Economic crisis widens gap between top firms and mid-market players: BCG

The global economic crisis is giving companies already dominant in their industry the chance to stretch their lead over their competitors, according to a paper published by global management consulting firm The Boston Consulting Group (BCG).

The failure of many companies to overcome the effects of the economic slump in a fast and effective way is widening the financial divde between the weaker and the established companies, according to the report.

In a survey of 439 companies with sales of at least $1 billion from seven of the world's leading economies, BCG found that top companies - those ranked first in their industry - have been growing revenues and profitability throughout the downturn. By contrast, those companies ranked outside the top three have been heavily affected by the economic crisis and have suffered declines in revenues and profitability.

According to BCG, the contrasting fortunes of the corporate "haves" and "have-nots" are no accident. ''The chief executives running top companies have recognised the seriousness of the crisis and have been deploying some of the tactics more commonly used by companies undergoing turnaround transformations. The leaders of their weaker rivals, however, have taken an overly optimistic view of their prospects - and if some are finally starting to take action, it is too little, too late,'' it said.

"Although market leaders have been less affected by the downturn so far, they are doing more to tackle the worst effects of the crisis - both for short-term protection and to benefit in the long term. In contrast, middle-of-the-market players are now running the risk of losing even more ground: they have been more severely affected, yet they are doing less to counter the downturn," said David Rhodes, global leader of the firm's financial institutions practice and a coauthor of the report.

The survey, conducted in March, found that 55 per cent of market leaders expnded revenues in 2008, compared with 40 per cent for the second and third players in a market and only 22 per cent of companies outside the top three

Fifty-eight per cent of market leaders increased profits in 2008, with less than a third seeing declining profits, compared with only 21 per cent of companies outside the top three seeing improvements.
 
Despite the calamitous impact of the economic downturn, the survey found that may CEOs were struggling to come to terms with the "new realities" of the global crisis, BCG said.

''More than 60 per cent of companies thought that the International Monetary Fund had overstated the seriousness of the crisis in its January forecast of global GDP. When the IMF subsequently revised its forecast downward in March - projecting the first global economic contraction since World War II - these companies were even more badly out of line,'' the survey pointed out.

More than two-thirds of corporates also erred when they thought the speed of their company's reaction, the quality of their action plan and the capability of the management to address the economic challenges effectively was "satisfactory" or "very satisfactory".

Many also failed to realise their real prospects. While nearly two-thirds said that the profitability of their industry as a whole would decline, more than 40 per cent forecast higher profitability for their own companies.
 
While more than 70 per cent predicted increased price sensitivity in their customer population, more than one-third admitted that they were budgeting for increased selling prices; only a third expected their own prices to decline.
 
Some 55 per cent expected their company to emerge stronger from the crisis; only 15 per cent expected to emerge weaker.
 
In the BCG survey, market-leading companies identified the following actions as key to their success:

• Undertaking more frequent reviews of their budgets and plans, typically every quarter;
  Tracking the external environment-both macroeconomic and industry indicators-with far greater seriousness;
  
• Preparing for the downturn by acting early to reduce operating costs and overhead while optimising working capital-even though they have typically been less affected than their lower-ranked rivals;
  
• Aggressively acting to protect cash by reducing working-capital requirements, postponing capital expenditures, and paying down debt;
  
• Variabilising fixed costs and reducing breakeven levels by reevaluating outsourcing and opportunities to increase shared services;
  
• Cutting costs more decisively by reducing production capacity and more aggressively laying off employees; and
  
• Actively exiting underperforming businesses and divesting assets;
  
• Trying to secure future growth by investing in R&D and innovation to a greater degree than other companies in the survey;
  
• Protecting and growing their existing revenue base by increasing marketing expenditures and focusing on key accounts; and
  
• De-averaging the actions they are taking by simultaneously cutting costs or capacity or increasing expenditures or capacity in different parts of their portfolios, depending on potential, as well as opportunistically seeking attractive acquisition opportunities while not shying away from difficult decisions about underperforming businesses