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This article originally appeared

in the October 2009 issue of

The journal of
high-performance business

High-Performance Business

Aftershock
By Caroline Firstbrook

 lobal business reality has been fundamentally and permanently


G
altered by economic and financial disruption. The nature and
degree of the transformation will vary across industries. But as
they consider their response, all executives must master five
dimensions of change.
Wall Street icon Lehman Brothers—the largest bankruptcy in history. Iceland,
a developed world sovereign state—flirting with insolvency. Abu Dhabi’s
International Petroleum Investment Company—snapping up stakes in troubled
energy, chemicals and construction companies in Spain, Germany and Canada.

What’s going on here?

The credit crisis and accompanying global recession have fundamentally


changed the business world. As a new economic and commercial reality
emerges, executives must reexamine conventional wisdom about how to
succeed and, in many cases, abandon it.

How will this new reality affect business in three areas critical to success—the
customer, competitive dynamics and the prospects for growth? And what are the
implications for how managers configure their businesses and lead their people?

The customer is king


Customer values and buying behavior have changed, often dramatically,
across most industries. How permanent will these changes be, and what
opportunities does this create to respond to these new needs and win
market share away from the competition?

New buyer values


Frugality is cool. Examples abound With less to spend, buyers will
of the newfound popularity of thrift, choose more judiciously. They
including non-cash bartering clubs, will increasingly look for products
the return of do-it-yourself and the and services that are more closely
widespread phenomenon of trading tailored to their needs. As a result,
down to more value-oriented retail companies will have to invest in
formats and offers. Conversely, more sophisticated approaches to
conspicuous consumption is no customer segmentation, and use this
longer fashionable, as signaled by information to develop genuinely
the growing anxiety in the luxury differentiated offerings.
goods sector.
Durability will also increase in impor-
This fascination with thrift will tance, as customers hold on to prod-
likely persist for three to five years ucts longer. For example, the average
after the recovery, for several rea- age of trade-ins for US cars rose to 76
sons. First, consumers who amassed months at the end of 2008, up from 68
mountains of debt, confident that months in the fourth quarter of 2006.
the value of their homes and other While this has been caused in part by
investments would continue to rise, the shortage of credit for new vehicle
now need to reckon with their credi- purchases, it also reflects improved
tors; disposable cash will be tight. quality; cars once replaced at 100,000
Second, as they retire, the increas- miles can now remain on the road
ing numbers of older consumers will for 200,000 and more. Thus, instead
have less money to spend. Finally, of purchasing new cars every three
higher tax rates, lower asset values to five years, customers may choose
and the elimination of bonuses will to extend ownership—perhaps even
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Outlook 2009
constrain the spending of even the keeping vehicles until they’re ready
Number 3 wealthiest consumers. for the junkyard.
Other values, such as environmen- costs and risks by creating third-
tal sustainability and corporate party joint ventures that allow
social responsibility, are likely direct competitors to share common
to grow in importance as con- infrastructure at a lower cost. This
sumers reject the indiscriminate is already happening in newspaper
consumption patterns of the past printing and mobile telephony,
and become more selective in their where common networks and
choices. A growing number of infrastructures have increasingly
companies are already investing in become the norm.
developing their green credentials,
and with activist groups determined Third-party suppliers of such
to turn the spotlight on the worst services as billing and collections,
offenders, this has become an now serving multiple competitors
increasingly visible measure of in the same industry, are likewise
Values such as environ- corporate performance. Meanwhile, becoming more important players.
mental sustainability growing opposition to exploiting As companies look to reduce costs,
fur-bearing animal species is hit- third-party suppliers are expected
and corporate social ting the already troubled luxury to provide a wider range of offer-
goods sector. ings, including sales, customer
responsibility are likely service and IT infrastructure, free-
to grow in importance Similar changes will affect indus- ing up cash and leaving businesses
trial buyers. The present, pervasive to focus on their core strengths.
as consumers reject the emphasis on cost management
indiscriminate consump- will lead to wider adoption of
Tapping into emerging
professional purchasing practices—
tion patterns of the past. reverse auctions and the use of consumers
specialized third-party procurement All countries and regions are not
services, for instance—and persis- created equal when it comes to
tently higher levels of price sensitiv- the impact or aftermath of the
ity across all industries. Continued recession. Developed Western
tight credit for companies of all economies, coping with the
types may also lead to an increased consequences of the meltdown in
interest in new ownership models, financial markets, are likely to
replacing outright ownership with, experience slower growth, for a
say, “pay-per-use” models. longer period. Although the slow-
down in global demand has con-
For example, more and more air- strained expansion in emerging
lines are using performance-based markets, the continued growth of
logistics—based on the “Power by the middle class in India, Brazil,
the Hour” approach to aircraft- South Africa, China and other
engine ownership pioneered by developing economies will provide
Rolls-Royce—which promises a an important source of new demand
fixed cost for engine flight hours for multinational companies.
over the life of the contract. Mean-
while, governments in the United For example, retail sales in China
States and the United Kingdom are have remained much stronger than
contracting for military aircraft those of other big economies this
and other equipment on an avail- year, with robust spending com-
ability basis, leaving manufacturers ing not only from the traditional
responsible for supplying spares high-growth cities clustered around
and other services on demand. the Yangtze and Pearl River deltas
but also from inland and lower-tier
Companies in a wide range of cities, as the country’s growing
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Outlook 2009
industries will also seek opportu- middle class continues to flex its
Number 3 nities to share capital investment economic muscle.
New competitive landscape
Entire industries will undergo wrenching and perhaps lasting changes
as a result of the downturn. How might power shift between buyers
and suppliers? Who will the new competitors be, and how will the rules
of the game change?

