Management 590 Weekly Theme: Major challenges and appropriate strategy for conducting business when confronting a global

economic slowdown like the one we are currently experiencing Linda Day Lozada Texas A&M-Commerce

In partial fulfillment of the requirements for MGT 590 Professor Lloyd M. Basham July 31, 2011

Table of Contents

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Abstract Regulatory environment Access to credit and cash flow management Human Resources Increasing marketing expenditures References Appendix

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Abstract The financial meltdown of 2009 is still creating waves and attracting more strict government regulations. Economic activity is still recovering from a recession and government agencies are turning to higher taxes to avoid bankruptcy. The federal government is hopelessly divided and is suffering from mission creep. The regulatory environment is demanding huge expenditures on reporting technology; a new capitalization requirement is impacting our ability to gain access to credit and forcing us to look into other options which include selling some assets to gain some liquidity. To make matters worse, the economic recovery is still frail and we could potentially fall into another recession at any minute. Difficult times call for extreme measures but we can no longer target the usual suspects and believe that we can stay healthy by simply downsizing, cutting training and marketing expenditures; instead, we must take a long term view and capitalize on the opportunities that a recession brings. In the middle of all the negative economic news, our businesses in emerging economies are still growing at a fast pace, we must take this opportunity to stay calm and while everyone is cutting jobs we must carefully look to hire experienced talent, while everyone cuts training budgets we must ensure that our employees have the tools to succeed in an environment that is demanding a lot from them. Finally, our marketing expenditures must remain constant or even increase, we cannot afford to lose market share in any of our businesses and times of great uncertainty are great opportunities to attempt to cut into our competitors market share. Action and a positive outlook should be an integral part of our business strategy and should ensure that we not only survive but manage to thrive during this recession.

Regulatory Environment In response to well publicized frauds in the US financial markets and the subsequent global economic meltdown, US and European governments have reacted by creating a number of new regulations that are certain to impact all global businesses. The financial sector has bear the brunt of the latest regulatory wave and the new liquidity rules will drive up the costs for banks (IBS, 2011b). Higher cost for banks will in turn increase the cost of borrowing for businesses across the globe. The economic slowdown has also impacted the ability of most of the worlds governments to collect revenues, in most instances; governments will look to increase business taxes to make up for the revenue gap. Governments in developed markets are bending to political pressure and continuing to push new regulations in an already overly regulated environment. Differing national political priorities will create an uneven field of play, giving raise to regulatory arbitrage and incentives to migrate certain business activities to more accommodating jurisdictions (Ernst & Young, 2010), companies from emerging economies will benefit from friendlier business climates but excessive liquidity infusion and under regulation could also fuel inflation and potentially lead to overheating. (Rao, 2010), our company must be careful when making strategic decision to move operations abroad, short term cost may be reduced at the expense of a sustainable long term strategy. In developed economies like the U.S. and Europe, new taxes and higher capital requirements will impair the industrys ability to absorb risk, impose a competitive disadvantage when it comes to attracting capital relative to other financial market players, (Ernst & Young, 2010). In the United States, the Securities and Exchange

Commission has become more aggressive and completely restructured the way that it pursues examinations and enforcement action (Lowenstain, 2010). In 2010, the SEC brought nearly 700 enforcement cases and obtained $2.8 billion in penalties and disgorgement (Lowenstein, 2010). What businesses need to do around some of the new regulatory programs often takes years and significant resources to implement, the fact that new regulations are coming every year complicates the matter (IBS, 2011). An uncertain regulatory environment both damages investment and the ability of companies to act (Ernst & Young, 2010) but half hazard regulatory compliance is not an option, we will have to turn to sophisticated and flexible data managing systems to build a proper response. (IBS, 2011b). Our compliance department must maintain constant communications with business personnel to propagate the notion that the compliance function is crucial for the survival of our organization. (Lowenstein, 2010). Companies must plan ahead and prepare for expected changes now, rather than waiting for regulations to be imposed (Ernst & Young, 2010). Effective compliance programs will promote multiple goals: Effective corporate governance, enterprise risk management, business ethics and elevation of market perception are all crucial during a recession and must be at the forefront of our companys recession strategy. (Lowenstein, 2010) Access to credit and cash flow management The cost of raising capital and liquidity is being driven up by the extent to which the markets and rating agencies believe that the reforms have ended the era of financial institutions that are too big to fail( Ernst & Young, 2010). Government backing may no longer be a given and this could impact the ability of many companies to retain their access to credit. Skyrocketing government debt in Europe and the U.S. and the fears of

