How Asia's Companies Can Get Fit for 2011

During the second half of 2010 there have been fresh doubts about the strength of the economic recovery. This was triggered by concerns, rightly or wrongly, over sovereign debt levels, public purse strings being tightened, increased costs arising from new regulations and stubbornly high jobless figures. Globally, these facts do not augur well for a consumer-led economic recovery.
 
As we round out the year, CEOs and CFOs actually have reason to look ahead to 2011 with a little more optimism than they did in 2008 or 2009. But they must continue to galvanise their organisations for an environment characterised by modest growth and undeniable downside risk.
 
Here in Asia, we are lucky that there continues to be some good opportunities for business expansion. However, we cannot ignore the potential sources of instability and the fact that sentiment is still so weak in the West. For companies pursuing a growth agenda, it is even more important to assess the foundations of their business model. Are these fit for the challenges that 2011 and beyond will bring, or are they still fragile?
 
Five Key Issues
KPMG recently published a new C-level strategy paper to address these questions. Through feedback from our previous campaigns and discussions with clients, we identified five issues that we believe are key to being fit for the future.
 
  • Understand your competitors and your competitive environment. We believe that while it is useful to know how you are performing in your sector, it is more critical to understand how your peers’ business models put them at an advantage or disadvantage. But CEOs should take care not to become so obsessed with competitors that they overlook the potential for disruptive influences from beyond their peer groups.

 

  • Sustain and embed cost reduction measures. Many organisations succeeded in reducing cost in response to the global financial crisis. Now, with signs of recovery, CEOs and CFOs are being challenged by their boards or head offices to raise revenues against a static cost base. Many organisations have used the downturn to focus on streamlining that goes far beyond routine cost-cutting. These efforts can help them focus more of their energies on areas that create the most value. The benefits can be felt in improved margins and also in better decisions and performance.

 

  • Ensure the business can withstand more turbulent times. Business resilience is back on the agenda. The CEO needs to consider whether cost-cutting or layoffs have left their organisation vulnerable or more efficient. How well can they respond to unexpected events, both positive and negative? Has the organisation achieved a single view of risk? The effects of the loss of a key client or an unforeseen disruptive event need to be assessed not only in terms of operational continuity but also on its impact on key metrics such as cash flow.

 

 

  • Understand he externalities of the business model and the changing regulatory landscape. The CEO needs to be clear who in the organisation is tasked with scanning the landscape for new taxes and regulatory changes, whether industry-specific, such as capital adequacy, or more widely drawn, such as carbon emissions. It is important to understand how the business is changing and how it may be affected by new policies or tax regimes. Specifically, the sustainability agenda is creating both uncertainty and new growth opportunities in many sectors.

 

  • Now, more than ever, the CEO needs to lead by example. We have seen that charismatic and successful leaders are not beyond reproach. Leaders need to ensure that senior managers are suitably incentivised and that their conduct is sending the right message to peers, stakeholders and the rest of the organisation. As the business environment changes, people may view stricter rules or guidelines as temporary and thereby dismiss them, particularly if their peers and managers are doing the same. At this point, policies and procedures need to be reinforced and reviewed to ensure their ongoing relevance.
 
Embedding Reforms
As we prepare for not only further volatility but also growth opportunities, it is important for companies to consider whether they have really embedded or institutionalised the things done during the downturn for the long term benefit of the organisation.
 
The CEO needs to demonstrate and make clear to everyone that the disciplines and rigours imposed during the downturn were not endured for nothing. More importantly, it must be stressed that those impositions were and continue to be part of a strategy to build a stronger business for the long term. In doing this, management needs to set the right tone at top and lead by example: no senior executive can be beyond reproach.
 
This strategy can have external dividends as well. After the volatility of the past two years, many investors are looking for companies that can demonstrate sound management and generate more stable earnings. Recent disruptive events are a reminder that even the largest and most reputable of companies can come unstuck if they set overly ambitious quarter-by-quarter earnings targets and are blind to the accompanying risks.
 
About the Author
Honson To is a Partner and Asia Pacific Head of Advisory at KPMG. Click to read the new KPMG publication entitled Fit for the Future: A CEO Guide to Succeeding for the Long Term.
 

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