Shifting power in the value chain and General Motors Corp. has
In many industries, imbalances in announced plans to end franchise
supply and demand (resulting from agreements with 1,100 US dealers.
underinvestment during the reces- In better times, this would have
sion) will create price volatility as meant big payouts. When GM
demand returns. For example, the announced the closing of its
World Steel Association predicts a Oldsmobile division in 2000, it
global drop in steel demand of 15 had to pay more than $1 billion
percent in 2009, driven by more in compensation to the dealers.
than 25 percent declines in Europe
and North America. Looking downstream, changing
customer circumstances will
Such spikes will not be limited to ripple back up supply chains, forc-
commodity industries. Shipbuild- ing otherwise healthy companies
ing and aircraft manufacturing into difficulties from which many
are just two industries where a will not recover. For example,
slowdown in demand and a conse- makers of electronic components
quent reduction of manufacturing have already felt the impact of
capacity is likely to create short- reduced demand for consumer
ages and push up prices in the electronics, and a similar pattern
medium term. In the first quarter has emerged upstream for automo-
of 2009, Airbus, the commer- tive manufacturers. In the publish-
cial aerospace division of EADS, ing industry, plunging advertising
secured only eight net new orders revenues have accelerated the
(after cancellations), down from decline in profitability for news-
395 net new orders in the same papers and magazines, bringing
period in 2008. Although it has many to the brink of insolvency.
a substantial order backlog to
deliver against, Airbus recently
announced a modest reduction New competitors
in output for later this year and Bankruptcies and financial distress
predicted further cuts to come. will change the faces of many
industries. In some cases, this
The specter of failure among will result in diminished capacity,
suppliers may force downstream potentially improving returns for
customers to buy them out in order those companies that remain in
to secure access to resources that the market. However, capacity may
are scarce or difficult to replicate. also simply change hands, often
Supplier consolidation and bank- at fire-sale prices that allow new
ruptcies could create additional entrants to compete from a much
problems for buyers, shifting the lower cost base.
balance of power and nullifying
established rules and agreements. Meanwhile, attractively priced
acquisition opportunities will
As part of its restructuring plans, likely draw new investors into
Chrysler Group is canceling con- Western markets. Several emerg-
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Outlook 2009
tracts with 800 of its 3,200 dealers ing-market multinationals have
Number 3 in the United States, for example, already demonstrated their inten-
tion of using M&A as a basis to New rules
extend their footprint into the Increased regulation will be part of
more profitable markets of the the new reality for many industries,
developed world. as governments seek a more active
role in managing such key industries
China’s Sichuan Tengzhong Heavy as banking, housing, manufactur-
Industrial Machinery Co., for ing and health care. These range
example, has tentatively agreed from proposed cap-and-trade rules
to purchase GM’s Hummer brand designed to control the industrial
of large sport utility vehicles and emission of greenhouse gases to
pickup trucks, while the Industrial sector-specific actions such as carbon
and Commercial Bank of China is dioxide abatement measures in the
slated to buy a 70 percent stake in auto industries of Western Europe and
a Canadian subsidiary of The Bank the United States. The end result will
of East Asia, giving it a valuable be added costs and new constraints on
foothold in the Canadian market. what companies can and cannot do.