massive government defaults could extend the credit crunch for the long term and have a strong impact on the cost of credit. (Ernst & Young, 2010). Businesses throughout the world are currently experiencing increases in the size of their debtors ledges, late payment or failure to pay by customers puts obvious pressure on the cash flow of a business (Gustafson, 2009). The current credit crunch is affecting even companies that are reducing debt, but specially those who are not, all firms depend on a constant flow of credit to carry them smoothly through the ups and downs of business fluctuation (Colvin, 2009) and the unprecedented near freezing of credit is creating significant problems for businesses worldwide. Despite the tight market, our company may be able to leverage equity capital or raise equity in the public or private capital markets to reduce the cost of paying some of our existing debts. If the strength of our current balance sheet does not allow us to obtain credit, we must assess what assets can be quickly liquidated and the viability of selling the assets collaterizing any problem loans (Ernst & Young, 2010). Generating cash during a recession is a challenge, we must look beyond familiar methods. In the capital management area our company could look into introducing short billing to shorten collection lead times, front-ending procurement process to optimize supplier payment discounts, and conducting an in-depth analysis supported by technologies to continually focus our credit teams on the most critical accounts to manage. (Ketchin, 2009). Cost cutting and a prudent investment strategy are part of the prescription for a healthy balance sheet during a recession (Francella, 2009), however, cost savings should never come at the expense of the ability to execute a long-term vision (Wang, 2008). Companies should avoid cost cutting on R&D, training and marketing, there may be

some short term gain, but reduction on these three areas will reduce the ability of the business to at least hold its own in a deep recession (Davies, 2008). We must work hard to identify duplicative activities inside our organization and elsewhere in the value chain (Davies, 2008). Human Resources According to HR magazine, the most critical human resources issues that organizations face during a recession include talent management and staffing, employee engagement and employee morale (HR, 2009). Most companies associate effective cost cutting during an economic crisis with massive layoffs. During the last recession in 1988, downsizing became the primary cost cutting strategy. Current research about the handing of that crisis has shown that this strategy carries significant risk (Davies, 2008). According to a HR magazine survey, fifty-five percent of HR executive respondents choose layoffs and downsizing as an important strategy to respond to a recession (HR, 2009). Headcount reduction could decrease employee motivation and their levels of effort; it can also negatively impact the levels of trust of employees and promote a climate of insecurity. (Davies, 2008). Managing employment cost while maintaining a viable business and meeting organizational objectives, is often not consistent with a strategy that involves massive layoffs (McBride, 2009). Companies may worsen the problems created by massive layoffs by also eliminating meaningful retention strategies during a recession, they implicitly or explicitly communicate that employees should feel lucky to have a job (Deloitte, 2009), this could have a significant impact on the ability of these companies to retain valuable employees during and after the recession, instead, we must expand our retention

strategies, employees that are often retain during a recession tend to be the best and brightest, we do not want to create an environment that could motivate our most valuable employees to leave. A renewed focus on employee training an and professional development is also crucial during a recession, with cost-cutting and restructuring measures, some remaining employees will have found themselves taking on new responsibilities for which they have little training or direct experience, (Ernst & Young, 2010), we must support and develop our employees so that they do not grow frustrated or despondent. From a global perspective, most companies are still woefully uncompetitive when it comes to attracting and retaining local talent to run their fast growing operations in places like China and India. Labor cost is emerging economies is raising partly due to inflation, our company has found itself spending substantial resources training local talent to then see these employees leave to take jobs at local companies. Global companies are worried not only about the search or war for global talent, but also about retaining much-needed talent, (Ernst & Young, 2010). In China, most global companies are facing substantial challenges in finding professionals who both understand the market and are able to communicate with, convince and be entrusted by Western senior executives. (Hughes, 2011). The ability to execute our strategy is dependent on a cour ability to hire and retain talented management at every level, and our company cannot afford to emerge from the recession without the human capital that it will need to retain or enhance our lead on competitors. In the United States, baby boomers retirement is also creating a void on the skill set of the labor force because fewer students in developed nations are now studying

engineering and many of the best of those are then seduced by the financial advantages of cities like London or New York (Ernst & Young, 2010), our company needs to invest on sponsoring science and engineering educational programs in Universities as well as finding ways to steer high school students into the hard sciences. In our financial branch, we must be mindful that overregulation is making it harder to offer the same compensation packets that less regulated boutique financial services or even some foreign firms (Ernst & Young, 2010). The negative public perception of business executive compensation after the financial meltdown is so great that it continues to push politicians to pass even more stringent laws and regulations regarding executive compensation packet (Ernst & Young, 2010). Our company must compensate our inability to match pay incentives by working hard to create an environment where employees feel stable and appreciated. According to Deloitte

consulting, money is an important part of any retention strategy, but non financial incentives are critical to employees and offer opportunities for companies to differentiate themselves in the talent marketplace, (Deloitte, 2010). According to recent surveys, employees ranked two non financial factors among the top three reasons why they were thinking about leaving their current jobs. Lack of job security was cited as the primary factors (36%) closely followed by lack of career progress (27%). (Deloitte, 2010). We must encourage our older workers to differ retirement, though a number of measures ranging from remuneration, flexible working time and other benefits, to simply promoting a culture that embraces older workers (Ernst & Young, 2010). Our company should carefully monitor headcount reduction programs from competitors and take advantage of that opportunity to acquire talent. (Davies, 2008).

