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Management Report

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

Lessons From Strong-Performing Companies Under Recent Crisis

Lessons From Strong-Performing Companies Under Recent Crisis

KIM Jong-Nyun

Aug. 17, 2009

Transcript

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

Just like the stars that glimmer more brightly at midnight, there are companies who achieve stronger performance under a crisis such as the recent global financial slump. Among them are a handful of US firms, including Goldman Sachs, Intel, and Apple, plus some Korean and Japanese companies. Japanese companies in particular are fighting well despite a high yen. Today, we’ll take a close look at the secrets behind the successes of these companies.

First, P&G is a good example of how to overcome a crisis. Despite the global economic turmoil, P&G sustained a 20% level in operating profit to sales ratio. P&G sold its coffee brand Folgers to JM Smucker for US$2.95 billion in 2008 in an effort to clear out non-core assets and to place more focus on business growth. P&G offset the restructuring cost and improved its profit structure by carrying out a companywide cost- saving program throughout the whole spectrum of manufacturing, purchasing, logistics and marketing. As a result, the company achieved an improvement in profitability despite the decline in overall sales.

P&G focused on brand management by spending more than any other US firm on advertising in 2007 and 2008. In sum, P&G stuck to its three core assets . customer, innovation and brand . despite the shock of the recession. P&G chairman Lafley said, “The core strategy in times of recession is to be generous with spending on analyzing customer needs, pursue simplification throughout the entire innovation stage from the conception of ideas to the promotional stage, and focus on selling “brands” rather than “products.”

Second, Goldman Sachs became a shining example of “winner takes all” in the world devastated by the worst recession in 100 years. Goldman Sachs saw its net profits in the second quarter of 2009 exceed the market’s expectations by 46% to US$3.44 billion. This figure represents a 65% increase compared to the same term of the previous year.

Goldman Sachs’ outstanding performance is attributable mainly to its comprehensive risk management and aggressive post-crisis investment. Goldman Sachs established a “market risk management system” through a combination of various risk management techniques, while carrying out a thorough risk management strategy. Backed by these efforts, Goldman Sachs reduced its sub-prime mortgage-related assets before the full force of the financial crisis, and succeeded in evading the crisis. Moreover, when its rivals were collapsing due to failures in risk management or insistence on defensive management, Goldman Sachs accepted the risks and did not hesitate to make aggressive investments, thereby achieving a high profitability.

A handful of Korean firms also achieved outstanding performances and contributed to the improvement in the overall performance of businesses worldwide. Hyundai Motors, for example, sold a whopping 427,000 cars in the US market during the first seven months of this year. Hyundai Motor Group, consisting of Hyundai Motors and Kia Motors, overtook Nissan and climbed to No. 6 in the US market in terms of market share, with its operating profit to sales ratio estimated at 8.1% in the second quarter of 2009, much higher than those of Toyota, Honda and Volkswagen.

As a way to spur on car sales, Hyundai Motors launched a car buy-back program, in which the automaker buys back its vehicles if the owner becomes unemployed within 12 months of purchase. With such an aggressive marketing program that addresses the economic realities facing consumers today, Hyundai Motors succeeded in boosting market share in the US within a short span of time. Another factor behind the success of Hyundai Motors is the decisive move to increase its presence further in BRICs and the emerging markets that have been relatively less impacted by the global economic crisis.

Hyundai Motors is not alone in its success. Samsung Electronics broke the 10 trillion won mark in IT sales worldwide in the second quarter of this year, with global market share rising to over 20%. This remarkable growth is attributable to its speedy management and market-leading creativity in product functions and designs. Among the by-products are the Jet phone and the Haptic AMOLED phone, each employing AMOLED to improve color and video reproduction capabilities alike.

The lessons to be learnt from the strong performers can be summarized as follows: First, cost competitiveness is a prerequisite to overcoming a crisis. These companies attempted to respond actively to the crisis through the introduction of companywide cost saving programs and efficient product development processes.

Second, they carried out risk management on the basis of “faithful to the basic” principle, aimed at minimizing the impact of the crisis. Goldman Sachs, for example, established a companywide risk management system in pre-crisis times, thereby reducing risk exposure during tough times like today.

Third, cheap but high quality products pay off, particularly in times of economic recession. The smash-hit Nespresso by Nestle for example, was developed to target the needs of those who wanted to enjoy high quality espresso in a cheap and convenient form. Google maintained growth momentum by stimulating the curiosity of its users through the development of a series of brand-new services such as Google Earth and G- Mail.

Fourth, recession requires a creative marketing strategy. Unlike its rivals who were engrossed in cutting marketing costs to survive the economic slump, Hyundai Motors launched an aggressive car buyback program, promising to buy back its vehicles if the owner becomes unemployed. As such, companies should develop their own creative marketing strategies to break through the crisis, particularly in times of an economic slump when most businesses stick to defensive management.

Thus far, we have examined the ways in which strong performers played well even in an economic recession. Major Korean firms also performed well. The outstanding performance of the Korean firms is attributable not only to the improvement in their competitiveness, but to the advantageous external conditions, among others, favorable foreign exchange movements and the defensive management of foreign rivals. However, given that favorable external conditions do not last long domestic companies should well prepare themselves for a downturn in the external environment.

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

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