The Cash Cure

Image via WikipediaThis economist article refers to firms in the broad buiness sense, but its recomendations and lessons can also be applied to firms in the more targeted, business of law sense:

"Firms that remain standing through a brutal recession will be those that have taken the phrase “cash is king” to heart. Yet there is a risk that in a rush to build up their cash mountains, cuts could be made too fast and too deep when a more targeted approach to surgery is needed. For instance, a recent article in the McKinsey Quarterly points out that technology budgets are a favourite place to make cuts, but indiscriminate chopping will be more damaging than ever before because IT systems are now so tightly interwoven with everything from supply chain management to the determination of pricing strategies.

Another reason for caution is that firms on a cash crusade can all too easily choke off investment in promising new products. That would be a huge mistake because, paradoxically, a recession can be a fantastic time to launch innovations. For one thing, tougher times can make consumers reconsider many of their purchasing decisions, leaving them open to trying something new. For another, a less crowded marketplace makes it easier—and cheaper—to create awareness of a new offering.

Scott Anthony of Innosight, a consulting firm, points out that during the dotcom bust Apple launched its first version of the iPod music player and that in America alone more than ten other “disruptive” innovations started during the same period. Experienced senior executives are convinced that this downturn will produce a new crop of world-beating businesses. In a recent speech to the Council on Foreign Relations, a think-tank, Sam Palmisano, the boss of IBM, said he was certain that he would see new leaders emerging who would “win not by surviving the storm, but by changing the game”.

Firms who want to be winners coming out of the downturn will also need the financial resources to seize any opportunities that arise during it. Interviewed in the Harvard Business Review, John Chambers, the boss of Cisco Systems, a network equipment-maker, said the firm tended to make more aggressive investments during bad times than good ones. When its rivals pulled back from Asia during the region’s financial crisis in 1997, Cisco deliberately increased its presence there, gaining a leading position it has never relinquished. Cisco’s experience is a timely reminder that while having plenty of cash is a powerful remedy in surviving a recession, if it is also deployed wisely it can produce a champion when the downturn ends.

See Full Article: Desperately seeking a cash cure

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