Investors in distressed debt also On the positive side, the continued


provide a mechanism for recycling movement toward the harmoniza-
troubled operations. Firms such tion of global regulatory standards
as Apollo Investment Corporation, in industries as varied as automo-
Oaktree Capital Management and tive (emissions controls and safety)
Centerbridge in the United States, and telecommunications should
for example, can acquire compa- help reduce costs for global players.
nies at a fraction of their previous
value, often for as little as 20 to 30
cents on the dollar, and then bring Chronic volatility
them back to market at a profit. Exchange rate fluctuations will
continue as governments seek to
Accelerated consolidation is widely fund substantial investment in
expected in many industries, economic bailouts. Prices of a wide
including construction, energy, range of commodities, as well as
banking and retail, as the down- services such as shipping and trans-
turn forces companies to seek portation, will swing up and down
partners in order to survive, and as the market seeks a stable balance
depressed asset prices make deals between supply and demand.
more attractive for the strongest
companies. This, too, will change Investors will remain skittish,
the game for existing players, even as economies emerge from the
allowing the largest companies to downturn, and this will exacerbate
pursue scale-based cost savings higher volatility, resulting in faster
and offer benefits to customers and more extreme reactions to
that smaller players cannot hope changes in key economic indicators
to match. and the continued erratic behavior
of stock markets.

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Outlook 2009
Number 3
Prospects for growth
The heady days of ready cash and loose credit already seem like
distant memories. How will companies sustain their ability to invest
in growth and choose where and how to grow?

Organizations may need to con- nications, industrial equipment and


sider different capital structures natural resources that lack sufficient
and find new sources of cash to credit or deep pockets will have to
fund innovations, new capacity, rely on more expensive equity capital
enhanced capabilities, geographic to fund growth. The dramatic fall in
expansions or acquisitions. Man- the value of pension funds will also
agers must also revisit their plans create a burden for retiree-heavy
and prospects for organic growth, companies and constrain their ability
and adjust these to fit with the new to invest in new growth.
customer reality.
In one telling example, the UK tele-
The ability to invest Beyond these fundamental questions, com operator BT Group announced
executives will need to reassess in May that it will nearly double
in growth and the their portfolios of products and the amount paid into its retirement
choices of where and services, asking whether they still scheme, from £280 million in 2008
make sense in light of changing to £525 million, for each of the
how to grow will customer needs and competitive next three years, in response to an
widen the gap between dynamics. This may reveal gaps that
must be filled, or opportunities to
expected £4 billion shortfall in its
pension fund. These payments will
winners and losers. divest businesses that are either not consume almost a quarter of the
contributing to the company’s core company’s projected free cash flow
strategic thrust or failing to meet over that period.
minimum performance requirements.
With a smaller pool of investment To raise cash and pay down debt,
cash, companies will need to make some companies will have to sell
difficult choices about how to al- off assets, creating opportunities for
locate spending between developed more financially secure players. The
and emerging markets, and between overall level of M&A activity should
organic growth and M&A. pick up in late 2009 and accelerate
in 2010 as company valuations
The ability to invest in growth and stabilize and financially secure
the choices of where and how to competitors move to take advantage
grow will help widen the gap between of low asset values.
winners and losers in the future.
Winners will continue to invest in A number of noteworthy deals have
R&D through the downturn; have already emerged in 2009. In January,
capital available to take advantage Pfizer announced plans to acquire
of M&A opportunities at fire-sale Wyeth for $68 billion, while in June,
prices; respond to changing customer Fiat acquired key Chrysler assets in a
needs with innovative new offers; deal brokered by the US government.
and establish early, strong positions
in emerging markets. These invest- As a result of these and other
ments will create disproportionate changes, the average amount
advantages for these companies, pro- of leverage for all companies will
pelling them to stronger performance drop, while favorable emerging-
coming out of the downturn. market growth rates will continue
to attract investments away
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Outlook 2009
In the future, companies in capital- from slower-growing developed
Number 3 intensive industries like telecommu- economies.
New business models
New challenges require new ways of operating. How will companies adapt
to the new competitive reality, and what will this mean for business models,
governance and skills?
These dramatic changes in customer across multiple cultures, customers
behavior, the competitive environ- and competitive environments. This
ment and the outlook for growth is particularly true for companies
will have a significant impact in straddling developed and emerging
two key areas: how companies markets. More generally, as com-
operate and how they deploy talent panies expand internationally, the
at all levels of their organizations. need to exploit global scale while
As a result, companies will need to simultaneously customizing both
acquire new capabilities and rethink offerings and governance to fit the
what activities they should under- needs of very different markets will
take, and where. require new structures, processes
and skills.
In an environment where external
funding continues to be in short Technology will continue to transform
supply, companies will need to the way business is done, facilitating
consider new ways to preserve cash. greater mobility and the geographic
Outsourcing and offshoring will dispersion of activities. A growing
likely experience strong growth skills shortage in the West and the
as companies look to exploit labor relative abundance of those skills in
cost differences and tap into the emerging markets such as India and
superior operating efficiency of China will cause companies to move
specialist players. As an illustration, increasingly sophisticated activities
a recent survey of British multi- offshore—including major segments of
nationals revealed that more than the R&D value chain.
80 percent of them are considering
moving at least one major business Better risk management
function overseas in the next five The downturn will drive a need
years to cut costs. for new skills in risk management
and regulatory compliance. For
As companies expand across the example, to avoid a repeat of the
globe, it will become increasingly last crisis, banks will need to estab-
critical for them to exploit scale lish stronger and more objective
more effectively, both in back-office governance policies regarding risk.
activities such as human resources Two Spanish banks, BBVA and
management, finance and purchasing Banco Santander, have led the way
and in front-office applications by establishing risk committees,
like package design, marketing which include strong representation
analytics, and advertising and by non-executive directors, to
promotion. Rather than duplicating review new loans and discuss
scarce skills in each region, global broader risks. Many observers
centers of excellence enabled have credited this process with
by information technology will sparing the institutions much of
allow the most advanced players fallout from the credit crunch.
to deliver world-class capabilities
to all geographies. As volatility continues, more compa-
nies in more industries will need to
Other factors will influence the embrace hedging and forward buying
choice of business models. Increasing strategies for a range of commodities
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Outlook 2009
numbers of cross-border deals will to manage these risks and protect
Number 3 create new challenges in integrating future profits. And securing access
to scarce resources will become more their needs—are buying or leasing
important once growth returns. farmland abroad. This protects
them against future price volatility
As one example of new hedging and, more important, guarantees
strategies, China, South Korea the safety of their food supply in
and the Gulf States—countries a world where the threat of export
with excess capital but insufficient bans by producing countries has
agricultural capacity to meet become much more real.

