- 1 - O.Univ.Prof.Dr. Dietrich Kropfberger Management and Controlling in Times of the Economic...

- 1 -

O.Univ.Prof.Dr. Dietrich Kropfberger

Management and Controlling in Times of the Economic Crisis

O. Univ. Prof. i. R. Dr. Dietrich Kropfberger

Rijeka, 4th. July 2009

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Company Crisis

• In general the crisis of a company is an outstanding situation, which will threaten the existence of the company, and therefore the management has to make decisions under enormous time pressure and uncertainty.

• In particular, during a company crisis one faces the enormous threat of profit problems, ending in negative equity (accounting insolvency) and / or inability to pay (illiquidity) – the result will be bankruptcy.

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Present Situation For the concerned company a crisis is catastrophically in its

effects.But:

Struggling for life in competition with others is the normal situation of the market economy.

The problem today is: A lot of companies, who would be economically healthy

under normal circumstances, are involved in the present situation.And :

For most of these companies the economic crisis was unpredictable and therefore they were not able to protect

themselves in time.

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Different Kinds of Crises Need Different Solutions

• „Normal company crisis“ –you have to improve your situation by using management tools and of course having enough equity:

„When you are living at the seaside, than you should be able to swim. When your job is on a boat at any kind of weather, than you should have some additional life protecting systems with you too.“

• Present structural and global crisis of our economy: Business as usual is not really successful:

„If you are in the worse situation of a Tsunami, swimming is not really helpful. To survive you have to run very fast - and of course, it will be better to stay on a save position, e.g. on a hill. And additionally always remember, not only the water is dangerous, the real danger comes from all the things the water is carrying along.“

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Causes of a Crisis

Causes of a crisis are looking like a cloud with fuzzy boundaries.

endogene Krisenursachen

exogene Krisenursachen

Internal causes of a crisis

External causes of a crisis

gray area

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External Causes of the Existing Crisis and their Consequences

• Failure of the concept of deregulation and reducing the state influence to a minimum.

• Failure of the ideology of a „free and totally liberated market economy“ as a self regulating system.

• Lack of (clear) rules for global governance and legal regulations regarding the financial markets.

• Decoupling of the financial markets from the real economy (Crisis of Capitalism, Karl Marx)

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Long Term Reasons why the Crisis was Unavoidable

• Total deregulation of our global economy („A free economy is the guarantee for personal freedom“)

• Demonization of the state as an inefficient Moloch (Less state – more private!)

• Exploitation of our world’s resources („Private economic wealth overrides social and ecological responsibility. The future of the next generation - devil will care“)

• Breaking-free and dominance of financial markets („Money makes the world go around!“)

• Unlimited possibilities for gambling at the stock exchanges (Free exchange rates of currencies, futures, options, derivates)

• US-Americans were living their life on credit for a long period (both, in private life and as a whole economy)

• US-banks „exported“ the financial problems of the USA to the whole world („The others shall pay our debts!“)

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Economic Crisis

Production/Services

Consumption

Financial Markets/Financing /

Financial economy

Real Economy

Economic Cycle

Trade

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Financial Crisis as a Trigger of the Global Crisis

• Disconnection of financial markets from the real economy and the uncontrolled policy of cheap money

• Illusion that men are bound in honour – and especially the illusion that managers and entrepreneurs are above reproach.

• Mixture of economic pressure, profit seeking, greed for money and the illusion of a never ending bull market

• Belief in the omniscience and the honour of the analysts• Gambling, roulette, Ponzi scheme and fraud at the stock

exchange.• Incomprehensible dimensions of the „bets“ and, as a

consequence, the profits and losses• Selective perception, which means, seeing profit

opportunities through rose-coloured glasses and ignoring the risks

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Crisis Accelerators (Schulmeister)

• Dreams of the amateurs („I want to be a rich man…I let my money work!“)

• Professional players („The stock prices are rising – Hurra! The stock prices are declining – Hurra!“)

• Vision of wealth, unearned and without real work (Financial profits and interests are higher than return on investments in the real economy)

• National state as a gambler ( „Maastricht –no problem, we are polishing our budgets by nice tricks!“)

• And additionally: In reality most of the politicians are economic amateurs and therefore have trust in their consultants. („The fire raisers are becoming the chief officers of the fire fighters“)

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Real Dimensions of the Crisis• Gambling at the stock exchange for many years was the

long road to the crisis – but most of us were amazed at the bankruptcy of US banking flagships

• US crisis became a global crisis in no time – and it was accelerated by systematic speculations on sinking prices

• 50% loss in value of market shares, real estates and commodity assets worldwide

• Losses are higher and more people are affected than in the world economic crisis of 1929!

