How to win in a financial crisis
When is a good time to make strategic advances? During a crisis, of course.
Dominic Barton, Roberto Newell, and Gregory Wilson
Simple survival is the first strategy that most managers come up with when confronting a financial crisis. The savviest managers, however, realize that a period of great uncertainty, with financial and competitive landscapes changing almost overnight, can be the ideal time to make important strategic gains.
Douglas Daft, Coca-Cola’s chief executive, knows the feeling. In 1997, as head of the company’s Asian operations, he watched capital investment turn fickle and devaluations deepen while a financial storm swept across much of Asia. As panic spread, Daft summoned his executives to a series of workshops about how Coca-Cola could capture new growth opportunities and emerge strengthened from the trauma. After all, the company had achieved one of its greatest breakthroughs in international markets at the end of World War II, when it discovered new opportunities in the broken landscape of Western Europe.
Daft emerged with a focus on acquisition opportunities that, he calculated, would be unchained by the turmoil. Over the next few years, Coca-Cola bought a bottling business in South Korea, giving the company better access to the mom-and-pop retail stores there, and gained better access in China, Japan, and Malaysia. The company abandoned its country-defined market perspective in favor of a more regional strategic view and bought several locally branded coffee and tea drinks. It also revamped its procurement business by consolidating and renegotiating purchases of aluminum, coffee, PET (a type of plastic for bottles), and sugar.
It isn’t only foreign multinationals that can take advantage of upsets in emerging markets. At the beginning of the Asian crisis, South Korea’s Housing & Commercial Bank (H&CB) was a midsize, government-controlled institution focused on mortgage lending. Its performance was mediocre, and its market capitalization stood at only $250 million. Yet in Kim Jung Tae the bank had a bold CEO who took advantage of a useful fact—that employees are more willing to accept change during a crisis—to restructure the company by changing its organization, strategy, and performance culture. Regulations governing mergers were also modified, opening the door to H&CB’s 2001 merger with Kookmin Bank.1 Just before the merger, the market capitalization of H&CB stood at $2.1 billion, and it became the first South Korean bank to list American depositary receipts (ADRs) on the New York Stock Exchange.
Consider also the case of Roust, a company that used Russia’s 1998 debacle to transform itself, in three years, from a consumer goods distributor specializing in premium alcohol brands into a holding company that includes a leading bank built from scratch. The remake took nerve, but Roustam Tariko, Roust’s CEO, spotted an opportunity: the country’s many failed banks were leaving behind important facilities and talent that could be acquired cheaply. The missing ingredient—money—was one that Roust, fortunately, did have. In six months, Tariko crafted a solid business plan, used it to recruit selected senior managers from other banks, and established the Russian Standard Bank, now one of the largest consumer lenders in Russia and growing by several hundred percent a year.
Together with the shock, threat, and uncertainty of a financial crisis comes a new landscape of broad, radical economic change
How do companies achieve such transformations amid chaos? These anecdotal examples suggest that one common approach is to recognize that along with the shock, uncertainty, and threat comes a new landscape of broad, radical change. Alert executives relax their assumptions about the boundaries that normally confine their businesses. Coca-Cola already knew that local attitudes toward foreigners were changing and that acquisition opportunities would become more plentiful because of the Asian crisis—in short, this was an ideal time to expand market share. H&CB took advantage of regulatory shifts and its employees’ new willingness to accept change. Roust stepped into banking while industry leaders were falling.
In normal times, four boundaries limit the scope and nature of a company’s business: regulations, competition, customers’ attitudes, and the organization’s ability to change. In times of crisis, however, the boundaries often shift dramatically, and those shifting boundaries can become the means through which companies improve their competitive position. By understanding how the boundaries affect a business before the crisis hits, and how they might change during the upheaval, executives can prepare to capture strategic opportunities.
Regulatory restraints are embedded deep in the core assumptions of most companies. Management takes for granted parameters such as the types of businesses or markets a company can enter, the kinds of products or services it can sell, and how much market share it is allowed to capture. Often, however, these constraints are relaxed or removed during a crisis.
