The ongoing global recession has become a serious threat to both industrialized nations and developing nations alike. Recession has affected the world trade, which fell by 14% from December 2008 to February 2009. The projections for the full year 2009 offer little comfort with the WTO forecasting a 9% decline in global export volumes for 2009. Although the worse is considered to be over and economies around the world are showing progress, the business community at large remains cautious as they continue to grapple with the after-effects. Economists have predicted a moderate recovery by the beginning of the second half of 2009 but the road to recovery is sure to be paved with obstacles.
With today’s economy in a state of flux, it is more challenging than ever for businesses to make quick and right decisions. Businesses have to contend with irregularities in demand and consumption as well as slow growth stemming from a continuously contracting economy. Internally, the recession has brought about financial uncertainties that are making organizational planning unreliable. There is a much-felt need for stringent reviews of key business variables such as cost, recruitment, approval criteria, business scope, R&D allocations, marketing budgets and so on. However, the decision on all these variables can be made only after the organization adopts one of the two approaches of saving or investing in the current environment.
Why save?
Saving is an important way to safeguard for future and can come in handy when the business needs it especially in uncertain economic conditions such as now.
Savings is essential for smooth operations of the company, given that most firms are cash strapped during a recession. Typically, savings initiatives in recessionary times imply cost cutting which increase revenues without utilizing additional resources. Businesses need to get the most out of their existing resources and underutilized or non-performing resources need to be pruned down. Layoffs are a common occurrence that organizations resort to along with a trim on employee benefits yielding considerable savings. Strict controls are enforced and every dollar spent is carefully scrutinized.
Savings initiatives are typically focused on the short-term in an effort to deal with the tough economic climate. The financial discipline learnt through strict controls benefit the firm when the economy rebounds. Most importantly, saving creates more investment opportunities in projects and assets that aid future growth.
Why invest?
Appropriate investments during a recessionary period set the stage for a period of growth once business conditions return to normal. Investments can be in supplies or people. With prices depressed, smart businesses pile up on cheap supplies and services. There is also easy access to good talent which businesses can use to fight the downturns and expand in a revived economy. Investing during recession allows you to leapfrog competitors who may desist from making any bold moves.
Capitalizing on opportunities helps a business differentiate from its competitors and recession provides many such opportunities waiting to be converted. Investing is one such opportunity albeit one with long-term prospects.
Which method should an organization choose?
Both investing and saving come with their set of benefits, however, a preference for one method alone is a risky proposition. Cost cutting techniques might give quick results but the long-term impact may very well be damaging, if not checked. Indiscriminate layoffs will reduce the employee morale and tarnish the company image. Jet Airways, an India-based airline sacked 200 employees in October 2008 setting off a huge uproar and finally bowing to immense pressure, recalled the employees. Over emphasizing on savings is a conservative approach where opportunities are often overlooked and innovation takes a backseat.
Similarly, investing during a recession comes with its own set of caveats. An organization with a high-risk appetite may be more aggressive in their investments to capitalize opportunities. However, bad decisions during a recession are likely to be more costly than ordinary times as more risk is associated with it. An investment cannot be made at the cost of choking other internal resources. In 2008, Infosys Technologies bowed out of its race to acquire Axon because it did not want to strain its resources in view of the challenging times looming ahead.
Hence, we have a classic dilemma for companies in a recession economy. Should they invest or save?
The answer lies in a judicious mix of savings and investments. While firms are letting go of people who are underperforming, they are also on the lookout for quality staff with an eye on the long-term. Microsoft and Ernst & Young are examples of such companies who have a layoff as well as hiring program running in tandem.
Downturns provide an opportunity to buy assets at bargain prices. Jindal Steel Works recently announced that it is willing to sell its US steel plants for lower than its acquisition cost. Investments in strategic assets can lead to more savings in the future. For instance, investing in marketing during a downturn helps differentiate, which would be hard otherwise when competitors are on even keel. Wal-Mart’s clever marketing of “Every Day Low Pricing” created numerous customers even during a downturn when other retailers saw a dent in their revenues.
An organization has to strike the right balance between saving and investing by closely following the business environment. An MIT Sloan study concludes that the competitive risk of not investing can be higher than what managers think and that knee-jerk cutbacks can do more harm than good. Any wasteful activity should definitely be cut down like how Toyota does with its lean manufacturing. New avenues should be explored based on their cost and return on investments promises
Expert speak
Many industrialists and top executives agree in their views on making the best of a recession. Most of them believe that it is the time to make an opportunity out of the downturn and gain an advantage over others in this vulnerable market.
“The fact that there may be a slowdown in the US means people will become much more concerned over better value for money…we could look at it as an opportunity” Said Mr. Narayana Murthy.
“My belief is that the recent economic events are an opportunity for us to realign our business models and offer these differentiated solutions to our customers.” Said Mr. Vineeth Nayyar, CEO, TechMahindra, which recently acquired Satyam.
However, Chairman of Tata group, Mr. Ratan Tata sounded a warning for those who had invested during the market peak, like what they had but positively marked that Tata too would like to come out of recession with a new array of products and hence the need to utilize the recession.
“Both the acquisitions were made, I would say at an inopportune time in the sense that they were near the top of the market in terms of price.” Said Mr. Ratan Tata, he also added that, “I would like to see us coming out of the recession with these new products in place”.
Final thoughts
Recession gives organizations a unique opportunity to trim down on inefficient resources, expand and invest in efficiency as well as leapfrog competitors. Market turmoil causes volatilities that can be used to gain market share and even displace competition. The 1970s recession was the time when startups such as Microsoft, Apple, and Oracle established themselves by leveraging the recession intelligently and gained advantage over stalwarts such as IBM. Hence, any advantage to be derived from recession will depend upon an organization’s understanding and willingness to balance investments and savings rather than rely on a single approach.
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