• Banks didn`t trust each other and last year in autumn we were close to a total collapse of the whole banking system.

• There are dramatic effects on the real economy – e.g. in Austria and Germany the machinery industry faces a decrease of orders of 50% and more – wheels stand still and employees are put out of work.

• And additionally: We export our crisis to your economies too!

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The One Billion Dollar Question: Where has all the money gone?

• One part was consumed, the debts are non-refundable and lost.

• One part did not exist in reality – the capital gains have been only on paper.

• One part is coming back – the capital losses are (or have been) only on paper too.

• The bigger part was redistributed from the “silly” and small investors and the “greedy” investors to the “fiendishly clever” and sometimes quit “dishonest and fraudulent” big players! We can call them REALLY SMART!

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Political Ways Out of the Crisis

• Helping banks to get back liquidity and equity by enormous guaranties and credits by the governments and federal banks.

• Common sense and common policy from the governments in the EU and (nearly) world wide.

• Stimulation of the industries by deficit spending.• Common wording of clear rules and laws regarding

financial markets and closing of tax havens.• Restructuring and reinventing of unemployment through

new models of employment, like short time work models. • Building up trust in the economic systems.• Conclusion: We need a long range change of our economic

system, that means we need more regulations regarding the protection of our environment, our usage of resources, our social peace and our economic stability.

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Political Ways Out of the Crisis Conclusion

We need a long range change of our economic system!

That means: We need more regulations regarding the protection of our environment, our usage of resources, our social peace and our economic stability.

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Internal Causes of the Crisis

Causes of a crisis are looking like a cloud with fuzzy boundaries.

endogene Krisenursachen

exogene Krisenursachen

Internal causes of a crisis

External causes of a crisis

gray area

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The „Usual“ Internal Causes of a Company Crisis

Unpredictable external problems are only 20% of the causes, 80% of crises are based on internal problems:

• Lack of Equity• Lack of Cash and Liquidity• Management Errors • Old and / or wrong products and lack of innovation• Uncompetitive cost structure and lack of cost reduction• Personal incompetence of the management• Family conflicts and cashing out of the company for private purposes• Fraud

Any of these internal facts can be trouble for a company, but in combination with the current economic situation, any internal

crisis can become disastrous!

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Additional Internal Causes of Today’s Crisis

• Using the shareholder value concept to manage a company• Wrong and unrealistic requirements to all companies of an

industry to earn EVA`s and ROCE`s higher than the average of the industry.

• „Creative and innovative“ models of financing using the leverage effect and forgetting the need of equity as risk bearing capital

• Myopic view on monthly and quarterly reports• Illusion of unlimited growth for a company, driven by

mergers and acquisitions• Stock options and the belief that all of our managers are

bound in honour

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Industrial Accellerators of the Crisis

• A world wide network of the industries involves most of the companies.

• The bullwhip effect in supply chains brings overreaction in stock and orders.

• Selective perceptions and the „not invented here“ philosophy impedes reaction.

• The global loss of trust in any partner of the company makes crisis to a self fulfilling prophecy.

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Our Money doesn`t work by itself–only real efforts will bring real profit1. Find, develop and cultivate loyal and economically stable

customers. 2. Focus on productivity and permanent cost reduction.3. Focus on your outstanding capabilities, and develop your

core competencies permanently. 4. Focus your innovation in order to build up a competitive

advantage today and in the future.

And as a result: Gain market leadership in exactly defined market

segments by quality and a competitive price – quality relationship.

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Learnings to the Management• Creative and innovative forms of financing and using

leverage effects may be usefully for adventurer at the stock exchange, but they are dangerous for the real economy because of exit barriers and missing financial volatility.

• We have to stop creative accounting policies using the IFRS, like fair value based on the net present value of an investment.

• The concept of the shareholder value is useful if you are trading companies but it is not useful when you have to manage a company. (Malik, St. Gallen).

• Companies do not need to be large, they need to be strong. Growth on its own is not really a clever strategic goal. To be strong means to have satisfied and loyal customers on one hand and high productivity and a competitive cost structure on the other hand. (Malik).

