Management magnified strategies for revenue growth in an economic downturn

Management magnified
Strategies for revenue growth
in an economic downturn
A report from the Economist Intelligence Unit
Sponsored by SAS


Management magnified
Strategies for revenue growth in an economic downturn

Preface

Management magnified: Strategies for revenue growth in an economic downturn is the second in a series
of three reports written by the Economist Intelligence Unit and sponsored by SAS. The first report,
Management magnified: Getting ahead in a recession by making better decisions, was published in August
2009. The final report, on sustainability, will be published in October 2009.
The Economist Intelligence Unit conducted the analysis and wrote the report. The findings and views
expressed in the report do not necessarily reflect those of the sponsor. The report is based on in-depth
interviews with senior executives in the region and desk research.
The author is Madelaine Drohan and the editor is Katherine Dorr Abreu. Mike Kenny is responsible for
the layout. The Economist Intelligence Unit would like to thank all those who contributed their time and
insight to this project.
August 2009

© Economist Intelligence Unit Limited 2009

1


Management magnified
Strategies for revenue growth in an economic downturn

Executive summary

I

t is a rare company that puts together a growth strategy that considers the probability of a recession.
Yet recessions inevitably occur, and with each new downturn management is forced to grapple anew
with the challenge of having to increase revenue amid tighter budgets and fewer resources. “Great
companies are defined in challenging periods,” says Devin Wenig, CEO of the Markets Division at Thomson
Reuters. “It takes a great company to have the courage to invest in a tough period, often with terrific
results on the other side.”
Whether a company can take advantage of a recession to grow depends crucially on its financial
condition before the onset of the crisis. This is particularly true in the current global recession, sparked by
a crisis in the financial system that led to a freezing of credit in many parts of the world. Companies that
had their houses in order when the downturn began, with low levels of debt and a cushion of cash, are now
best positioned to pursue opportunities for growth.
But where do these opportunities exist? Despite the worst recession since the 1930s, there are still
ways for companies to grow, even in some of the hardest hit industries, such as automotive manufacturing
and banking. It is a mistake simply to consider the overall picture when plotting a growth strategy.
Because each region, country, and sector, is affected differently by the downturn, corporate strategies
must take these differences into account.
The choice for a well-funded company is whether to hunker down or to go on the offensive by buying
competitors, grabbing their customers, or investing in new products and new markets. The first option is
appealing, based on the results of a survey on decision-making conducted in May 2009 by the Economist
Intelligence Unit and sponsored by SAS. The majority of executives are focusing on cutting costs and
improving efficiency. For firms without the cash to mount an offensive, playing defence may seem the

Who took the survey?
The online survey included 234 executives worldwide:
31% are located in Asia-Pacific, 31% in Europe, 24%

in North America and 14% in the rest of the world.
The survey encompasses companies of every size:
44% are from companies with less than US$500m in
2

annual sales, 11% with sales ranging from US$500m
to US$1bn, 18% from US$1bn to US$5bn, and 27%
with revenue of more than US$5bn. Forty percent of
respondents are C-level executives. A broad range
of functions are represented; the major ones are
strategy and business development (44%), general
management (36%) and finance (33%).
© Economist Intelligence Unit Limited 2009


Management magnified
Strategies for revenue growth in an economic downturn

more realistic option.
Yet our research shows that firms focused on rapid growth are blending offensive and defensive tactics
in their efforts to pass their competitors. Embraer, a Brazilian aircraft maker, cut 20% of its staff and
reduced production, but continues to invest in two new business jet programmes. MakeMyTrip.com, an
online travel service with 50% of the Indian market, reduced expenses by 7%, but brought out three new
products in the last year. Lenovo, a Chinese computer manufacturer, is focusing on profitability in its
mature markets, but is spending heavily to penetrate emerging markets such as Russia and Turkey. Toyota
Motor Sales in the US reduced spending wherever it could, but still brought out a new version of the Prius
hybrid and is investing in technologies to make cars more fuel-efficient.
Despite frequent sightings of “green shoots”, the global recession is far from over. It will be months,
perhaps years, before it is clear whether these moves have paid off. What is certain is that it is possible to
break away from the crowd at times of crisis, balancing short-term expediency against long-term goals,

and so pursue a strategy for growth.