The talent agenda


The rapidly changing environment has presented new challenges to
leadership and the talent agenda. How do leaders need to adapt to create
greater responsiveness in the face of high volatility? How can critical
talent be fostered through the downturn, and how can lost skills be
rebuilt once growth returns?

Adapting to crisis-driven change must therefore take into account


will require companies to nimbly the potential for a gap at the critical
shift direction as needed, abandoning senior levels just below the CEO.
outdated plans and thinking and
redirecting efforts into new and The competition for talent will
more promising areas. As a result, reignite following the downturn
the quality of leadership will become as companies, eager to rebound,
more important than ever in deter- scramble to recruit needed skills and
mining an organization’s survival. rebuild capacity lost to the recession.
The downturn will pose difficult and The challenges will be particularly
often painful choices for leadership: intense in industries where specialist
how much should we cut and what skills have been lost—the financial
should we preserve, where should we sector, for example—in some cases
invest scarce resources for growth, permanently, as workers have emi-
which markets or activities do we grated or changed career paths.
walk away from, and how do we lead
teams confidently through change? In Western Europe and Japan, an
aging workforce has exacerbated the
Corporate boards should replace skills shortage, forcing governments
weak leaders who fail to make good to consider either increased immigra-
choices or articulate a vision that tion or outsourcing. Talent flight has
their organizations find compelling. also become a major problem in these
However, where leadership is doing regions. Germany, for example, is
a good job, companies will likely losing increasing numbers of skilled
ask some CEOs and leadership teams professionals as well as workers. In
due for retirement to stay on for 2008, more than 3,000 doctors left
an extended period to steer their the country, bringing the number
organizations out of trouble. of German doctors working abroad
to almost 20,000.
This could create a challenge for
the next generation of leaders, who Return of the Boomers
might prefer to pursue new oppor- One phenomenon of the downturn
tunities where they have a greater has been the return of Baby Boomers
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Outlook 2009
chance of promotion to the top. Suc- to the workforce. Between December
Number 3 cession planning in such situations 2007 and May 2009, 5.7 million
For further reading jobs were lost in the United States, Advanced Level General Certificate
bringing total unemployment to of Education). More than 2,500
“Creating an agile organization,” 8.9 percent—at that point, the highest people have signed up for the
Outlook, October 2009 level in 25 years. However, from course, including several hundred
“Outsourcing: A new value December 2007 to December 2008, university graduates eager to un-
proposition,” Outlook, October 2009 the number of Americans 55 and dertake this hands-on training.
older in the workforce rose by more
“India: The innovation advantage,”
than 870,000. Companies will also need to explore
Outlook, October 2009
new employment models to attract
“How to make the most of the With deflated retirement accounts and retain the best and brightest
Great Consumer Trade Down,” and lowered expectations for early younger workers, who often have
Outlook, June 2009 retirement, more Boomers have different perspectives on careers and
“How to organize for new realities,” decided to remain in the workforce. work than their parents. Research
Outlook, June 2009 The return of growth may prompt indicates that many so-called Millen-
“Does your company have an many of these workers to leave the nials (those born between 1980 and
IT generation gap?” Outlook, workforce, aggravating the skills 2000), for example, have a strong urge
January 2009 shortage in some industries. to achieve a work/life balance; as a
result, they may choose more flexible
“China rising,” Outlook, May 2008
Companies that recruit top talent job structures and benefits that differ
“A bold new look for global sourcing,” during the downturn can gain from those traditionally offered. For
Outlook, September 2007 long-term advantages. With fewer instance, Accenture research shows
“Why winning the wallets of China’s opportunities available to them, that Millennials want to use consumer
consumers is harder than you think,” new graduates have been widening tech (smart phones, MP3 music play-
Outlook, September 2007 their job searches. When recruiting ers), social networking and open-
in the City of London slumped source software while at work.
in late 2008, some companies that
traditionally struggled to attract Haves and have-nots
the best graduates saw an oppor- Talent shortages will be felt most
tunity. Aldi, the discount grocer, urgently among trained, educated
has seen a 280 percent rise in and experienced knowledge-worker
applications, and has increased its positions. In other industries,
recruiting target by 50 percent to however, shifting economic power
take advantage of the exceptional may lead to the permanent loss
hiring market. of jobs.

