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Management Report

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

Aggressive Management: Its Meaning and Implications in Times of Recession

Aggressive Management: Its Meaning and Implications in Times of Recession

SHIN Hyung-Won

May 13, 2009

Transcript

Welcome to our video program. I’m Hyung-Won Shin from the Management Strategy Department.

The biggest troubles facing companies in times of crisis are the deterioration of business performance and the decline in cash flow . since both will eventually lead to bankruptcy. This is why not only marginal companies but blue-chip companies rely on passive and defensive management through cost savings and disposal of assets, particularly when the economy is bad.

However, there is a point to be clarified. Defensive management refers to passive restructuring mainly to stabilize cash flow. In other words, if companies stick to defensive management without fundamental restructuring to improve competitiveness, there is potential that they could fall into a vicious circle of downsizing, relying on defensive management whenever their performance goes down.

A good example of this is Westinghouse, a 100 year-long rival of GE. When its profitability worsened in the mid-1980s, Westinghouse sold roughly 10 business units, cut payrolls, and made no new investment in core business until the title of CEO changed hands four times. Thereafter, Westinghouse experienced a string of divestures and eventually disposed of its core power facility unit to Toshiba in 1996.

GE, however, took a different approach. GE also implemented restructuring centering on disposal of business units and lay-offs in the 1980s. GE, however, used the proceeds it gained from the restructuring to strengthen its capability in core areas. In other words, GE carried out an aggressive management strategy in parallel with a passive one.

This different approach led to the dramatic gap today between the status of Westinghouse and GE. At the same time, an excessively aggressive management strategy that goes beyond the limit of internal capabilities could pose a threat to the lives of companies particularly, during a crisis.

However, the point is that the companies need to take a balanced approach between defensive and aggressive management. In other words, they need to reinvest the resources that they gain from defensive management to further strengthen the competitiveness of their existing business or to prepare for the launching of new business.

Let’s take a look at what types of aggressive management strategies are effective in times of crisis. First, companies can attempt to increase sales through aggressive marketing. When the economy falters, advertising demand declines with the cost of advertising falling. This creates a better atmosphere for businesses to achieve higher advertising effects at lower expense. In particular, new start-ups and latecomers could achieve a maximum of brand exposure by increasing their advertising budget during a crisis when large companies tend to cut advertising spending. Cuckoo Homesys, for example, spent 5 billion won to run its TV commercials when Korea was hit by the 1997 currency crisis. In contrast, large companies cut their advertising spending, thereby making it easier for Cuckoo to enjoy massive brand exposure in prime time.

Rents also go down during an economic recession. This, however, could create a better opportunity for strengthening the retail network. During the 1997 currency crisis, the banking industry implemented drastic restructuring, with a number of bank branches being closed. Casamia, a specialist in interior design and products, took advantage of this situation to launch a new outlet at the storefront of a building in a trendy area that was occupied by a bank branch in the pre-crisis days. Right after the branch was withdrawn from the building, Casamia signed a long-term lease and succeeded in attracting more customers.

Second, companies can use aggressive management techniques to develop and strengthen their market positions. During a recession, it is easier for companies with high credibility and an ample cash reserve to increase their market control through acquisitions of rival companies. The appropriate point of time in acquisition of rival companies is when the prices of companies on offer are near or at the bottom. Since it is difficult to know when and which companies will be in the market for sale, it is necessary to run a special M&A team to monitor the market situation.

The price of production factors also falls during a recession, creating an optimal chance for businesses to expand their facilities and to widen the technological gap with competitors. Once a gap is widened in times of economic slump, it is hard to narrow the gap in times of economic recovery when every company makes investment in technologies.

Third, aggressive management is needed to establish a new future growth engine. A strategy of upgrading the business structure towards a high profit, high growth one through full or partial absorption of other companies is worth considering. Doosan group, for example, succeeded in turning itself into a heavy industry-centered group from a consumer goods-centered one after the 1997 currency crisis.

Another effective type of aggressive management strategy during a recession is the creation of synergy and new value by leveraging the core capabilities of existing businesses. For example, Seven & I Holdings which operates convenience stores under the Seven Eleven brand, established Seven Bank in 2000 and installed ATMs at each Seven Eleven in Japan. In other words, it added banking functions to the existing retail network, clearing the way for about 9,000 Seven Eleven stores to offer banking services everyday. In terms of scale and service, it dwarfed the then No. 1 Sanwa Bank which operated about 800 branches throughout the country.

Also worth considering is investment in future technologies to take leadership in the future market. This explains why an increasing number of companies are flocking to environmentally-friendly products and new recyclable energy business today.

Despite the fact that all companies are suffering from a recession, the degree of impact and the strength of capability differ from each other. With this in mind, companies need to tailor an approach according to their capabilities.

To endure tough times and not to lose any opportunities that might occur hereafter, companies need to make appropriate use of defensive and aggressive management. They also need to determine what type of internal capability they need to accumulate by watching changes in the competitive landscape and market needs.

Thank you for watching. I’m Hyung-Won Shin.

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