© Economist Intelligence Unit Limited 2009

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Management magnified
Strategies for revenue growth in an economic downturn

Introduction
“You cannot [only
look at] global
trends, regional
trends, even
country trends. You
have to de-average
everything. Every
country, every
market and every
channel is reacting
differently to the
global crisis.”
Jan Zijderveld,
executive vicepresident,
Unilever, South
East Asia &
Australasia

A

t first glance, the global economic crisis, which began in the US financial sector, does not seem
propitious for growth. Indeed, a survey on decision-making conducted by the Economist Intelligence
Unit in May 2009 indicates that as demand for products and services dropped, a majority of companies cut
spending and focused on efficiency. Investment in new markets and products—prerequisites to organic
growth—took a back seat to cost reductions. Mergers and acquisitions—another avenue to growth—also
fell, as funds dried up and companies became reluctant to borrow.
Midway through 2009, a few positive economic signs have made executives more optimistic about the
future. But the Economist Intelligence Unit expects the recovery to be both weaker and longer in coming
than most analysts anticipate. We forecast that real GDP at market exchange rates will contract by 2.6%
this year. Global growth will return in 2010, but it will be a pallid 1.8%.
However, these averages obscure the uneven impact of the financial and economic crisis. When
thinking about a growth strategy in these uncertain times, “you cannot [only look at] global trends,
regional trends, even country trends,” says Jan Zijderveld, executive vice-president, South East Asia &
Australasia, of Unilever, a consumer products group. “Every country, every market and every channel is
reacting differently to the global crisis.”
We forecast that North America and especially Europe will limp along until 2013, with growth inching
towards 2%. Latin America, the transition economies in central and Eastern Europe, and the Middle East
and North Africa will experience a somewhat stronger rebound. Emerging Asia will be the fastest-growing
region between 2010 and 2013, led by India and China.
The outlook for industries is a similar patchwork. The automotive sector, office and housing

How has the current downturn affected your business?
(% respondents)

Demand is

9

Significantly higher

4

15

Slightly higher

14

14

Same as before

16

38

Slightly lower

37

24

Significantly lower

30

Overall
expenditures
are

Source: Economist Intelligence Unit survey, May 2009.

4

© Economist Intelligence Unit Limited 2009


Management magnified
Strategies for revenue growth in an economic downturn

World growth
(%, forecast closing date: August 14th 2009)
World summary

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Real GDP growth (PPP exchange rates)
World

4.8

4.4

5.0

5.0

2.8

-1.4

2.7

3.4

3.9

4.1

OECD

3.2

2.7

3.1

2.7

0.6

-3.7

1.1

1.4

1.9

2.2

Non-OECD

7.7

7.4

8.1

8.7

6.1

1.8

4.9

5.9

6.3

6.4

4.0

3.5

4.0

3.8

1.7

-2.6

1.8

2.3

2.8

3.0

3.6

2.9

2.8

2.1

0.4

-2.4

1.8

1.3

2

2.3

Real GDP growth (market exchange rates)
World
North America
Western Europe

2.5

2.1

3.1

2.7

0.6

-4.3

0

1.1

1.5

1.8

Transition economies

6.7

5.7

7.3

7.3

4.7

-5.7

1.5

3.5

4.1

4.7

Asia & Australasia

5.4

5.0

5.5

6.0

2.9

-0.7

3.5

4

4.3

4.4

Latin America

5.8

4.9

5.6

5.5

3.9

-3.4

2.4

3.4

3.7

3.7

Middle East & North Africa

6.7

5.6

5.6

5.8

6

1

4.3

4.4

4.8

4.8

Sub-Saharan Africa

5.7

6.5

6.5

6.3

4.5

-1.7

3.1

4.9

5

4.3

Source: Economist Intelligence Unit.

