the effects of the international downturn. Though the country’s Gross domestic product and employment growth are supposed to go low yet recession is far beyond the expected the market movement. The budget is still predicted to end up in surplus rather than deficit. The market reading clearly support the fact that while the commodity-prices have soared up, prices for Australia's three most important mining-sector exports--iron ore, coal and natural gas are quite stable (Oxford Analytica, 2008). The future company strategies of Australian companies in specific predict a low recruitment policy According to the Recruitment and Consulting Services Association (RCSA) quarterly survey, Australian recruitment companies are at the lowest grades. Only 58 percent of the companies tend to expect an increasing trend in the business. The survey also reflected on the strategy adopted by the recruiters who are now turning to social networking websites to source candidates as skill crisis still prevails. In Australia, NSW and Victoria are the most affected parts due to the downturn and recession is predicted for NSW in the near future. Finance, Insurance, real estate and service sectors are the most badly hit areas except the mining industries which are still able to manage. A serious comment by the Talent2 managing director, Andrew Banks has actually brought out the real root situation faced by the companies. He said “companies can’t afford to retrench people en masse because they just won’t be there to re-hire”. On the whole the predicted trouble times ahead in the Australian market have compelled the companies to take some major strategic moves.  Few of the practices which can help in strategizing the business in the times of crisis can help the businesses to revive. Conserving cash, protecting assets, reducing costs, improving efficiencies, attracting customer base are few of the general protective modes adopted by various organizations . The past histories of economic recession have revealed that such phases are temporary in nature, even the Great Depression of 1929 was overcome with a gradual passage of time, hence what is required at the moment is a rational approach towards resizing of firms. Terry H Hill, founder of Legacy Associates Inc, reveals about the strategy followed by him to face the critical situtaion. According to him, in such intense situations , effective two way communication is the key to success. The stragety specific to the current situation includes forecasting cash flow on a monthly basis rather than annually of half yearly to ensure balance between the expenditures and the accounts receivable. Further the firm has adopted the procedure of concerting the slow moving inventory or obsolete stock into cash. Timely collection of accounts receivable help to keep a continual floatation of money intact, refocusing attention on existing clients and customers extends a sense of belongingness to the customers helping in enhacing their satisfaction levels and extending their loyalty towards the organization to the optimum. Renegotiating with suppliers, lenders and landlords open up ways for bartering form of contracts. Attaining better insurance rates must be on the top priority risk in order to mitigate the maximum risk possible, right balance to be adequately insured must be the prime target avoiding any chance of over or under insurance. The downturn period is supposed to be the best time for creating abundant opportunities for brand extension or awareness thereby increasing the demand for the company products or services, in such a case collective experience must be prefered as is done by Legacy Associates Inc. Apart from the above measures the company also forged ahead to cut the cost expenses by atleast 10 to 15 percent to overcome the financial crunch. In a survey conducted by Deloitte in the end of sepemtember, 2008 in order to enquire about the different retention strategies during the difficult economic conditions, many useful aspects were revealed (Deloitte, 2008). At the time of the survey, the market was down by 25 percent year to date and a response from 151 companies of all sizes and varied field was generated.The survey helped in extraction of the major common challenges faced by the different industries particulary related to the declining stock market which led to the dissolution of llong-term incentives, secondly the reduced profitability due to the prevailing commodity process which have further affected the payouts ratio from annual incentive plans and thirdly a remarkable decline in the purchasing power of the consumers , hampering the opportunities for growth of the companies. When the change in the strategies of the companies was analyzed, it was found that many companies had different views about downsizing, regarded as one of the major change in the policies and strategies of the affected companies. Almost 78 percent of the companies intervened held a strong notion about not changing their year’s annual incentive plan midstream. However, those firms who decided to take such a step posed up a highly individualized approach. For instance some companies almost 6 percent were of the view that they would modify the performance targets but will make no changes to the performance measures, others thought of changing the performance measures used while few more almost 3 percent suggested that they wanted to establish a new plan for the second half of the year. 2 percent of the total surveyed companies wanted to adjust for unbudgeted expense increases due to higher commodity prices while on the other hand 8 percent were in a fix and could not finalize on an appropriate suitable approach for required changes (Deloitte, 2008). Very few companies agreed to make any sort of change to their current stock option or long-term performance plans however few firms did agree to make minor changes in repricing , canceling or re-issuing their current stock option grants or adjusting either the performance targets or measures of performance plans in accordance with the current business cycle. The survey results clearly revealed that most of the companies had no plans to change their current strategies but definitely had thought about their company policies for the coming year. For instance over 53 percent of companies are planning to adjust next year’s annual incentive plans due to current economic conditions out of which one-third of companies wanting to alter their performance targets while keeping the same performance measures. Another 14% will actually change the performance measures and almost 19 percent wanted to keep the same performance plans and modify the performance targets for upcoming plan cycles. Another