In South Korea, for instance, the Fair Trade Commission, which approves mergers, took a dim view of industry concentration before 1997. As the government scrambled to restructure the country’s sinking financial system, however, some formerly unthinkable bank mergers suddenly became possible.2 It was this shift that helped H&CB merge with Kookmin Bank in 2001, creating a behemoth unprecedented in South Korean banking: H&CB’s market share leapt from 11 to 26 percent in deposits, from 29 to 44 percent in retail loans, and from 5 to 24 percent in corporate loans.
Moreover, limits on foreign ownership might be liberalized or abandoned altogether. Throughout most major economies in Asia, the allowable levels of foreign ownership in banking, for example, rose from less than 50 percent to 100 percent in some cases; Malaysia was the notable exception (Exhibit 1). Similar changes took place in other industries, thereby creating new opportunities for foreign players.
Deregulation can also release pent-up consumer demand and create new industries, seemingly almost overnight. During the 1994 crisis in Brazil, its government extensively revamped the regulation of personal financial services. New rules designated mutual funds as legally separate entities from banks, and credit card issuers were allowed to work with a number of brands. As a result, mutual-fund assets under management rocketed from virtually nothing in 1994 to more than $120 billion in 1996. Over the same two years, the volume of credit card transactions soared from $10 billion to $26 billion.3 Institutions that anticipated the transformation saw their business take off.
Furthermore, financial crises not only spur top-down regulatory changes but also give companies leverage to influence change from the bottom up. GE Capital, for instance, was able to bargain with Japanese insurance regulators in 1998, when the government was trying to sort out the troubled industry. GE then recapitalized a failing company, Toho Mutual Life Insurance, in a $1.1 billion deal, and in return the government agreed, in a regulatory ruling, to lower the rate of interest on new policies, from an unprofitable average of 4.75 percent to a more profitable 1.5 percent.4 Executives should always work on the assumption that regulations can be changed, particularly during the throes and aftermath of a crash.
Industry leaders might seem to have the best position for weathering a financial storm, but interest-payment defaults, supply chain interruptions, and a loss of confidence by creditors or investors can quickly topple them, opening the door for newcomers and changing the dynamics of the business. After both the 1994 Mexican and the 1997 South Korean crisis, rankings among the top ten companies in each nation changed twice as frequently as before, and consolidation in many industries increased enormously.
The upheaval is often greatest in financial services. Three of the top ten private banks in Brazil were bankrupted by the crisis of 1994, and several state-owned banks were privatized, leading to the consolidation of the industry and to greater foreign participation. By 2000, half of the top ten banks in the country were newcomers; moreover, the foreign-owned banks in the top ten held assets that went from zero to $63 billion, or 13 percent of total bank assets, by the end of the year. All foreign-owned banks in Brazil held as much as 30 percent ($133 billion of the country’s bank assets (Exhibit 2). In Russia, a similar story played out: five5 of what in 1996 had been the ten largest banks in the country went bankrupt by 2001, while local upstarts such as Alfa Bank rose from relative obscurity to take their place among its biggest institutions. This situation was repeated in country after country.
Where small local players are hit hard by a crisis, they may well be acquired by larger companies, which tend to be foreign and to have more diverse operations. In Southeast Asia, cement production was dominated until 1997 by locally owned companies, many of them inefficient operators. Most are now foreign owned. Holcim, the Swiss cement giant, is one of the largest newcomers. After more than a decade of looking for opportunities to expand in Asia, it at last bought large and often controlling stakes in beleaguered local cement companies in Thailand (Siam City Cement), the Philippines (Alsons Cement and Union Cement), and most recently Indonesia (PT Semen Cibinong). By upgrading the management skills of these businesses and installing new boards of directors, Holcim turned lackluster performers into tough competitors; Siam City Cement, for instance, boosted its market capitalization fivefold in the three years after the takeover. This scenario was repeated in industries throughout Southeast Asia.