construction, and banking have all been severely battered, whereas digital technology and low-carbon
businesses such as wind power have registered growth. In industries where capacity was scrapped, such as
banking, future growth potential has been damaged.
Overhanging the recovery is the dismal outlook for trade: we expect global trade in goods to contract
by 9.4% this year and rise by only 2.9% in 2010. By the later years of our forecast period, the rate will
edge up to more than 5%. Here, again, there are deep divisions: developing countries as a group will see a
stronger contraction in trade this year, but will recover more quickly than developed countries.
This somewhat gloomy outlook might persuade executives to leave hatches battened down until the
storm has passed, but that would be a mistake. While a purely defensive strategy might ensure shortterm survival, it is unlikely to produce long-term growth. Just as the relative positions of economies and
industries are changing, so too are the positions of companies within each sector.
Our research indicates that growth strategies are possible even now. Those companies bold enough
to seek growth while all around them are contracting are the most likely to emerge stronger from the
downturn. There is no one-size-fits-all strategy; solutions are as individual as the corporation, its
operating region, and its products and services.
World trade in goods
(%, forecast closing date: August 14th 2009)
World summary

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

10.8

7.5

9.1

7.5

3.6

-9.4

2.9

4.6

5.2

5.7

Trade in goods
World
Developed countries

7.5

5.7

7.5

4.8

0.9

-9.9

1.9

3.2

4

4.4

Developing countries

17

10.7

11.8

11.6

7.8

-8.7

4.3

6.5

6.8

7.4

Source: Economist Intelligence Unit.

© Economist Intelligence Unit Limited 2009

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Management magnified
Strategies for revenue growth in an economic downturn

Key points

l Firms that put their financial house in order before the recession are best positioned to grab market share
during a downturn.
l Flexibility is vital for companies to reposition themselves for new markets and new customers.
l Constant innovation is required, even in the most turbulent times.

On the offensive for growth

O

“If you are a good
company, this is
the best time in
the world to grab
share. Figure out
who’s vulnerable,
because it’s hard
to take share away
from somebody
when they’ve got
it.”
Roger Martin, dean, Rotman
School of Management

6

ne of the hallmarks of the current recession is that it began in the financial services industry. This
created a sudden and severe credit freeze virtually worldwide, crippling those companies whose
growth plan depended on raising funds.
In contrast, those with the foresight or good fortune to lighten their debt load and stock up on cash
before the freeze saw a wealth of opportunities. “If you are a good company, this is the best time in the
world to grab share,” says Roger Martin, dean of the Rotman School of Management at the University of
Toronto, and a member of the board of directors at both Research in Motion, the maker of the Blackberry,
and Thomson Reuters, an information giant. “Figure out who’s vulnerable, and grab share, because it’s
hard to take share away from somebody when they’ve got it.”
A determining factor of whether a company can go on the offensive is its financial strength at the onset
of economic turbulence. The “good” companies that Mr Martin mentions are those that had their financial
house in order, with manageable debt and cash reserves. “It’s like a disease,” says an executive with a
global mining firm. “If you were not in good physical and mental shape before, there is little you can do
to fight the disease. It’s the same thing for companies in the face of an economic downturn. If you are not
financially strong and with a low-cost base, the odds are against you.”
The availability of financing also depends on where you are operating. Banks in China and in other
countries in South-east Asia that saved while Western consumers spent during the late boom still have
money to lend to the right company. “We have a saying in China,” says Dr Weijiong Zhang, co-dean of
the China Europe International Business School in Shanghai. “If you are a good company, the banks are
chasing you. If you are a bad company, you are chasing the banks.”
There is no single way to grab market share. In these tough times, strategies range from the
straightforward acquisition of a weakened rival to the adroit use of government stimulus packages.
Flexible companies are reorienting their products and services to appeal to markets that are still growing.
Investment in innovation, key to both exploiting short-term prospects and ensuring long-term growth, is
a common theme in growth strategies.
© Economist Intelligence Unit Limited 2009


Management magnified
Strategies for revenue growth in an economic downturn

What ties these companies together is their belief in the opportunities to be seized despite—and in
some cases because of—the global crisis. To use the slightly hackneyed phrase, these firms have decided
that the best defence is a good offence.

