Companies Need a New Response to the Economic Crisis, a Booz & Company Survey of the Fortune 500 Companies Finds

As layoffs and cost cuts fail to halt declines, senior managers must think beyond ‎survival tactics and adopt strategies for success.

Senior executives at many Fortune 500 companies spanning a wide range of ‎industries are missing key opportunities for cost containment and revenue growth ‎during the current recession, found a recent survey by Booz & Company. The ‎management consulting firm surveyed 155 senior executives at a number of Fortune ‎‎500 companies and found widespread concern that traditional cost-containment ‎measures are falling short during this downturn, as well as clear evidence that new ‎approaches are needed.‎

The survey found that chief executives and other senior managers are struggling ‎with the downturn’s scope, timeline, and solutions and are often trying to apply ‎traditional solutions to a very non-traditional recession. Ninety-two percent of senior ‎respondents cited “constantly changing objectives due to unstable economic ‎conditions” as a major challenge to achieving their cost-reduction goals. This ‎indicates that such unusual economic circumstances may leave senior executives ‎stymied from implementing new solutions, due to a lack of certainty that they will ‎work. ‎

As a result, many companies are turning to traditional spending cuts and layoffs. ‎Almost 40% of companies surveyed are focused on cost reduction alone, and most ‎senior managers have already exercised their default plans. Measures such as across-‎the-board cuts, working capital management, marketing spend reductions, and ‎renegotiating purchasing contracts have been widely employed among respondents. ‎Since these measures typically realize significant savings within six to eight months, ‎they are often the first actions taken by companies during downturns. ‎

The survey data shows that while industry leaders in cost competitiveness also ‎prioritize layoffs and large scale cost cuts, they are twice as likely to adjust ‎compensation levels as less cost competitive companies. The data suggests that ‎successful companies are more balanced in their approach. In addition, one in five ‎companies is making capital expenditure cuts of 25% or more. ‎

By relying primarily on a short-term, cash-conservation view and cutting new ‎investment to the bone, companies risk destroying their fundamental ability to ‎compete once the economy starts to rebound. And at a more basic level, it’s not clear ‎whether the strategy is even feasible or sustainable in the short term; 86% report that ‎they have already implemented their cost-cutting toolbox and are running out of ‎options for further action, and 72% acknowledge that the cost-cutting culture is ‎hurting morale.‎

“The same old solutions don’t work in this new breed of recession. Companies need ‎to take a more comprehensive approach to the entire picture—both cost containment ‎and revenue enhancement—by pruning dead growth that is draining resources and ‎allowing the strongest parts of the company to survive and thrive,” said Booz & ‎Company Principal Ahmed Youssef.‎

Since economic downturns typically eliminate weaker competitors, the survey ‎authors argue that only companies that make strategic cuts and place careful bets on ‎areas of short- and long-term revenue growth are in a position to emerge from this ‎recession stronger than ever. The survey findings support that view in a number of ‎ways: ‎

Cuts need to be more thoughtful: More than 72% of companies indicated they are ‎pursuing traditional, “big bang” cost-cutting methods such as across-the-board ‎layoffs. However, only 30% of respondents are taking measures to freeze salaries or ‎bonuses and better align compensation with the market. This reluctance to take a ‎creative approach to compensation and bonuses risks a backlash from stakeholders ‎who are increasingly scrutinizing compensation levels.‎

Necessary cuts need to be bigger and faster: The study’s authors recommend larger ‎savings targets and faster timeframes. Companies reported expected savings of 4% ‎to 9% across business segments, but Booz & Company analysts believe average ‎program savings between 10% and 20% are within reach for most companies. This ‎paradox—companies feeling “maxed out,” while setting insufficient savings targets—‎presents a real challenge. Savings can also be achieved more quickly. For example, ‎survey respondents expect to see results from working capital management in eight ‎months, but Booz & Company has found that an aggressive approach can bring ‎results in three months. ‎

Cross-functional, coordinated cost-cutting is more effective: Nearly 40% of ‎respondents whose companies adopted a formal, enterprise-wide, and cross-‎functional approach to cost-cutting expect to achieve savings of 20% or more. This ‎compares to a similar expectation for only 20% of companies who leave cost cutting ‎to the business units. ‎

Revenue enhancement should also be a focus: With so much attention being paid ‎to cost-cutting, revenue enhancement has largely been placed on hold. The survey ‎found that programs to grow revenue being contemplated or pursued by ‎respondents are far down the priority list and mostly long-term, such as acquisitions, ‎market diversification, and new product development. More immediate revenue-‎generation opportunities that are not investment-heavy, such as aggressive ‎management of pricing and promotions, are not being actively pursued. ‎

Relying on emerging markets is risky: Companies that continue to make ‎investments are typically doing so in emerging markets, pulling money out of the ‎U.S. and Europe in favor of investments in Asia and the Middle East. Sixty-two ‎percent of multinational corporations report plans to invest in growth in the Asia ‎Pacific region, compared to 24% planning growth investments in North America and ‎‎22% in Europe. However, this recession has also hit export markets, and it is not ‎clear that domestic demand will be a sufficient shock absorber for shrinking exports. ‎

“Multinational companies should continue investing in emerging markets—even ‎with the recession, growth rates are expected to be positive and exceed those of the ‎developed economies,” said Youssef. “At the same time, they should not put ‎complete faith in these markets to offset massive slowdowns at home.” ‎

The study’s authors suggest that senior managers readjust their mindsets for a ‎shifting landscape. Companies and even entire industries may look very different at ‎the end of this recession than they did at the beginning. By remaining flexible and ‎open to new opportunities, decision-makers can have dramatic impact on their ‎companies’ success if they:‎

  • Concentrate business portfolios on long-term winners with an emphasis on ‎targeting the most valuable customers.‎

  • Attack costs in a strategic, coordinated manner to reduce break-even to its ‎lowest possible level without losing market advantage.‎

  • Adopt a long-term view of how the industry should and will restructure, ‎including possible government intervention.‎

  • Develop a long-term game plan that includes a defined industry vision and ‎where the company fits within it. Plan capital expenditures based on that plan.‎

  • Prepare to take intelligent risks, including preparation for the upturn, ‎planning for price increases, and possibly recapitalizing debt. ‎

“Success will require leadership to aggressively seek out new ideas and ‎opportunities—not just cut costs,” said Youssef. “In spite of the challenges of the ‎current economy, those players who are strategic and bold will lead their industries ‎into the eventual upturn.”  ‎

Survey Methodology

Booz & Company surveyed 155 senior executives of Fortune 500 companies on the ‎specific strategies and tactics their companies have implemented to address the ‎recession. The survey was conducted anonymously in January 2009 by a third party ‎research firm. A quarter of the survey respondents were among the senior-most ‎decision makers in their company (e.g., CEO, President, COO, CFO), while the ‎remaining 75% were executives who report directly to the c-suite. A range of ‎industries are represented in the survey, including automotive, manufacturing, ‎consumer products, media, professional services, energy, utilities, chemicals, ‎industrial manufacturing, technology, and transportation. ‎

The survey asked detailed questions on specific cost reduction and revenue ‎enhancement measures, as well as targeted questions on the anticipated impact of ‎Congressional bailout packages and the US Presidential election.‎

The complete survey findings can be found in the report “Survival vs. Success: How ‎Companies Are Responding to the Recession and Why It Is Not Enough” at ‎ More material on managing in the economic crisis can be found at ‎‎