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LEADING IN A DOWNTURN

LARRY ETTAHGROUP MANAGING DIRECTOR/CEO

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The World We Live in Today

”Today, I say to you that the challenges we face are real”.

- President Barack Obama

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How did we get here?• Greed: Irrational exuberance, Asset bubbles,

speculative excess in property and stock market. Easy money, leveraged equity markets, Deals and poor regulation. Risk under priced.

• Has led to the collapse of many notable financial institutions and organisations in the manufacturing, durable and fast moving consumer goods sector.

• Politics: Deficits, money supply.

• Result: Parlous Balance Sheets, Contraction of credit, suicides. Irrational complacency, corporate failures, nationalisations, blood bath of layoffs. Humility.

• Lessons: No business is too big or too old to fail

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Why are we so badly traumatized!Inertia

• While Lies: Our Economy is Sound! No fiscal firepower directed at the issue. Someone is sleeping at the switch. Leadership “not on seat”.

• No adequacy and coherence in response.

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Current Reality: It is not a Crisis; It is a deep Crisis

• There is severe recession and credit contraction with no end in sight in the current year. (Interest 22% prime?)

• The outlook is highly uncertain, and the timing and pace of recovery depends critically on strong policy actions. Estimates 2-3yrs.

• Global growth is expected to fall to less than 2%.

• Financing conditions will likely remain acute for some time, especially for corporate sectors that have very high rollover requirements.

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The Nigerian Business Environment

• Wriggling under challenges

• Official pretences has given way to confession.

• Our situation has been made the more difficult by the fact that our own environment was already in the throes of infrastructural inadequacies coupled with poor security and other structural problems.

• Financial strains remain acute, pulling down the real economy.

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The Nigerian business environment (Cont’d)

• A sustained economic recovery will not be possible until the financial sector’s functionality is restored and credit markets are unclogged.

• As economic prospects have deteriorated, stock market tanked. Consumers can no longer use their stocks as ATMS.

• The foreign exchange market has been

volatile as Naira is under speculative attack.

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The Nigerian business environment (Cont’d)

• Government intervention through forceful policy actions to restructure the financial sector, resolve uncertainties about losses (margin credit) and break the adverse feedback loop with the slowing real economy. Government becomes the only entity with a strong balance sheet to buy off the toxic assets (margin loans). Will that happen?

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The hard times are here!

• Bizarre somersault in the foreign exchange market;

• Low electricity generation

• Falling oil prices – low government revenue and foreign reserves for import financing; Culling of international trade finance facilities. Currency and translation risk.

• Capital market instability;

• The not-too-stable financial system.

– Tough economic realities.

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What does this mean for our business?• The goal here is to understand the true picture

and not what we wish to believe.

• What is the health of the business environment: Is this a growth market or not. If growth how to pursue low cost growth or if low growth how do we allocate resources to ensure excellent returns at minimum risk.

• The safe thing to do at a time like this is to, some may say:

- Freeze infrastructure investments;

- Defer new growth projects;

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What does this mean … (cont’d)

– Cut advertising, recruitment and training investments;

– Postpone loyalty programmes for customers and staff.

• These may not all be a correct position to take now.

• But we must have downside models and downside planning on any potential activity or investment we undertake. Intelligent Risk and No gambling. Keep capital discipline: No one expects us to predict the future but we are expected to show discipline once projected returns do not materialise.

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What does this mean for our business?• Some of our businesses may have suffered

immediate losses as a result of depreciation in the exchange rate in respect of previous import transactions yet to be paid for.

• Our AE 2009 is already under pressure from the expected rise in prices of raw materials and other business costs.

• Revenue projections will also come under serious strain as individuals and organisations re-order their spending priorities.

• Growth projections have also been tested by the deep uncertainties in the business environment.

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What to do?• ASPIRATION - Keep sight on our vision

and goals.

• DESPERATION - Take no prisoners

• INSPIRATION - Lead your people; give them hope

• PERSPIRATION - We need to run faster to even stay at the same spot, manage the fundamentals, be ready to go zig when others are going zag.

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What to do cont’d …

• If we are No.1, behave like No.2 and think likewise (insurgents than incumbents)

• Bring analytical rigor to decisions. 95% of economic rent of every company comes from 5% of activities (people?). So have to discover that 5% fast and focus on it.

• Lead from the front, side and back

• Be prepared to reconcile compassion with aspiration as we take on the leadership challenges and face the sad but necessary duty of firing underperformers.

• The general environment is same for every player what differentiates success from failure is insight, perception, industry, competition, consumers etc.

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What to do Cont’d….

• As business managers, we must be good owners and aggressive managers of performance, act proactively and decisively, take tough decisions (become less sentimental), have the tension needed to deal with cost, and position our businesses to take advantage of the upturn when it comes.

• Engage in frequent reviews that helps us understand what’s happening and what turns in the road are going to be necessary. Ask hard questions to prevent dumb decisions.

• Some urgent actions are required in the following areas:

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Balance Sheet ManagementWe must remember that in business cash is reality.

All activities must save or bring in more cash.

Unbridled credit sales should be curtailed.