Targeting rivals
Buyers in distressed markets know that those who purchase in a downturn tend to get more for their
money. Asset prices have dropped, making acquisitions both attractive and possible for firms that
have the financing. Although the hardest hit industries in the downturn, banking and automotive
manufacturing are rife with acquisition possibilities. Thus Fiat, an Italian car giant, was able to take over
most of the assets of Chrysler (one of the US Big Three) in June 2009, using technology transfer instead of
cash to seal the bargain.
In banking, TD Bank Financial Group in Canada and Banco Santander in Spain have both used a
strong and stable retail market at home as a base from which to snap up weaker foreign competitors.
TD purchased Commerce Bancorp in the US, and Banco Santander bought Alliance & Leicester and the
savings business of Bradford & Bingley in the UK. In both cases, the purchases fit a long-term growth
strategy that management continued to pursue in the downturn. “We’d be interested in doing other

Short term versus long term
The paradox of downturns, according to a management
guru, Michael E. Porter, of the Harvard Business
School, is that companies have to think short term
without forgetting about the long term. Firms listed on
stock exchanges are already preconditioned to think in
terms of the daily share price and the next quarter, as
are the analysts who follow them. Add crisis conditions,
where cash is tight and management time is taken up
fighting fires on a daily basis, and it is easy to see how
long-term planning drops down the list of priorities.
Indeed, one-half of the executives responding to

our survey on decision-making say that decisions at
their firm have become more focused on the short term
over the past year. At best, this can be a temporary
oversight, quickly rectified as panic recedes and the
economic situation stabilises. At worst, measures
taken with only the short term in mind can prove
unsustainable in the long run.
Can executives realistically juggle both? The answer
appears to be a qualified “yes”. “Recession should
validate the long-term strategy,” says Drew Levine,
© Economist Intelligence Unit Limited 2009

president of security services at G4S Wackenhut. “If
recession shakes a company’s long-term strategy,
then it was not valid in the first place.” Executives
consulted for this report acknowledge that dealing
with the sudden onset, unexpected severity and
continued volatility of the global recession takes up an
extraordinary amount of management time.

“Recession should validate the long-term
strategy, not shape it. If recession shakes a
company’s long-term strategy, then it was
not valid in the first place.”
Drew Levine, president of security services, G4S Wackenhut

Yet all say senior managers have no choice but to
keep both horizons in mind when plotting a growth
strategy. “You are always trying to win market share
today, control your costs today, deliver good results

today,” says Devin Wenig, CEO of the Markets Division
of Thomson Reuters. “But if that’s all you do, you
don’t have a strategy.” He believes that really good
management teams “are able to walk and chew gum at
the same time”.
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Management magnified
Strategies for revenue growth in an economic downturn

“You want to be
offensive, but
you have to be
realistic.”
Tim Thompson, senior vicepresident, TD Bank Financial
Group

acquisitions,” says Tim Thompson, senior vice-president of TD Bank Financial Group.
The garment industry in China, a sector rocked by the dramatic contraction in world trade, is also
consolidating. “Now is the time to merge with another company,” says Dr Zhang. “The price is good.
There is little serious competition [for the asset]. You have the time and the opportunity to enlarge your
company.”
Although buying a competitor gives a company an instant growth spurt, industry conditions, the high
cost of a takeover or the difficulty acquiring financing may dictate another course. “Consolidation is not
a tradition in our industry,” says Luiz Carlos Siqueira Aguiar, CFO of Embraer. He is keeping a watchful eye
on rivals that have announced delays to new products or are experiencing financial difficulties in the hope
that some clients may be persuaded to switch aircraft suppliers. “All of those facts are sure to open up new
opportunities for us.”
For some firms, organic growth is still possible, although the rate might be slower. They can still gain

market share if competing firms stagnate. “Typically, we build 30-35 new branches each year in Canada,”
says Mr Thompson of TD Financial Group. “This year, we anticipate we’ll only build 20 in Canada and 35 in
the US. You want to be offensive, but you have to be realistic.”