Conventional wisdom suggests that companies should put new investments and potential M&A deals on hold when markets are changing rapidly. Yet the experience of many successful companies during periods of financial turmoil clearly demonstrates the opposite. From August to December 1997, as chaos broke out in Asia, upward of 400 deals, totaling $35 billion, were completed in the region outside Japan—a more than 200 percent increase over the same period the year before.6
Certainly, it would be foolhardy to ignore the greater risk that acquisitions entail during financial crises. Nevertheless, deals can be structured to accommodate it. In 1997, for instance, the Belgian beer company Interbrew was negotiating with South Korea’s Doosan over the sale of its beer business, Oriental Brewery (OB). Given the uncertainty in the market and rumors of impending change in the liquor laws, the two companies agreed on a set of "triggers," or conditional payments, designed to bridge gaps in expectations of future value. Interbrew bought a 50 percent stake in OB, with the triggers leading to additional payouts if specific changes occurred in the industry structure or tax code. By thinking creatively, Interbrew and Doosan inked a "win-win" deal that managed the downside and the upside.
Customers’ attitudes evolve
As people lose their jobs, and sometimes their savings, their demands as customers may change. If so, retailers and manufacturers of lower-end goods are naturally well placed to prosper. The fortunes of the Indonesian company Ramayana, a discount retailer once shunned by a growing middle class more interested in global brands and upscale goods, began to improve when the country’s currency, the rupiah, plummeted in 1997 and the public’s purchasing power dwindled. Ramayana’s managers responded by holding prices steady, offering goods in smaller quantities, and providing affordable, staple items such as cooking oil, rice, and sugar. While high-end and mass-market department stores saw their sales decline, Ramayana’s sales increased by 18 percent in the year to December 1998, when the crisis was at its height.
McKinsey research shows that after 1997, consumers in many Asian markets became more receptive to new financial products, new channels, and foreign institutions (Exhibit 3). From 1998 to 2000, consumer attitudes toward credit also changed sharply: for example, the percentage of people who considered borrowing "unwise" fell from 46 to 26 percent in South Korea, from 52 to 42 percent in Malaysia, and from 55 to 45 percent in the Philippines. Not surprisingly, in many countries the once fiscally cautious public has gone on a borrowing spree; the amount of consumer loans from 1998 to 2001 increased by 30 percent in South Korea and by 129 percent in China. Similar changes in demand have occurred in other industries as well.
Public perceptions of foreign companies can alter, too. Only 47 percent of South Koreans favored incoming foreign direct investment in 1994, for instance, but by March 1998 almost 90 percent did.7 South Koreans recognized their country’s need for not only foreign capital but also the technology and new management practices that foreign companies would inevitably bring. President-elect Kim Dae-Jung played a key role in persuading the country of the benefits of foreign investment, drawing on the example of the United Kingdom’s financial-services and automotive industries, in which few companies are British owned, though well-paid jobs abound. That argument took hold, and from 1997 to 1999 inflows of foreign direct investment to South Korea increased from less than $7 billion to more than $15 billion.8
Foreign companies that respond quickly to such shifts in attitude can reap the benefits. Before the crisis in Asia, Citibank struggled to expand its operations in the region. Following the Indonesian riots of May 1998, however, Citibank set up 75 minibranches in the country’s four largest cities. In most cases, the branches consisted of only an ATM and an attendant, yet this modest investment helped Citibank increase the number of its accounts by 300 percent. In Singapore, meanwhile, Citibank employees greeted people arriving from Indonesia at the airport during the early days of the crisis with signs reading, "Citibank will help you!" Over the next few years, the bank invested more than $200 million in Asia. According to one Citigroup manager, the crisis "gave us opportunities that were beyond belief."9
For executives willing to make bold moves, a crisis can be a burning platform that creates an opportunity to change corporate culture and operations drastically: shareholders, employees, and creditors alike recognize that things must change, and resistance melts away. For visionary leaders, this is the time to revamp the power structure, adjust the organization’s size, create a stronger and more performance-driven culture, and throw out sacred cows.
At H&CB, for instance, CEO Kim Jung Tae drove unprecedented changes throughout the organization during the crisis of 1997 and 1998. First he set tough performance targets (a return on assets of 1.5 percent and a return on equity of 25 percent) intended to mirror the performance of US-based Wells Fargo and Britain’s Lloyds TSB. Kim declared that H&CB could "become a world-class, top-100 retail bank in three years"—high aspirations for a mediocre, midsize South Korean institution. The tumult of the times, however, enabled Kim to back his words with actions: he cut 30 percent of the staff within three months and in the first year took a salary of just 1 South Korean won (less than $0.01), receiving the rest of his compensation in stock options. In South Korea, these measures were unconventional, to say the least.
