On becoming a sustainable company

On becoming a sustainable company

When the Asian crisis hit, several major shocks were immediately felt by companies across Asia. Capital flow to the region, which continued to increase prior to the crisis, immediately reversed as investors' confidence in the region plummeted. Sharp devaluation of Asian currencies caused increasing debt defaults for both foreign debt and accounts receivables. Ballooning inflation and unemployment lowered consumer confidence and spending. Labor unrest heightened due to lower wage increases, layoffs, inflation and on-going uncertainty. The impact of the crisis on companies operating in the region was large and far-reaching.

Both the timing and magnitude of the crisis was simply unexpected. Many companies were caught off guard. For some, the crisis simply worsens their already bad condition prior to the crisis. Some faced ballooning debt burdens that forced them into bankruptcy. Some were acquired by companies with stronger financial capacity, mostly foreign firms.

Not all companies, however, were hit hard by the Asian crisis. Some even benefited from the crisis. Jollibee Foods Corporation, the franchise holder and operator of the Philippines top fast- food chain, for example, benefited from the crisis.

Jollibee was ready for the recession in the Philippines. It had no dollar-denominated debt; it sold an affordable product; and it had a proven record of defending its turf against global fast-food franchisers like McDonald's. Jollibee ranks frequently first in brand-name recall in local Philippine marketing surveys. With the slump, Philippine consumers were cutting back on upscale dining, which helped Jollibee post further gains. In the first half of 1998 alone, Jollibee already reported a 33 percent rise in net profits on sales of 6.7 billion pesos (source: WSJ 1998 Asian Economic Survey).

Companies in Asia responded to the growing crisis in different ways. A survey conducted by Andersen Consulting at the onset of the Asian crisis (1998) shows that most companies in Asia adopted defensive postures, namely cost-cutting, postponements of new investments, portfolio restructuring, and debt restructuring (see Figure 7-2).

Aligning competitiveness and financial soundness

To determine the appropriate responses for Asian companies, we devised a matrix which represents a "snapshot" of Asian companies condition at the onset of the Asian crisis. Using market competitiveness and financial soundness as variables, Asian companies may fall into one of four cells: Bubble, Aggressive, Conservative and Sustainable (see Figure 7-3). The best position is, of course, "sustainable" companies, ones that have high global competitiveness and high financial soundness. To survive or emerge from the crisis as winners, Asian companies that fall into the other three categories (bubble, aggressive and conservative) must eventually become a "sustainable" company by improving their competitiveness and/or fixing their financial problems.