Market and product positioning
The crisis has prompted a return to basics, forcing companies to focus on their customers. The survey
results confirm this trend: 53% of executives say that they are giving more weight to information on
shifts in customer attitudes when they make major decisions affecting operations and 57% believe they
should make a greater effort to consult customers before making major decisions. Flexible firms have
quickly repositioned themselves and their products to appeal to new customers and growing markets,
often taking advantage of information already available within the company to pinpoint areas of
possible growth.

Customers are at the front and centre
(% respondents)

Given the changes in the economy over the past year, which of the following types of information or analysis have become more important
than they were before when making major decisions?
Shifts in customer attitudes
53

Trends in the market for your organisation’s products and services
47

Profitability of specific customers or groups of customers
47

Given the changes in the economy over the past year, which groups do you believe need to be consulted more than in the past when making
major decisions?
Customers

57

Middle management
46

Providers of capital (eg, financial institutions, investors)
33

8

Source: Economist Intelligence Unit survey, May 2009.

© Economist Intelligence Unit Limited 2009


Management magnified
Strategies for revenue growth in an economic downturn

In China, firms dependent on exports to North America and Europe were faced with a grim choice: stay
oriented towards the export market and watch sales drop or stagnate for years, or reorient the company
to the domestic market, which is still growing, albeit more slowly. Dr Zhang cites, for example, Mindray
Medical International, an instrument manufacturer that is now focusing on domestic sales. To do this, it
has shifted production to instruments that are more affordable for its Chinese clients than the top-of-theline products sold in Western Europe. A Chinese solar panel manufacturer made a similar turn towards the
domestic market after sales to Germany, previously its most important market, faltered.
The global mining firm executive says his company is shifting its focus to emerging economies,
where housing and infrastructure needs will keep demand growing for many years, and away from North
America and Europe, which traditionally accounted for almost one-half of its sales. Qingtong Zhou, CFO
of Emerging Markets Group at Lenovo, says the company is targeting emerging markets, including Russia
and Turkey, because that is where it expects most growth to take place. There are opportunities in young
markets where companies are still jockeying for position.

Even where the geographic focus stays the same, firms are repositioning their products and services
to increase sales. This can be as simple as lowering existing prices, marketing the low-cost attributes
of a product that were not emphasised before, bringing out a low-cost version of a popular model, or
repackaging consumer products into more affordable sizes. Apple chose to bring out a cheaper version
of its popular iPhone during the North American recession. In India, Nokia introduced a less expensive
mobile phone. Also in India, Honda, which traditionally offered higher-priced sedans and sports utility
vehicles, brought out a dramatically cheaper car.
In South-east Asia, Unilever repackaged many of its consumer products to lower their price points and
changed distribution to include smaller shops that were winning business away from hypermarkets. In the
Philippines, for example, many of its products were resized so they could be sold for 5 pesos (about 10 US
cents). “The way you win is a little bit different than in good times,” says Mr Zijderveld. “It’s about going
back to the consumer, offering better value for money, making sure our portfolio covers all different prices
and segments, and making sure we are available where the consumer is shopping.”

Innovation
There are limits to what can be done with existing products. Those companies that can afford to are
continuing to innovate as part of their growth strategy. Indeed, in all of the companies interviewed,
innovation programmes had been spared the knife.
MakeMyTrip.com, a fast-growing online travel service in India with around 1.5 million customers and
4 million visitors to its website each month, launched three new products over the past year that offer
customers new options. “All of these products require a fair amount of either contracting or product
development,” says Deep Kalra, CEO of MakeMyTrip.com. “We went ahead with the product strategy
because we considered it key to our growth.”
In the US, even though automotive sales have plummeted, Toyota Motor Sales brought out a new
version of its Prius hybrid vehicle, and is continuing work on new models to fit changing fuel economy
and environmental demands. In another direct response to the economic crisis, Toyota has made its
© Economist Intelligence Unit Limited 2009

9

Management magnified
Strategies for revenue growth in an economic downturn

manufacturing plants more flexible, building more than one model at a single plant. Bob Daly, senior
vice-president of Toyota Motor Sales USA, compares the company’s response to driving along the road
and running into traffic. “You have to put on the brakes,” he says. “But you have to remember that your
original purpose was to get home, so you adjust your speed and continue to drive home.”

