Downplaying the Financial Crisis

Underestimating the Crisis
David Rhodes and Daniel Stelter, The Boston Consulting Group
14 pages

The Gist:

For months, financial forecasters have been doing everything short of suggesting we don gas masks and stockpile canned goods. But according to the sixth installment in the Boston Consulting Group's "Collateral Damage" series, the drumbeat of grim prognoses is failing to "instill a sense of urgency" into many corporations. In their survey of 439 companies with sales above $1 billion (including 86 with sales above $20 billion), the authors found that "too many companies are reacting late and with insufficient purpose." Many also show signs of inflated expectations: while 65% of companies said their industry's fortunes would decline, 40% predicted improved profitability for themselves. Probing the mindsets of top managers, the authors show why things may get worse for many major corporations and prescribe a series of measures companies can take to navigate the stormy road ahead. (See TIME's Top 10 Financial Buzzwords")

Highlight Reel:

1.: On how companies remain dismissive about the financial downturn—and unprepared to seize the opportunities it presents: "Companies are still underestimating the size and scope of the economic crisis. They are generally too optimistic about their own performance and believe that they have taken sufficient steps to respond to the crisis. They often tend to be too inward-looking in their forecasts, relying on their own 2008 experience rather than fully assessing the changing external environment: managers do not like to create or accept negative plans. Consequently, although taking action, companies have not adopted the steps either to protect themselves from the worst effects of the downturn or to prepare for the upturn."

2.: On how market leaders are better poised to weather the storm: "Companies outside the top three in their industry have been slower to act and will likely suffer disproportionately from the recession. In contrast, market leaders, even though they have not been as badly affected as their lower-ranked rivals, are doing more to address the crisis. Too many companies are focused on taking easy measures: cutting travel, entertainment, internal meetings, and the like. Far fewer are even contemplating taking measures that would increase their long-term competitiveness."

3.: On how to manage your company in the midst of a crisis: "An effective way to manage even a well-run company in times of economic upheaval is to follow some of the disciplines typically imposed by a turnaround manager ... a good crisis manager devises a blueprint for taking advantage of opportunities that the crisis creates, quickly and effectively transforming a struggling company into a competitive entity that is well positioned for future success."

The Lowdown:

Opportunity is the silver lining embedded into every crisis. With so many sectors in flux, savvy players will reap rewards. But executives are demonstrating an unwillingness to retrench, and the report mounts a persuasive case for why that's a dangerous thing. Emerging from the tumult unscathed requires a clear-eyed look at the recession's bleak realities—and the talents of a turnaround artist. "The global economic landscape will be changed for at least a generation," the authors write. "Preparing for that eventuality now is essential." Perhaps because they have more to lose from not doing so, the cream of the crop has been better able to cope. Fifty-five percent of market leaders — according to sales figures — grew revenues in 2008, the authors note — a significant leap from the 40% of second and third-place companies that notched gains. That may be the least surprising element of this short, scary report. Shrewd management was likely how they reached the top in the first place.

The Verdict: Skim

Read "The Lost Decade May Only Last Three Months
Read "Is the Stock Market Headed Back Down?"