Financial crises can be anticipated and better managed tactically in their early days, based on the learnings that we take away from our client work in both the private and public sectors. Unfortunately, many com- panies and countries too often respond to financial storms reactively—
too late, with too few resources, and without the required skills to be effective in minimizing the direct and indirect costs of a crisis.
As we explain in Chapter 4, “Managing the First Hundred Days,” execu- tives need to play their best cards. There are five tactical measures that exec- utives need to execute successfully in the first hundred days of a crisis. First,
executives need to understand and maximize the company’s cash position:
Cash is their ace in the hole. Managers need to maintain liquidity at all costs. Second, managers need to identify and minimize operational risk.
Since both supplies and supplier relationships typically are interrupted, often for long periods of time, executives need to make plans to manage inventories and find alternative suppliers, either locally or overseas. Third, rigorous scenario planning is required as the crisis unfolds to anticipate a range of events and then plan the optimal reaction to them. Fourth, man- agers also need to review the company’s business performance thoroughly and be prepared to divest assets to get cash and/or because they are not part of the company’s post-crisis, long-term strategy.
Finally, in the face of extreme uncertainty, bold leadership, vision, and strategy also are required to preserve and protect the most fragile crisis com- modity: the confidence of employees, customers, creditors, investors, depos- itors, and regulators alike. As Frank Cahouet, the retired CEO and chairman of U.S.-based Mellon Financial Corporation and chief architect of its suc- cessful turnaround in the late 1980s, says: “Managers need a strategic plan and a great story to tell in any turnaround situation.” Management’s ability to communicate effectively with all stakeholders will help it win in the early days of a crisis.
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Financial crises are periods of significant strategic opportunity for those executives and investors who fully understand regime-shifting events and their new degrees of freedom to gain a competitive advantage dur- ing a crisis. Crises are not necessarily just periods of unmitigated value destruction.
In Chapter 5, “Capturing Strategic Opportunities After the Storm,” we assert that once the early days of a crisis have subsided, managers need to turn their attention quickly to setting a new strategic direction and building their institutions for the future. While many managers think that financial crises have only financial downsides and no competitive upside, we know from experience that crises represent huge opportunities for companies to gain a strategic advantage competitively as entire industries are both restruc- tured and revalued and economies are transformed. The challenge is to iden- tify opportunities early, and then act on them with superb execution.
Fast movers with a clear vision, a credible strategy, sound corporate governance, and access to capital can secure a winning position in a post- crisis competitive environment. In the wake of the U.S. banking and S&L crises in the late 1980s, for example, Hugh McColl, the former chairman and CEO of North Carolina National Bank (NCNB), developed a vision of nationwide banking in the United States and saw strategic opportunities to
enter lucrative new markets such as Florida and Texas, which previously had been off-limits due to arcane and protectionist banking laws. The Texas banking crisis helped to break down these old laws. By working aggressively with the FDIC to buy failing banks and S&Ls in new geographies and build new business lines in asset management and loan workouts, NCNB paved the way for its national transformation to NationsBank and its eventual merger to become BankAmerica.
Hyundai purchased Kia in the early days of the Korean crisis and reached an 80 percent market share in Korea. Thanks to its aggressive post- crisis strategy, Korea’s Housing and Commercial Bank (H&CB), now Kook- min Bank after their merger, increased its market capitalization from roughly $300 million in 1998 in the wake of the Korean crisis to a pre- merger value of $2.8 billion in October 2001. In February 2002, its post- merger market capitalization was approximately $12 billion. Moreover, there are plenty of other success stories to tell where management has had the foresight, courage, and execution capabilities to seize the strategic opportunities that a crisis produces.
New strategic opportunities like these are created because crises typi- cally change the entire competitive landscape. Crises often unleash what we refer to as the “five degrees of freedom”—previously accepted boundary conditions that are literally swept away in a financial storm. These five degrees of freedom include: regulatory regimes; competitor strengths and posture; customer behavior and needs; organizational capacity for change;
and social values. For example, regulations on competition and market con- duct usually change. Competitive rankings change as well; it is not uncom- mon for a list of the top ten companies in a given industry to shift dramatically after a crisis. The behavior of customers changes, too, as they get the opportunity to sample new products and services from new providers.
Society’s values also can change; it took a crisis, for instance, for Koreans to begin to welcome substantial foreign direct investment.
Winners recognize that nearly everything affecting strategy can change during a crisis. To maximize the value of these five degrees of freedom, suc- cessful executives will move deliberately along several fronts. First, they set a vision for the company’s future; winning executives look beyond mere sur- vival and see opportunities in a crisis. Second, they set aggressive perform- ance aspirations. Third, winners strike during a crisis to find unique and regime-shifting acquisition opportunities, which they then seize rapidly, transforming their companies along the way. Finally, they execute effectively and efficiently.