Government stimulus packages
Although traditional sources of funding all but dried up in some regions in the early stages of the crisis
and remain constrained as of mid-2009, the massive stimulus packages, particularly in the US and
China but also in at least 30 other countries, have benefited companies. Firms in sectors targeted by
governments have rapidly worked the new financing into their growth strategy. The Chinese government’s
programme to support rural entrepreneurs opened up opportunities for Lenovo. According to Mr Zhou,
Chinese farmers are buying personal computers with the help of a government subsidy. Similarly in the
US, resources meant to spur sustainability have helped green technology firms.
Government stimulus in the US opened a different set of doors for G4S Wackenhut, which provides
security services. The firm secured a contract from the US Customs and Border Protection to transport
detainees, freeing 700 federal officers to focus on tasks that required law enforcement powers. Drew
Levine, president of security services at G4S Wackenhut, says this dovetails with the firm’s long-term
strategy of adding value to security services so that they are less of a commodity. Outsourcing is one of the
opportunities that the recession has created, notes Mr Levine. “When times are tough, when benefits are
squeezed, all kinds of organisations are looking to shed full-time employees.”
There are risks to pursuing a growth strategy, especially during a period of deep uncertainty. An
acquired company may have hidden problems. An innovation may fail or an investment underperform.
Potential customers may be too panicked to consider valuable solutions being offered. The global
downturn could last longer than even the grimmest forecasters anticipate. Yet risk-taking is inevitable if a
company wants to grow, confirms Mr Wenig of Thomson Reuters. “If you are not taking risks, you certainly
don’t have the right strategy.”

10

© Economist Intelligence Unit Limited 2009


Management magnified
Strategies for revenue growth in an economic downturn

Key points

l A judicious mix of offensive and defensive measures is needed to maintain growth.
l A downturn opens doors for transformational change based on cutting non-strategic areas and focus on higher
priorities.
l Solutions must be weighed for their short-term impact and fit with the long-term growth strategy.

Protecting assets and resources:
on the defensive

F

or many firms, going on the offensive in a downturn is neither realistic nor financially feasible. These
companies have more limited options, but they can still position themselves for growth if they use
the global recession as an opportunity to make tough, transformational changes. The bottom line, always
important, has become even more so. Our survey on decision-making indicates that the finance division at
a majority of companies is providing the most input when major decisions are made.
In a crisis, according to Freek Vermeulen, professor of strategic management at the London Business
School, management normally goes through a period of denial or paralysis, followed by a round of
cost-cutting. Nevertheless, many of the measures considered defensive—including cutting staff and
expenses—are being combined with an offensive strategy. Companies are spending money to gain

advantage, but cutting in non-priority areas or where efficiencies have been identified. “You have to be
very tough on areas that are not strategic priorities, because they have to contribute to areas that are,”
says Mr Wenig of Thomson Reuters.

“You have to be
very tough on
areas that are not
strategic priorities,
because they have
to contribute to
areas that are.”
Devin Wenig, CEO, Markets
Division, Thomson Reuters

Finance has the most imput in major decisions during downturn
(% respondents)

When major decisions are made – decisions that result in a change in the organisation’s business objectives – which functions provide the
most input?
Finance
68

Sales
38

Strategy
36

Customer service
34

Marketing
34

© Economist Intelligence Unit Limited 2009

Source: Economist Intelligence Unit survey, May 2009.

11


Management magnified
Strategies for revenue growth in an economic downturn

Staff and salary cuts
Rising global unemployment shows that staff reductions are being widely used to cut costs. Since the
crisis began, the ranks of jobless workers worldwide have swelled by an estimated 40 million to 60 million
people, according to the International Labour Organisation. The Economist Intelligence Unit expects
unemployment to continue to rise in North America and Europe until 2010.
Embraer exemplifies a two-track approach. The company laid off 4,000, or 20%, of its workforce in
early 2009 and trimmed production levels. Yet it maintained investment in new products and continues to
develop two new business jet programmes launched in 2008. “When the market comes back, we need to
have new products to offer to clients,” says Mr Aguiar, the company’s CFO. “We did not change one single
cent of our investment in new products.”
Salary freezes or cuts are also a popular measure, sometimes taken in tandem with redundancies, and
sometimes as a way to avoid them. In China, many export-oriented small and medium-sized companies
have kept their employees on at much reduced pay and working hours in the expectation that eventually
the market will improve and workers will be hard to find.

