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How to Win in a Financial Crisis

DOMINIC BARTON, ROBERTO NEWELL, AND GREGORY WILSON - The McKinsey Quarterly, 2002 Number 4

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.

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.

BEYOND BOUNDARIES
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.

REGULATIONS MOVE
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.