distinct strategic move observed in the survey was keeping with the stand alone retention programs (Deloitte, 2008). Twenty two percent of the companies agreed that they would create a stand-alone bonus pool for 2008 whereby the flexibility of rewarding employees and business units for exceptional performance would be considered irrespective of the current economic crunch just to boost up the morale and efficiency of the performers. Companies who are able to maintain large funds have decided to maintain a small pool with 25% or less of the annual incentive pool target awards (Deloitte, 2008). Companies’ strategic modifications also include changes in the deferred compensation plan, implementation of a new or newly-modified severance plan. Companies have started thinking on easing the stress and strain confronted by employees at the workplace and have revealed consent on improving their work environment trying to balance the work and the family demands. Methods such as flexible work schedules, telecommuting and compressed work weeks are few of the measures which the companies intend to apply in the coming year so as to retain their employees and improve efficiency in the current market downturn situation (Deloitte, 2008). Maintaining a healthy CSR is adopted by most successful companies to face the economic turmoil. Such strategic approach facilitates solid customer base and stable revenue. In a financial survey help by Wyatt W, (2008) focus on changes which the companies opted to make in the year 2009 was undertaken. The key findings of the researches highlighted the number of measures opted by companies to address the current market issues. The companies have planned to reduce the bonus payments and base pay increases however no certain or specific measure is assured for planning reward or talent management. Companies are thinking to apply a number of contingency measures to cope with the sudden unexpected market changes, adopting a strategic workforce planning is observed to be a key change for almost all the companies. Reduction in unnecessary expenditures such as travel, entertainment, new hires has also been suggested by few of the companies. Due to the high inflationary market conditions and instability of the economy companies have also decided to lower the salary increases in the coming year 2009. More structured approach to retain talent including greater differentiation in pay schemes is strongly recommended by most of the firms. On the whole it has been observed in the survey that instead of finalizing on one particular approach, the firms are more inclined towards adopting a basket approach to stabilize and forge ahead progressively (Strickland G, Nichols I, 2008). One of the recommended business strategies by the companies are to adopt a more aggressive payment policy which can save them from the brunt of from losing money when customers can't or won't pay. The companies have now opted to construct their own payment strategies to monitor the flow of cash (ROSENBERG M J, 2008). In hard times, strategies have changed 30% of the IT budget that goes for discretionary spending is now applied towards the growth of the business. Australian IT companies are more inclined towards choosing smaller projects with quicker paybacks and tight alignment approach. CIOs desperately want to reduce business volumes (Tucci L, 2008) Australia’s and the world’s largest miner group Rio Tinto Group has decided to cut off 14,000 jobs and reduce their capital investment as a part of their new strategic approach. The job cuts in the company account for 12.5 percent of the company's total 112,000-person labour work force. The firm has also decided to reduce its operating expenditure in order to save 2.5 billion Australian dollars ($1.6 billion) at the target year of 2010. The company’s main approach is to maximize cash creation and pay off their debts. Other mining industries of the country have also adopted the same approach. The rising demand in recent years has led to expansion and job growth for many mining companies but the past demand is no longer sustainable (Smith T, 2008). At Capital One Financial Corp. the main strategies adopted to face the market crunch are maximizing the core strengths, minimizing weaknesses, and having pre-plans to face future market turbulences. The company has adopted a proactive approach to stabilize the business operations. Based on the information extracted by the managers in regard t the current workloads and needs of the workforce, changes are projected. On the basis of the workload projections and anticipated productivity growth, the company establishes the future required quantity of workforce and accordingly initiates changes. The database simulations constructed by the company help them to fulfill the labor needs with greater proficiency which further helps then during turbulent market conditions. Capital One’s strategy is smarter and related to contingency planning (Wells J S, 2008) There are numerous strategies which can be adopted to overcome the great times of the current finanical position such as focusing on the core principles which include adherence to investment strategy, oversight of portfolio company management, effective utilization of outside resources and reinvestment in portfolio companies. Conducting a rigorous pre deal due diligence in four main ker areas comprising of market, competitive positioning, identifying value creation opportunities and assessment of exist strategies helps in tight financing which leaves very less chances of error in the acquisitions of the portfolio company (Charles I,2008). Industries which are specifically related to sub prime, mortgage and housing, the leaders of the industry have come up with the major strategies such as reduction in expenditures by almost 44 percent, cut off in the labour rate by 29 percent, refinancing debt by 29 percent and soughting acquisitions by 32 percent, addition of employees by 67 percent (Norman J, 2008). Globalization is regarded as one of the cost-reducing solution in the economic crisis and downturn situation. When budget reductions are taken up as a measure to combat the market downturn, CXOs think of redistributing the funds toward globalization It can be well analyzed in the end that in order to overcome the market turbulence, three major dimensions have to be looked upon by the individual organizations which include industry’s source and level of turbulence, company’s current strategic position and their financial strength. The organizations need to develop situational strategies (Rigby K D, 2001) that could be immediately acted upon at the times of crisis. 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