Finding efficiencies

Firms are seeking ways to make internal operations more efficient, but are looking for cost savings from
suppliers as well. This is also a tactic used both by companies in distress and those looking for ways to
finance their growth strategy.
At its operations in South-east Asia, Unilever looked closely at all its suppliers. “We are one of the
world’s biggest advertising buyers,” says Jan Zijderveld, executive vice-president for the region. “Media
costs have risen continuously. Now we are expecting them to go down, and to pay less for advertising this
year than we did last year.” Even firms paying the same amount for marketing are restructuring how they
do it, discarding methods that do not have immediate benefits, such as sponsorship of sports and cultural
events, in favour of those where the value for money is more immediately obvious, such as paying for cost
per acquisition in online marketing rather than cost per click.

Risks of defensive strategies
“You can cut costs.
You can reduce
staff. You can
reduce debt. But
what happens if
opportunities come
along?”
Dr Weijiong Zhang, China
Europe International
Business School

12

The obvious risks to a purely defensive strategy, especially if it is not done in combination with offensive
moves, is that a company stripped of people and resources loses the capacity to reach out to new
customers and offer better products and services. This is particularly dangerous at a time when customer
tastes and needs are increasingly volatile. “You can cut costs. You can reduce staff. You can reduce debt,”
says Dr Zhang. “But what happens if opportunities come along? It takes time to increase staff and grow

your debt again [to fund expansion]. And by then you’ve missed your opportunity.”
Still, it can be equally risky to ignore the opportunity provided by the recession to take a hard look
at operations and remove some of the fat that accumulated during good times. Trimming unpromising
products or divisions, reining in a salary structure that has ballooned out of control, abandoning markets
with no growth potential—all are more palatable to stakeholders when they are seen as part of a well© Economist Intelligence Unit Limited 2009


Management magnified
Strategies for revenue growth in an economic downturn

CASE STUDY: MakeMyTrip.com chooses profitability,
but also gets growth
While no company was perfectly prepared for the global recession,
executives at MakeMyTrip.com, one of India’s largest online travel
agencies, were better placed than most, having weathered and
survived a series of harsh blows just after the company was created in
April 2000. They were still struggling to establish the company when
the dotcom bust occurred, followed by the 2001 terrorist attacks on
the US. The spread of the SARS (severe acute respiratory syndrome)
virus starting in late 2002 further undermined the travel market. “As
a company, as a team, we had actually seen a tough time,” says Deep
Kalra, the company’s CEO. “So I don’t think anyone panicked.”
The team decided that, in this recession, the company would
focus on profitability rather than revenue growth, and began
looking for ways to reduce costs. Marketing was an obvious target.
“We decided that pure brand spend, as opposed to transaction
spend, should come down,” says Mr Kalra. Sponsorships, and print
and television advertising were cut and search engine marketing
was reconfigured. Instead of paying companies like Yahoo when
customers clicked on their online advertisement, MakeMyTrip.

com renegotiated its contracts so that payment was made when an
online user made a purchase. “We get the transactions, we’re happy