Research suggests that businesses that grow during a recession are good at spotting attractively priced talent, acquiring talent from our competitors could bring us a rare opportunity to push into product areas where demand is growing, expand geographically or even strengthen our position by moving quickly and faster than our competitors when the economy recovers. (Davies, 2008). Increasing marketing expenditures In order to survive and thrive during the current recession, our company must invest heavily market research, we need to know more than ever how consumers are redefining value and responding to the recession, (Quelch, 2008). Delivering high

customer value depends on our ability to understand the customers changing perception of our products and meeting any new expectations or demands (Kotler & Keller, 2009). Recessions are not a good time to cut advertisement expenditures, it is well documented that brands that increase advertising during recession, when competitors are cutting back, can improve market share and return on investment at lower cost than during good economic times (Quelch, 2008), our company should take this opportunity to advance on our competitors by increasing the frequency of communications with customers, this will boost revenue and stimulate demand for our offerings, especially if competitors are busy slashing prices instead of promoting the quality of their services, (Wang, 2008).

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References Kotler, P. & Keller, K.L. (2009). Marketing Management, Chapter 6. Pearson Prentice Hall, New Jersey. Francella, B (2009). Wava reveals how to survive a recession. Convenience Store News, 45(2), 12. Retrieved on 27 July, 2011, from EBSCO Davies, R. (2008 July 31). Recession: Key questions for business survival and growth. Critical Update by Dr. Robert Davies. Retrieved July 27, 2011, from www.drrobertdavies.com HR Magazine (2009, December). Rethinking strategies during recession. HR Magazine, p. 12. Ketchin, D. (2009, February). Make it flow. Accountancy Magazine, p 37. McBride, K. (2009, February/March). Thinking outside the square, managing employment costs during the recession. Human Resources, p. 8-9. Colvin, Geoff (2009, January 8). How to manage your business in a recession. CNN Money. Retrieved on 27 July, 2011, from http://money.cnn.com/2009/02/07/magazines/fortune/colvin_managing.fortune/ Gustafson, B. (2009, March). Insolvency: Dodging the domino effect how to survive recession. New Zealand Management, Vol. 56 Issue 2, p 4 Ernst & Young (2010). The Ernst & Young risk report 2010, the top 10 risks for global businesses. Retrieved on 28 July, 2011, from http://www.ey.com/CH/en/Issues/Managing-risk Lowenstein (2010) The Compliance value proposition and the current regulatory environment. Retrieved on 28 July, 2011 from www.lowenstein.com/.../Regulatory%20&%20Compliance%20Overview%20Summer% 202011.pdf Rao, S (2010, December 17). Analysis: Emergening markets 2011: consensus or crowded. Reuters. Retrieved on 27 July, 2011, from http://www.reuters.com/article/2010/12/17/us-emerging-crowdedidUSTRE6BG4TW20101217 IBS Journal (2011, June 29). Overview: Regulation and compliance, riders on the storm. IBS Journal. Retrieved on 28 July, 2011 from http://www.ibsintelligence.com/index.php?option=com_content&view=article&id=15960
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&catid=305&Itemid=493 IBS Journal (2011b, June 29). Analysis: Basel III, it cant happen again. IBS Journal. Retrieved on 28 July, 2011 from http://www.ibsintelligence.com/index.php?option=com_content&view=article&id=15960 &catid=305&Itemid=493 Wang, J. (2008, December 15). Recession Cost-cutting No-Nos. Entrepreneur Magazine, retrieved on 28 July, 2011 from http://www.entrepreneur.com/article/printthis/199184.html Deloitte (2010, April). Has the great recession changed the talent game? Deloitte Consulting. Retrieved on 28 July, 2011, from http://www.deloitte.com/view/en_US/us/Services/additional-services/talent-humancapital-hr/ac8070028ceb7210VgnVCM200000bb42f00aRCRD.htm Quelch, J. (2008, March 3). Marketing your way through a recession. Harvard Working Knowledge. Retrieved on 27 July, 2011, from http://hbswk.hbs.edu/cgibin/print/5878.html Hughes, M. (2011, July 7) Consumer Trends Affecting China Business, The China Business Market Reported. Retrieved from http://starglobaltribune.com/2011/chinabusiness-consumer-trends-affecting-the-china-busi...

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Appendix A

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