Kites rising against the wind - Doing business in turbulent times

“Kites rise highest against the wind – not with it!” - Winston Churchill once used this sanguine quote in the midst of adversity. Considering that the South African business community is facing adversity in the form of bleaker economic conditions, which is likely to result in the bleeding of margins and vulnerable earnings prospects; pondering this quote is considered apt.

Despite being inundated with reports of an economic slowdown, it would appear that business has been caught by surprise. The notion of being caught “skinny dipping while the tide has retreated Warren Buffet: 2007 letter to shareholders of Berkshire Hathaway” provides a suitable metaphor for the current situation.

How has this occurred though? Analysts at reputable asset managers have been predicting for the last few years that the bull market was not sustainable indefinitely. It is interesting to note that before the current onslaught of “bubbles”, the bubble concept was rare and of historic novelty. The Dutch Tulip bubble of 1636, is a case in point. People began paying exorbitant amounts for tulips; bulb traders amassed fortunes; bulbs that were considered too rare and valuable to even be planted, were kept as a store of wealth. Looking back, this is considered complete folly on the part of those involved. This irrational exuberance is, however, part and parcel of the human psyche and will rear its head again.

So what is business to do in recessionary times?

From a shareholder perspective, business needs to show a desire to be able to play well under all conditions. To a Springbok rugby fan, justifying a loss as a result of wet conditions is absurd. A win, as a result of a flexible game plan that deals with the conditions better than the competition, is applauded. Similarly, business objectives to add value to shareholders should apply equally in adverse economic conditions. Belts should be tightened, but not around a rotund business’ girth which includes non-core, value eroding activities.

A back-to-the-basics strategy is called for. Business needs to relook at its fundamentals. Core value adding activities should be prioritised and non-core activities should be outsourced. Customer satisfaction and retention should not be sacrificed for the goal of pushing more volumes. Cost reduction and supply chain optimisation are necessary strategies to provide better traction in the wet.

Our business as advisors also needs to respond to the different economic conditions. Our due diligence, valuations and M&A expertise address a bullish, acquisitive market with aplomb. In bearish markets, where capital rationing becomes increasingly restrictive, the market requires advisors that would provide the know-how of seeking to add value to shareholders through maximising margins without the benefit of premium pricing. Furthermore, effective positioning of our vendor due diligence services is required to assist business with divesting.

To the realists, initial costs would be required in order to establish costing efficiencies, but these are costs that would not be required to be incurred again once the next bubble bursts or when we again find ourselves in recessionary conditions. Since the cyclicality of the economy is inevitable, preparing for future downturns should not be seen as ad-hoc strategies, but should form part of the long-term strategy of the respective firm.