to pay,” says Mr Kalra.
MakeMyTrip.com also scrutinised the price hotels and airlines
charged when it sold rooms and flights to its clients. The company’s
size—it has an estimated 50% of the online travel market in India—
gave it clout with its suppliers, and it was able to negotiate much
better terms. “We had a great year,” says Mr Kalra of the financial year
that ended on March 31st 2009. “We grew revenue by 88%.” One-half
of that growth came from an increase in transactions. The Indian
economy is still growing, albeit more slowly because of the world
recession, and online travel is a growth industry. The other half came
from an increase in margins the company was able to negotiate with
its suppliers and other cost reductions.
While the company made these defensive moves, it continued a
slimmed-down offensive strategy. Mergers and acquisitions were
put on hold, but investment in new products continued. In the last
year it has launched three new services that allow users to book and
purchase long-distance bus travel, buy packages that combine flights
and hotels, or buy railway tickets online.
The best part of downturns, according to Mr Kalra, is that they
force a company to look at its internal processes and products
and decide which ones are key to the business and which can be
eliminated or fine-tuned. “These are things people talk about, but
frankly I don’t think you do them until you are really pushed to the
wall.”

considered crisis response. “You want to take advantage of the downturn to do things that are hard to do
otherwise,” says Mr Martin of Rotman School of Management.

There are more subtle risks to massive cost-cutting programmes as well. Companies turn inward,
become more hierarchical in their decision-making and narrower as they focus on core competencies. The
focus is too often on cutting costs rather than seeking new revenue. “In a crisis, you want to open up and
look for new revenue streams,” says Professor Vermeulen of the London Business School. “As a lone top
manager or top management team, you’re not going to have all the ideas and all the information.”
Professor Vermeulen cites the example of a British firm that made software for the automotive sector.
The chief executive invited staff to submit new ideas, and one group of employees noted that, although
the automotive sector overall was in the doldrums, the spare parts divisions were doing well because
people were keeping their old cars longer. Their suggested software program for spare parts inventory
control is now a major new source of revenue for the firm. Companies that have become more top-down in
their approach would have missed that opportunity, believes Professor Vermeulen.

© Economist Intelligence Unit Limited 2009

13


Management magnified
Strategies for revenue growth in an economic downturn

Conclusion

G

rowth is possible in an economic downturn, even one as severe as the current crisis. The financial
health of a company at the outset of the crisis will determine whether it can go on the offensive and
use the downturn as a growth opportunity, or whether it will be forced to play defensively and risk losing
market share.
Going on the offensive in an uncertain economy is not for the faint-hearted. It takes confidence and
courage to spend money in a recession, when the timing of recovery is uncertain. Yet there are companies

that are sticking with existing growth plans, or taking advantage of new opportunities produced by the
crisis. Some of their tactics are tried and true techniques used in prosperous times, while others are new
to this recession. Offensive strategies include:

l
l
l
l
l

acquisitions and mergers;
targeting the clients of weakened competitors;
reorienting the company or its products to new geographic markets and new customer groups;
continuing to develop new products and processes; and
taking advantage of government stimulus packages, especially for infrastructure and green
technology.

Growth strategies are always risky, but even more so now. Yet standing still or contracting is likely to
result in a loss of market share. For firms whose financial foundations were shaky at the onset, there is
little choice. Their options include:
l
l
l
l
l
14

cutting staff and salaries;
reducing production to bring inventories in line with demand;
pressuring suppliers to drop prices;

reducing marketing efforts; and
lowering prices on products and services.
© Economist Intelligence Unit Limited 2009


Management magnified
Strategies for revenue growth in an economic downturn

Purely defensive moves may well ensure short-term survival, provided nothing crucial is cut that will
undermine long-term sustainability. However, that survival will have been bought at a high price if the
measures taken have left the firm so pared down that it is unable to take advantage of new opportunities
when the economy rebounds.
Focusing entirely on offensive moves can be just as risky as a wholly defensive mindset. “Those are
both bet-the-company strategies,” says Professor Vermeulen. To survive, a company has to look for new
avenues of growth. A judicious mix of the two—cutting costs in non-priority areas in order to use the
savings to develop new products and enter new markets—is the best way to ensure that a firm comes out
of the great recession of 2008-09 in better shape than it went in.

© Economist Intelligence Unit Limited 2009

15


Cover images: iStockphoto.com

Whilst every effort has been made to verify the accuracy
of this information, neither the Economist Intelligence
Unit Ltd nor the sponsors of this report can accept any
responsibility for liability for reliance by any person
on this report or any other information, opinions or

conclusions set out herein.


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