Not paying cash immediately should not encourage purchases and subsequent inventory overhang.

More proactive approach to cash management – short-term cash flow reporting; immediate investigation of variances.

Avoid asset heavy and margin Iean business and investments.

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Balance Sheet Management (cont’d)..

• Aggressive working capital management – adequacy and quality of stock levels, securing best credit terms from creditors than is available to debtors.

• Aggressive review of adequacy and quality of banking and other financial arrangements.

• Review of discretionary and non-discretionary (no luxury of nice to haves) expenditure and assessment of real business needs.

• Enhanced control over purchasing and order processes (core and non-core) with probable lowering of authorisation limits and increasing exco accountability.

• Deploy based on right cost, right skills, right business environment. Ensure work flows to places where it is best done.

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Focus on Must Do for business

• This is not the time for frivolities.

• In a downturn such as we are in, we must ensure that our customers occupy the number one position in all that we do.

• Innovate: Products, processes, brands, systems to increase our “shots on goal”

• This is the time to identify which customers, products and channels are the most profitable and give due attention to them.

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Cost Management• A time like this provides a unique opportunity to

re-evaluate the relationship between your business cost and profit.

• You , no doubt, may have been doing something like this before, but there is need to move from ad-hoc cost management to more strategic and sustainable way of managing cost whilst successfully maximising profit. What does it take to be ahead of the curve on cost?

• The inefficiencies of the past can no longer be tolerated by the market, I mean consumers. The competitive landscape has changed so dramatically that we can no longer continue with a business as usual attitude to cost.

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Cost Management (cont’d)…• We need to have more detailed information on

elements of our cost to be able to manage the mix effectively. This means that our reporting format may need to be altered to reflect more information for management decision making.

• It must be stressed that we need to remain focused on cost cutting and keeping a close watch on head counts.

• It is not sufficient anymore to be guided by the rule of thumb of making increasing cost to be less than inflation. Zero based budgeting is the only option.

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Flexibility – Scenario Planning

• Periods of uncertainties such as this calls for flexibility.

• This entails re-assessing your business operation and consider a number of options possible.

• The model that worked for you last year may no longer be relevant today. Avoid being blinded by your past triumphs. This is an opportunity to think afresh. A critical test of our management and leadership acumen.

• Nobody can accurately predict what may happen to the entire economy in the next few months. Building a body of possible scenarios will provide opportunity for switching between options.

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Flexibility – Scenario Planning (cont’d)..

• Stress test all your assumptions.

• Leading in a downturn is all about being flexible, anticipating and reacting quickly to changing circumstances. Changes don’t come along in nice annual packages, so our approach to strategy must be episodic although we have our AE. Changes in technology, consumer behaviour, consumer taste, resource prices, competition behaviours etc. Ride that change with quickness and skill.

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Flexibility – Scenario Planning (Cont’d) ..

• You cannot get rid of ambiguity and uncertainty; it is the flipside of opportunity. If we wait for certainty and clarity, we wait to see what others do, but it may be too late to profit the knowledge.

• Mitigate risks while also positioning your business to seize opportunities which may arise.

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Take your people into confidence

• All of these will require that we manage our people effectively as they are crucial to executing a sustainable strategy at a time like this.

• Your job is to breakdown the situation into challenges that your subordinates can handle. You should absorb the ambiguity in this environment and give less ambiguous problems to others. Give them targets not vision.

• Recognise the value of your people.

• Identify the talents that cannot be lost.

• Identify possible succession risk areas and ensure that possible candidates are well motivated.

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Take your people into confidence (cont’d) …

• Give responsibility and challenges to your talents at a time like this in a different part of the organisations where their talent could be most relevant. Don’t care what jersey people wear, HR, IT, Finance etc. Look for people with answer to a problem whether he is on JC10 or JC40, in UAC for 40 years or 4 days. Battlefield promotion – pull up and stretch our people. Fewer managers, talented people whose job can be scaled up. Pleasant surprises; replace their small jobs with big ones and they blossom.

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Take your people into confidence (cont’d)..

• Engage with your people by keeping up dialogue with your employees.

• Show your employees you value them and care for them. Show empathy. Offer development opportunities and discuss their future with the organisation. But also be firm!

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Conclusion

• We cannot hope to exhaust the discussion tonight.

• These issues will be taken further in the course of the retreat as we have invited professionals to discuss with us the issues highlighted above.

• We will be looking more at answering the question “how” in the remaining part of this retreat.

• Our deliberations should provide us with the pathway to navigate in this year’s tricky economic landscape.

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Conclusion (cont’d) ..

• Be less sanguine about risk

• Be prepared for the Pain that is plain to see and have to unsentimental detachment to take the tough judgement calls

• Roll up our sleeves and ensure important decisions are made in our business quickly without sacrificing the value of collective debate.

• “Stand and Deliver”

• “Be of strong will … To strive, to seek, to find and not to yield” Tennyson.

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Conclusion (cont’d) …

• I wish you all a pleasant stay in Ijebu-Ode and successful deliberations.

THANK YOU FOR YOUR ATTENTION AND HAVE A GOOD NIGHT REST