By Paul Nunes, Accenture
How well positioned is your company to respond effectively to the downturn? The answer is a function of three assessments: relative performance (as measured over recent business cycles and management eras), your own unique circumstances, and overarching global conditions.
From our extensive research over the past six years, we know that on its own, a rising share price tells observers little about whether a company is consistently outperforming its peers.
Accenture’s formula for judging high performance examines company performance by looking at metrics that indicate true competitive strength: strong profitability balanced with strong revenue growth and positioning for the future, all delivered consistently and over time.
The downturn, however, threw a wrench into some of this machinery. Consider relative performance: not all high performers were in strong positions when it hit. Some found themselves cash poor, for example, perhaps because of recent strategic acquisitions. Likewise, some low performers, perhaps because of an inability to identify promising investment opportunities when the economy was strong, had cash on hand.
Once a company has established its relative competitive stance, it should assess its own particular circumstances. Accenture research following previous recessions found that leading companies practice sound, value-based financial management, emphasizing cash flow and strong balance sheets during good times. This approach provides flexibility and financial muscle during bad times. While there is no perfect formula for downturn readiness, some elements are clearly important: cash position, balance sheet strength and the diversity of cash flows.
The key questions to ask about cash reserves are, “Do we have sufficient cash to see us through the crisis?” and “Do we have enough to make long-term investments attractive at this moment?”
For its balance sheet, a company must ask, “Is our balance sheet sufficiently strong that we can credibly take an aggressive stance in the market rather than a defensive position?” And in a broader context, it must ask, “How susceptible is our current position to additional volatility and a worsening of global economic conditions?” The answers to those questions will help companies understand their options.
The third assessment: changes in the global context. The shift to a multi-polar world—one characterized by multiple centers of economic power and business activity—creates new challenges and opportunities distinct from those experienced in a national or regional downturn.
For example, sovereign wealth funds and national governments have become significant bargain-shopping investors as well as sources of bailout funds. Also, large companies in a multi-polar world are almost always part of a dense web of networks, so it’s important to assess not only your own strengths and risks but also those of your partners, customers and suppliers. Their fate can substantially influence yours. A formal, 360-degree risk review, with a focus on worst-case scenarios, should be undertaken.
In total, these three assessments will force companies to look deep inside and far abroad to determine their financial health and their chances of maintaining, achieving, or regaining high performance after the downturn passes. To read more, see “Managing in extraordinary times: New choices for new challenges” (by Paul F. Nunes, Caroline Firstbrook and James M. Ellis).
Paul F. Nunes is an executive research fellow at Accenture’s Institute for High Performance in Boston, where he directs studies of business and marketing strategy. His work has appeared regularly in Harvard Business Review—including recently “Can Knockoffs Knockout Your Business?” (October 2008) and “The Tourism Time Bomb” (April 2008)—and in numerous other publications. He is also the coauthor of Mass Affluence: Seven New Rules of Marketing to Today’s Consumers (Harvard Business School Press, 2004). In addition, Mr. Nunes is the senior contributing editor for Outlook Journal.
