[SERI COLUMN]Strategic thinkingThe fallout from the global financial crisis is ripping through the real economy, creating difficulties for companies. Though the degree of difficulty may vary, no company will be completely spared from the grave situation.
But during a crisis, “strong” companies step forward and show their true potential. In this sense, “strong” does not refer to corporate size or powerful resources. Rather it is about the ability to devise an appropriate strategy that fits the business climate and to execute it resolutely.
In “The Art of War,” a Chinese military treatise that was written during the 6th century B.C., there is a famous story about the importance of strategy that is instructive today. More than 2,000 years ago, General Tian Ji, a senior official living in the State of Qi, raced horses against young noblemen and the king, often with sizeable bets. A contest consisted of three races. Sun Bin, who later became one of Tian’s top strategists, told the general that he was losing because he always pitted his best, middling and worst horses against the opponent’s similar horses.
Sun advised Tian to use his worst horse to race against his rival’s finest in the first round (Tian lost). In the second round, Tian would use his finest to race against the opponent’s mediocre horse (Tian won). And in the third round, Tian would use his average horse to race against his opponent’s worst (Tian won). The general would win the contest and the bets.
Applied to business today, Sun Bin’s strategy implies that even a company with inferior capital can win by accurately gauging its resources and deploying a superior strategy. A Samsung Economic Research Institute analysis of companies during the 1997 currency crisis attests to this [See “How should companies respond to an economic recession?” JoongAng Daily, Dec. 15].
SERI found that two-thirds of the companies in the top 25 percent in terms of sales revenue and return on assets before the 1997 crisis fell out of the top tier. Meanwhile, lower-tier companies ascended. The crucial determinant was that these companies depended on their strategies, not their resources.
McKinsey & Company, the global management consulting firm, conducted similar research on American companies a few years ago. The study revealed that around 40 percent of companies ranked in the top 25 percent before the U.S. recession in 2000?2001 fell out of the group and 15 percent of the companies moved up. The lower-ranked companies rose because they first closely examined their resources and their true market position.
During a recession, strategy options naturally shrink. Typically, a defensive mode such as cost control is adopted, rather than aggressive action. However, uncertain times can be an opportunity for companies that take a different view. While rivals only focus on survival, thus neglecting preparations for the future, one can aggressively seek changes in the landscape of the market.
For example, Corning, a U.S. glass and ceramics manufacturer, suffered massive losses in its fiber optics unit after the dot.com bubble burst in 2000. Its share price plunged to $1 in 2002 from $100 in Oct. 2000, and half of its workforce was laid off. The situation was similar with other IT-related companies, but Corning invested 10 percent of its sales in R&D, aggressively investing and strengthening its core competency. That came after it had already injected $10 billion into its fiber optics operation. Corning’s proactive approach bore fruit, solidifying market leadership.
Another aggressive strategy is growth through acquisitions. Falling stock prices and other asset values can be considered openings for new investment.
These movements are a part of strategies to strengthen core competencies. Examples this year are Japanese financial companies that emerged from Japan’s “lost decade” to grab parts of their stricken Wall Street counterparts. In September, Mitsubishi UFJ Financial Group bought stakes in a weakened Morgan Stanley and Nomura Holdings acquired Asia, Europe and Middle East operations of bankrupt Lehman Brothers.
A recession is simply the right time to secure asset values, global brand, source technologies and key talent. As rivals slash marketing expenditures, investments and their workforce and undergo restructuring, a company can gain ground even if it invests less than in a boom. Companies that boast financial strength by such intangibles as brand power are positioned to benefit. Acquisitions by Korean companies in June this year are cases in point. Snack maker Lotte Confectionery acquired Guylian, a global brand of luxury Belgian chocolate, in June this year, and Dongwon Industries purchased Starkist, the top U.S. canned tuna brand, from Del Monte Foods.
Spring comes after a brutal winter. Many companies are already preparing for this. What will determine new power after the crisis? The answer starts with identifying what a company does best.
*The writer is a research fellow at Samsung Economic Research Institute. For more SERI reports, please visit www.seriworld.org.
By Kim Keun-young