Diamond Recession Report Dont Waste A Crisis

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Information about Diamond Recession Report Dont Waste A Crisis
Business & Mgmt

Published on December 16, 2008

Author: eugenehlee

Source: slideshare.net


Should be required reading for leaders in all companies - great pearls of wisdom based on learnings from the last recession.

Don’t Waste a Crisis: Emerge a Winner by Applying Lessons from the Last Recession Competitive executives should welcome recessions. In the heat of a downturn, superior companies pull away from the competition and aspiring companies can dart ahead. In order to find patterns of success and failure, we studied more than 400 companies and their performance (relative and absolute) before, during, and after the last recession (1998–2004). Our analysis yielded four types of firms: Stalwarts, strong firms Corporate Performance Through the 2001 Recession that held their leads; Low Idlers, weak firms that remained weak; Disappointed Stars, firms that weakened; and Opportunists, Pre-Recession During Post-Recession firms that sped ahead during the downturn (see Figure 1). Four in Quartile 1998 1999 2000 2001 2002 2003 2004 10 firms moved up or down within these categories during this time Stalwarts frame—a tremendous time for competitive change (see Figure 2). 4 Those that emerged as Stalwarts or Opportunists created more than 3 Disap pointe $350 billion in market value, while the other companies destroyed d Sta rs over $200 billion. 2 ts rtunis Oppo The key questions for any executive are: 1 • How did your firm fare during the last recession—were you Low Idlers a Stalwart or a Disappointed Star? Source: Diamond analysis • How is your firm poised during this recession, both overall Figure 1 and compared to your competition? • Did you learn the right lessons from the last recession? • Are you performing the accurate analysis and taking the winning Breakdown by Category (Revenue over $100 million) actions necessary to emerge stronger from this downturn? 20% 22% Everyone Cuts Costs, but Only Some Benefit Disappointed Stars Opportunists All four quartiles cut capital expenditures as a percentage of sales, and all but the Disappointed Stars cut both R&D and advertising. However, only the top two quartiles (Stalwarts and Opportunists) 28% 30% increased gross margins during the recession year, and by the end Low Idler Stalwarts of the recession had improved margins by 20%. In other words, they were smart about their cuts and successfully improved the design N-415 of their business (i.e., the configuration of people, assets, capital, and Source: Diamond analysis information to generate value for customers) to create operating Figure 2

For example, the Atlanta-based utility Southern Co. decided to invest Be Smart in the installation of an automated meter-reading system in 2008. In addition to yielding cost savings from no longer sending staff out to read meters every month, the system will improve the company’s Grow the Cut Costs Business business design by providing meaningful data around customer usage patterns, which will benefit both users and the company. In the future, 1. Cut the right costs 1. Grow good customers Southern Co. could create an infrastructure to enable dynamic pricing. 2. Automate 2. Remix marketing 3. “Variablize” cost Invest Likewise, we worked closely with the management of a multi-billion for the Future dollar transportation company to architect and test the use of GPS and RFID technology on its vehicle fleet—dramatically lowering the 1. Invest when others can’t 2. Put your eggs in one basket cost for scheduling, routing, and maintenance, while improving driver safety and providing them with a platform for future innovations. Source: Diamond analysis Figure 3 Principle 3: Use Vendors to Drive Down Total Cost and ‘Variablize‘ Your Cost leverage that eluded others. The central lesson of our research is that The meaning of “being a company” is more complicated today, so at the very time when a leader is tempted to shorten his or her time careful thought is required to determine which true core competencies horizon and make simple across-the-board cuts, superior performers to build in-house versus those that should be sourced from vendors dig into the data and act more intelligently than the competition. or offshore providers. Companies that can optimize the resources inside and outside their walls hold the keys to maintaining and improving Further analysis of the company recession data and of case studies performance in a downturn and can use vendors to “variablize” their revealed seven lessons to thrive in a downturn, while improving cost base. In some cases, companies can negotiate longer-term the fundamental design of your business (see Figure 3). contracts to extend strategic relationships and reduce near-term costs. During the current economic downturn, the CIO of Johnson & Johnson Seven Principles for Thriving in a Downturn pushed key software vendors for enterprise contracts in order to reap economies of scale. Now, all J&J entities receive benefits of volume Principle 1: pricing, which will save the company $150 million a year. Cut the Right Costs by Getting at the Root Cause of the Expense Cutting costs across the board is generally a bad idea because money Recently we helped a major investment bank create an on-demand, is better spent in some areas than others. Firms willing to perform a outsourced capability so they could flexibly ramp up and ramp more thoughtful operations review—highlighting fixed versus variable down their IT staff to meet demand and their ability to spend— cost drivers, in the context of the company’s business model, servicing saving them millions of dollars in the process, while improving time objectives, and organization—will yield much more value. to market. We helped a leading credit card company rethink its approach Principle 4: to service and were able to lower costs through customer self- Identify Customers to Grow On service while increasing customer satisfaction. At a large insurance Rather than catering to all customers, unprofitable and highly broker that was about to make an across-the-board cut of 10% on transactional customer relationships should be re-assessed during its technology budget, our analysis uncovered numerous opportunities a recession. Singapore Airlines recognized its best customers for process standardization across the new business development were business and first-class travelers flying transcontinental group and identified more than 10% cost savings while simultaneously routes. Management cut back on short-haul routes, added long-haul increasing their speed in setting up new businesses. routes, and invested $300 million to improve business and first-class service. As a result, Singapore Airlines was profitable when East Principle 2: Asia fell into a recession following the currency crisis in 1997. It still Automate, Automate, Automate remains more successful than other Asian airlines. Given the continued, rapid decrease in the cost of information technology, it is essential during a recession to search for new places We also helped a large domestic airline redesign its channel strategy, to automate. Projects which may have been infeasible only a few inclusive of the Web, to change the nature of its relationships and years ago may now be economically viable. interactions with key customers. In anticipation of the changing 2