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The Manager`s Job and the Controller`s Functions

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Companies Goals

Success factors

(future core capabilities)

Liquidity Profit

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Steps to Handle the Crisis

1. Step: Make sure that you will have enough liquidity using a strong cash management.

2. Step: Protect your profitability by (pro-)active actions in marketing and sales.

3. Step: Protect your profitability by (pro-)active actions regarding your cost structure.

4. Step: Build up strategic success factors based on (pro-)active portfolio-management.

Pro-active means, don`t wait until there is a need for doing something – do it now and do it permanently.

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1. Step: Providing of Liquidity by a Strong Cash Management

• Strengthen your equity – equity is risk bearing capital! • Find stable and long-term forms of financing! • Execute a focused working capital management!• Make cash with your assets, which you don`t need for your

(core) business - deinvest!• Check your investment programme very critically! • Search for (net) cash flow and focus on cash management!• Be careful when using accounting principles – profits that

are only in your books are not very helpful.• And in case of an emergency: Be quick and resolute: „A

horrible end is better than a horror without end!“

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2. Step: Protect your profitability by (pro-)active actions in marketing and

sales• Adjust your product range and your list of customer – concentrate on

your money makers and reduce your money losers! • Install a key account management on one hand but try to reduce your

dependency from a very small group of customers on the other hand!• Concentrate on your core business and try to use your capabilities to

realise additional sales! • Install a system of better budgeting – use less key figures - but realistic

ones and install a consequent MbO-system!• Realise that the marketing mix consists not only of 4 instruments – the

4 Ps of Kotler: product, price, place and promotion – there exists a 5th one: PERSONELL SELLING! (Kulhavy)!

• And additionally, don´t forget: „A market is more valuable than a factory! “Your customers of your markets are generating your money and your profits, at first your factory is only spending money and generating costs and losses!

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Wasting Money by an Extensive Diversity in the Portfolio (Horvath &

Partners)20% of our customers are

generating 180% of profit

With the last 20% of our customers we are losing

this additional profit

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Offers based on Marginal Income Only

• When markets are declining, capacity-utilisation is the key to profit or loss.

• Therefore it`s better to sale on a marginal income than having no turnover.

• But: When markets are declining, in the short run it is also necessary to earn contributions to the step fixed costs at least.

• Break even point is changing – at least you have to earn the fixed costs that are affecting expenses.

• But: In a real competitive situation capacity -utilisation at any price may be deadly quickly

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Problems of Reduction of Prices

Profit

Loss

Additional Profit

Sales

Profit of Normal Business

Additional Business

Fixed ci

Fixed costs

Contribution Margin

Break Even0

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CH E A

PERIS ALL

WAYS

POSSIBLE

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Problems of Pricing based on “Cost-plus”

B4Sales

CostsPrices

Cost ofGoods Sold

Cost-plus Prices

B3

P2

B2 B1

P1

P3

P4

Calculation Sheme of “Cost-plus”-Prices

Varaiable Costs

Surplus based on actual capacity utilisation

Surplus for Profit

Cost-plus Price

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Protecting Profit by Influencing the Cost Structure of a Business

During a crisis declining capacity utilization brings problems with your cost structure, that are called „Cost-Remanence“:

1. Step costs are standing still. (e.g. overheads, depreciation of additional machineries, interests)

2. Variable costs are changing their characters – soon they will become fixed costs (e.g. wages, setup costs, costs of shifts)

3. The degression of fixed costs is changing to a fatal progression of fixed costs.

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Operating level

Step costs

Remanence of variable costs(variable costs become fixed)

Remanence of fix costs (step costs become sunk costs)

0

Cost

s

Variable costs

Operating level

Remanence of Costs

cost

s

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Progression and Degression of Fixed Costs

Fixed

cost

s per

unit

Units produced / sold

Progression of fixed costs

Degression of fixed costs

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Asymmetric Progression of Fixed Costs

Variable costs per unit

Total costs per unit

Price A

Price B

Price Ccost

s., p

rice

s

Capacity / Units sold

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Steps to Change Your Cost Structure

• Reduce organizational slacks and unneeded fixed costs (personal hobbies of the management, „vested rights“ of the staff)

• Install a lean management philosophy in order to avoid wastefulness.

• Adjust your capacity to the market situation (flexible fit of capacity and sales – breathing capacity)

• Make the remanent costs of your staff flexible and nearly variable (flexible work time, reduction of shifts, short-time working, dismissals for short time, dismissals of unproductive workers and reducing staff, etc.)

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Lean Management means:Do not waste your money!

Only the money of your customers brings long term value added!

All parts of your products and services your customer is willing to pay for, are value adding, the rest is waste!

