We are in a vicious cycle. “Best practices” as regards how to navigate during a crisis suggest that a firm should not stop investing during a downturn; actually a firm should push innovation and investments so as to:
- offer differencing / innovative products during the recession in order to justify a price premium
- be prepared for winning in the “upturn”
However, we see none of this these days. Everyone is cutting on costs and investments instead.
Granted, Business Leaders are not all faulty here. There is just no money.
However, if no one is innovating nor preparing for the upturn there might be no recovery at all, since there might be no growth-drivers. Scary…
If any lesson can be learned, there might be case for managing companies differently, saving cash in order to prepare for any “unpredictable” circumstances such as the current recession. The same way you would save money yourself.
Now we just need to convince the Market of the virtues of old-fashioned treasury management…
Filed under: business, thoughts Tagged: | business, cash scarcity, innovation, investment, LinkedIn, recession, upturn
Unfortunately, I think we’ll see the stimulus package funding a few projects that will end up like much of the housing projects of the last decade – with no interested buyers. Let’s hope I’m wrong and that forcing people to spend money on something ‘they should’ will work.
I think the hesitation to invest is partly based on the fear that capital structures will need to change soon. What will be the new tax policy?
And, where are interest rates going to go? If they are left to what the market says, few projects in any pipeline will have a positive NPV.
Businesses have initiated too many projects, confused by artificially-low interest rates. This waste needs to be cleaned out. I think some great investments will be to liquidate bad investment, retrench (oxymoron, I know), and develop a conservative strategy limited to engaging the company’s strengths to meet a well-defined, profitable need. Go ahead and reduce market share, but be the first choice for the few in your niche.
One last thing about being prepared – I am not convinced there is an upturn coming any time soon. For this reason I agree with Mr. Ichbiah about differentiation (and I extend this to mean sell more to fewer people).
I agree that the uncertainty surrounding the cost of capital or Wacc are definitely a part of the equation indeed. Thank you for bringing up this up.
Regards,
Romain
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