Longer term, even if the financial As of June 2009, the US manu-


sector regains some of it lost luster facturing sector had accounted
and lures away some of these for more than 25 percent of the
highfliers, employers such as Aldi country’s job losses since the
will be better placed to market beginning of the recession. Many
themselves on college campuses by of the losses were among auto-
leveraging these alumni. mobile manufacturers and related
suppliers. Without government
Becoming a clear employer of incentives and other forms of
choice will depend on honing an intervention, many of these jobs
employee value proposition that may move to lower-cost locations,
appeals to the younger generation. creating the threat of large-scale
In 2008, McDonald’s became one and long-term unemployment in
of Britain’s first employers autho- those industries.
rized to award its own nationally
recognized educational certifica- The gaps in contribution, productiv-
tions. The company began offering ity and pay between highly trained,
courses in basic shift manage- educated and experienced knowledge
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Outlook 2009
ment that are the equivalent of workers and a rapidly expanding
Number 3 the United Kingdom’s A-levels (an pool of available but largely unskilled
workers could drive greater labor Finally, ultra-low-cost-labor coun-
unrest. This in turn could compel tries—Laos, Cambodia, parts of
governments to act; possibly to Africa—will see significant business
introduce regulations that limit the interest and growth as multination-
differential treatment of employees, als seek to manage labor costs when
for example. the global economy recovers.

The downturn has already precipitated major changes in buyer behavior,


industry structure and competitive dynamics, and has opened a gap between
winners and losers that is likely to grow substantially. Success in the eventual
upturn will depend on leadership’s ability to anticipate and react to these
and succeeding changes and to make wise, often very difficult choices
about how and where to invest, how to configure their operations, and how
to preserve and rebuild key skills once growth returns.

About the author

Caroline Firstbrook is the managing director of Accenture Strategy in Europe,


the Middle East, Africa and Latin America. Ms. Firstbrook has extensive experience
in M&A strategy and target evaluation, merger negotiation, positioning for
privatization and new market entry strategies across a wide range of industries.
In addition to her consulting experience, she spent five years as an entrepreneur,
setting up and later selling Easychem, an Internet retailer of crop inputs to
farmers, and partnering with life sciences company Syngenta to explore biotech
venturing opportunities. Ms. Firstbrook is based in London.

Outlook is published by Accenture. caroline.firstbrook@accenture.com


© 2009 Accenture.
All rights reserved.

The views and opinions in this article


should not be viewed as professional
advice with respect to your business.

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High Performance Delivered
are trademarks of Accenture.

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please visit www.accenture.com

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Outlook 2009
Number 3

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