Over the following two years, Kim launched more than 20 performance-improvement initiatives in areas such as pricing strategy, retail credit scoring, and customer service. To improve accountability and make it easier to judge the performance of the bank’s divisions, he reorganized them away from their geographic focus, turning them into customer-oriented business units. The proportion of compensation based on performance was increased and the bonus system revamped. These radical reforms were unthinkable before the crisis. Afterward, though, employees and other stakeholders went along with them, so that H&CB met Kim’s ambitious performance targets within two years.
Meanwhile, Ayala (see Ken Gibson, "A case for the family-owned conglomerate," The McKinsey Quarterly, 2002 Number 4), a 168-year-old Philippine conglomerate, had always prided itself on a social pact with its employees: a job for life. In the wake of the 1997–98 financial crisis, however, Ayala’s management realized that the company would have to refresh its talent pool to remain competitive and took the unprecedented step of offering a voluntary layoff program.
Time and again we have seen crises prompt managers and shareholders to reevaluate the ways of local management and move closer to international best-practice standards in areas such as governance, staff management, and accounting. Companies that make these reforms are better placed to emerge as market leaders when the dust settles.
Seize the day
Merely recognizing that the rules have changed and looking for new opportunities is not enough, however, to make the most of a crisis. Where a company in normal times might have months to manage late-paying wholesalers, each day can make a critical difference during a crisis. This environment can brutally punish companies that are slow to adjust but offers the possibility of big rewards to those that are fast and flexible.
Moving quickly often means being the first to enter a market when its future is still clouded by uncertainty. This takes courage, but the payoff can be handsome. Consider the experience of Lone Star Funds, the first investor to purchase distressed banking assets in South Korea. Bidding against a very small number of investors in December 1998, Lone Star obtained its first portfolio of nonperforming loans from the Korean Asset Management Company (KAMCO)10 for just 36 percent of book value. Being the first company to do so seemed risky. Steven Lee, Lone Star’s country manager in South Korea, said that "No one had tested the liquidity of these assets in the market. It was a daunting due-diligence task." The move paid off, though, and the portfolio earned a very significant annualized return. At KAMCO’s next auction, in June 1999, 14 investors were in the bidding pool and prices rose.
Making strategy during such times requires fast footwork and a rapid reassessment of the way circumstances change with each major event. The sharpest executives will review the changing boundary conditions of their companies on a weekly, even daily basis. Although steering through each day’s turmoil is hard enough, managers must always keep an eye on the changes needed to make a company emerge as a winner and consider how to influence these changes before competitors do.
Financial crises shock and paralyze not only countries but also companies—and often pull companies under. For sophisticated executives, however, the tumult produces a changing backdrop for doing business, and this backdrop can be exploited, frequently to great advantage. By remaining calm while the weary and wary retreat—and by keeping an eye on fundamental changes in the regulatory, financial, and political environment—the best crisis managers have turned unfortunate circumstances into the opportunity of a lifetime for their companies.
About the Authors
Dominic Barton is a director in McKinsey’s Seoul office; Roberto Newell is a recently retired director in the Miami office; Gregory Wilson is a principal in the Washington, DC, office. This article is adapted from their forthcoming book, Dangerous Markets: Managing in Financial Crises, New York: John Wiley & Sons, 2002.
1The merged entity now goes by the name Kookmin Bank.
2Before the 1997 crisis, only one bank merger had ever taken place, and it was viewed as largely a failure, since labor law restrictions ruled out potential cost savings.
3Banco Central do Brasil.
4Falia News, Number 32, April 2000; and Nikkei News, February 11, 2002.
5Inkombank, Menatep, Mosbusinessbank, SBS-Agro, and UNEXIM.
7Survey on South Korean opinion about foreigners investing in the South Korean economy, Korea Development Institute, 1994 and 1998.
8Ministry of Commerce, Industry, and Energy. See "Pupil who has learned enough to tutor," Financial Times, March 21, 2002; and Foreign Direct Investment in Korea, KPMG, September 2001.
9"Citibank conquers Asia," Business Week, February 26, 2001.
10A government-run body that bought the distressed assets of banks and other financial institutions and was charged with liquidating those assets.