nature of its customer base, our client is changing its approach to change the nature of relationships with agents and customers. Even to match the needs of its best customers. in the face of a challenging insurance environment, this innovative insurer is reinventing how agents interact with their customers in a Principle 5: digital world, and investing at a time when its competition is retrenching. Optimize the Marketing Mix Advertising and marketing spending are the first areas companies Principle 7: typically cut when faced with a down economy. Many of the leading Put All Your Eggs in One (or Only a Few) Baskets companies today are busy looking across all their channels: Web, An across-the-board strategy rarely works, whether for cost- phone, direct mail, face-to-face, to match optimal channel to optimal cutting or for investment. Scattered diversification increases the interaction. In the process, they are taking advantage of new, chance that the business units with the most potential will be more cost-effective methods of interaction, where possible. underfunded. Instead of spreading investment across the organization, companies should focus new investment in core strengths or in For example, in financial services, there is tremendous interest in social developing the next core strength. For example, Microsoft invested media as a means to drive improved interaction with clients and heavily in one product launch during the ‘01 recession: the Xbox increased trading. We are helping an investor services company, game console. It was an instant success, selling 1.5 million units in which has announced a new, comprehensive Web-based investor its first two months, making it one of the most successful launches communications capability that allows brokerage firms to host in video game history. A downturn is also a time when firms trim their own investor chat rooms and validate how many shares of their portfolios of non-core divisions, and double down on the stock a person has in a given security, so investors can know central value of the company. Borden divested its “high-fat holdings” if the person making the comments owns 10 or 10,000 shares unrelated to the core dairy business in the early ‘80s recession, of a given stock. Such social media hold the opportunity to drive and it acquired specific companies directly related to its core customer interactions and transactions with minimal cost. business. As a result, the company’s average annual net income was significantly higher than that of competitors throughout this period. Principle 6: Invest When Others Can’t—Invent the Future Our research shows that the Stalwarts kept their feet on the What’s an Executive to Do? long-term growth accelerator by continuing to spend on R&D. Diamond This is a time when strong leaders can take the initiative to move recently helped a large Property & Casualty insurer manage its their companies ahead. Stalwarts and Opportunists increased innovation portfolio and identify areas to expand the use of technology market value by $350 billion through the last recession. Using a Recession to Improve the Design of Your Business Recession Portfolio of Operating Readiness Initiatives Review Diagnostic and KPI’s (Ongoing) Timeline: 2–4 weeks Timeline: 3–4 months Compare your performance in the last recession to operating principles changes and management your peers; review industry analysis plan analysis to inform themes and lessons skills, capabilities learned monitoring plan initiative portfolio Create financial baseline saving, revenue and trends; review enhancement, and positioning investments Conduct leadership alignment review (cut costs, grow the business, invest for future) Create Recession Implement Quick Hits Readiness Report Source: Diamond analysis Figure 4 3

Diamond has worked with companies to analyze quickly where uses targeted practices, and carries out a structured plan can proceed to cut, how to grow, and where to invest to create value following through a recession with an Opportunist’s confidence of emerging a downturn. Our proprietary approach starts with understanding stronger at the other end. n where your firm stands compared to the market and your competitive set—and determining the “business design” your company needs For more information, please contact: to win. (see Figure 4, previous page). John Sviokla, Managing Partner – Innovation & Research john.sviokla@diamondconsultants.com Taking action is not without risk. Times of uncertainty can create 312.255.5780 confusion, cause delay, demoralize organizations, and make staying the course seem like the best option—but staying the course Paul blase, Managing Partner – Enterprise Practice may mean emerging from the recession with a whimper. Leadership paul.blase@diamondconsultants.com that provides an organization with a common set of principles, 312.255.5508 About Diamond Diamond (NASDAQ: DtPI) is a management and technology consulting firm. Recognizing that information and technology shape market dynamics, Diamond’s small teams of experts work across functional and organizational boundaries to improve growth and profitability. Since the greatest value in a strategy, and its highest risk, resides in its implementation, Diamond also provides proven execution capabilities. We deliver three critical elements to every project: fact-based objectivity, spirited collaboration, and sustainable results. To learn more visit www.diamondconsultants.com. Diamond Suite 3000 John Hancock Center 875 North Michigan Ave. Chicago, IL 60611 T (312) 255 5000 F (312) 255 6000 www.diamondconsultants.com © 2008 Diamond Management & technology Consultants, Inc. All rights reserved. CHICAgO • HArtFOrD • LONDON • M uM bAI • NE w YOrk • wASHINgtON, D.C.

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