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Management Report

Management reports, briefs and video-clips issued by Samsung Economic Research Institute

How Should Companies Respond to an Economic Recession?

How Should Companies Respond to an Economic Recession?

KIM Jong-Nyun

Dec. 17, 2008

Transcript

Welcome to our Video Program. I’m Jong-Nyun Kim from the Management Strategy Department.

With the global economic slump deepening from the second half of 2008, an increasing number of Korean firms are facing a crisis of leadership. Under these circumstances, “surviving the recession” is now the central issue for many firms. Today, we’ll take a close look at how businesses can tide over the recession by deploying SERI’s S-R (Shock-Resilience) model.

The SERI S-R model was developed as a tool to analyze the impact of recessions on businesses from the perspectives of shock and resilience. “Resilience” refers to financial flexibility and “soft competitiveness.”

By using the S-R model, SERI was able to examine the status of listed companies outside the finance industry with sales of over 100 billion won among listed firms between 1996 and 2000. SERI found several notable patterns in corporate strategy and performance.

First, two thirds of the top 25% of firms fell out of the high-performance group during the recessionary period. Second, the impact of the recession on the top 25% was similar or higher to that on the remaining 75%, indicating that the business environment is not the only factor that determines corporate performance.

Third, the high-performance and low-performance group showed a difference in corporate competitiveness during the pre-crisis period. In other words, they had a different level of resilience.

Fourth, among the four groups classified on the basis of corporate performance in 1996 and 2000, two groups . i.e., ones that moved from low to high performance groups, and ones that fell - showed similar levels of resilience but took on different strategies. In other words, companies with similar levels of resilience attained different outcomes according to what strategy they used.

In times of recession, in particular, businesses need to employ different strategies according to the level of their resilience, while restructuring their cash flows and enhancing efficiency as a basic strategy.

Firms with good levels of financial flexibility and soft competitiveness will need to strengthen their market leadership. They can do this through pursuing M&As and expanding investment to prepare for the market’s upturn. Recessions in particular often provide an ideal opportunity for leaders to strengthen market control by taking over promising-but-temporarily cash-strapped companies. Market leaders at these times often acquire companies with similar product offerings to enhance their presence. In early 2008, for example, Deutsche Telekom acquired Suncom of the US as part of its efforts to tide over the recession in the German telecom market, and to enhance its global presence.

Groups with strong financial flexibility but weak soft competitiveness need to strengthen their business structure. Since rival companies tend to adopt belt-tightening measures in times of a market slump, these companies can enhance brand image at relatively low cost and secure source technologies through M&As. Sungkwang Electronics is a good example of this. Once an OEM supplier of rice cookers, Sungkwang suffered a sharp decline in new orders since the currency crisis. To survive the crisis, Sungkwang developed its own proprietary brand, “Cuckoo” and placed its marketing focus on its own brands. Thanks to this strategic shift, Sungkwang jumped to the top spot in the Korean rice cooker market.

Firms with low financial flexibility but strong soft competitiveness need to create more income by making active use of their intangible assets. When the food & beverage business was sluggish during the collapse of the IT bubble, Starbucks, for example, focused on high quality services instead of cutting prices. Starbucks introduced a series of innovative services, including in-store wireless Internet access, issuance of Starbucks cards, and improvement of customer service. Thanks to these efforts, Starbucks saw its coffee sales grow by 8% in 2002.

Companies that lag in both financial flexibility and soft competitiveness need to switch to survival mode. These firms will need to secure as much cash as possible before they fall into an even deeper slump. When their survival or future growth is uncertain, they need to seek strategic partners. Hite, one of Korea’s largest beer makers, sold $30 million worth of non-voting preferred convertible stocks to the US investment firm Capital Group in 1998 and attracted $100 million in foreign investment from Denmark’s Carlsberg Group in 1999, all aimed at improving its cash flow and financial soundness.

Thus far, we’ve examined strategies for overcoming a recession, and how they differ according to the inherent resilience of each company. Despite the deterioration of the management environment resulting from the global economic slowdown, Korean companies have achieved notable growth in management capabilities since the previous currency crisis. This makes the situation qualitatively different. Financial flexibility has also improved sharply with the increase in interest coverage ratios and the decline in debt-to-equity ratios. In addition, Korean firms’ soft competitiveness has also improved greatly, particularly in branding, design, and technology.

Korea’s flagship companies have demonstrated similar resilience to their global rivals, while having superior financial structure and performance. In other words, global firms are now facing even more difficulties than Korean firms. Today’s crisis could be an ideal opportunity for Korean firms to get the upper hand in the global marketplace if they can overcome the tide of recession and actively carry out a strategy to overcome recession.

Thank you for watching. I’m Jong-Nyun Kim.

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