Therefore concentrate on your customers and ask your staff, where and why you are wasting and how you can become lean in your cost structure.

Reasons for wasting money are usually:1. Overproduction 2. Transportation 3. Inventory/WIP (Work in Progress) 4. Processing waste 5. Motion 6. Waiting 7. Defective products

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Avoid waste by

• Quality and secured processes (Standardised work processes, autonomous maintenance,

workflow design, Smed, Six sigma, audits)

• Inclusion of staff (continous improvement, teamwork, trainings, quality

circles, information meetings, delegation and management by objectives)

• Just in time production (Kanban, Smed, single unit production, timed assembly,

mass customizing, pull organisation of production)

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Inventory, „Reserves“ and Slacks Hide Problems

Lake of

inventory

Worse PPSMachine failures

Quality problems

Long Transportation

distances

Supply problems

Not really balanced

production lines Long rates of

Exchanging dies

Absen-ces

from work

Manage-ment

failures

Communi-cation

failures

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Special Issues Regarding Cost Structure

• Reduction of staff versus keeping core competencies• Customized lots versus big optimized lots• Reduction of capacity and of fixed costs on the one hand

versus costs of closing the business on the other one• Reduction of fixed costs in the calculation only versus real

cash effective reductions• Outsourcing versus insourcing

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4. Step: Building up strategic success factors by doing a proactive

portfolio-management• Comb through your portfolio – analyse, find and eliminate

your cash traps (cash burning products, market-segments and customers)!

• Make a relaunch of your old and profitable cash cows! • Make a detailed analysis of your markets and try to

segment them even deeper!• Concentrate your future investments!

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Strategies for success1. Get ideas from your customer!

2. Segment your market consequently – you cannot be everybody `s

friend!

3. Generate customer-know-how!

4. Solve the problems of your customers and provide individual benefits

to them!

5. If the product („hardware“) can be substituted, be different because of

your service („software“)!

6. Build up competences in problem solving!

7. Concentrate on your target groups when positioning in the market!

8. Stand out of the crowd of your competitors, you need an USP!

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The Controller`s Job in turbulent Times (I)

Traditionally: the controller is responsible for

· delivering information which is up to date and useful

· the information-system itself

(mainly in the day to day business). and· coaching the staff regarding economic processes.

Today: he is also

· the dialogue-partner and the internal consultant of the

management in strategic issues,

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The Controller`s Job in turbulent Times (II)

• Do not only control and keep everything in check but also help the management and the staff to control themselves by giving them useful information.

• Controlling means giving governance for self-regulation!

• Staff brings the profit, it`s not the controller!

• Motivation for success and profit is self control, it’s not external control!

• We do not need more controlling, we need more help for being more effective and more efficient!

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In Times of Crisis Remeber the Findings of Kaplan & Norton

• If you can`t measure it, you can`t manage it!

• What gets measured gets done!

• Twenty is plenty! (Find the quintessence!)

• „Only Actions Count!“

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In Times of Crisis Management and Controlling Must Work Hand in

Hand

Manager is driving the business and is responsible for the

results

Controller is driving the information system and is responsible for

transparency

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Trends in Controlling: Changing the focus while increasing efficiency

(Quelle: B. Gaiser, Horvath & Partners 2004)

Analysing, Consulting,

Projects

Planningand

Reporting

Data Preparation

Integrated Systems,Standardisation

Change of the controller`s

role

Process re-engineering, Standardisationand Better Budgeting

Planningand

Reporting

DataPreparation

Analysing, Consutling,

Projects

More Consulting + Less Data Preparation + Reduced External Controll

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Crises as Turningpoints Crisis is an Hellenic word: krisis

means determination, turning point

“

Sales, profit

Management of

opportunitiesOpportunity

ThreatManagement of crisis

Normal business

Business as usual

Turbulent times Succes or failure

Time

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Management of Crisis or Management of Opportunities Reactive Management of Crisis: Management is surprised and angry about what happens – and maybe – when the crisis is really dangerous they try to react.

Active Management of Crisis:Management is searching and analysing the situation exactly, and if there is a threat, they will react immediately.

Pro-active Management of OpportunitiesManagement makes things happen and transforms potential crises into opportunities.

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Management of Opportunities means…

• to install an early warning system to recognice changes at an early stage.

• to see changes as an opportunity and not as a threat.

• to analyse the old business models critically.

• to build flexible organisational structures and new business models.

• to define break through projects for the company’s success and to implement them!

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Conclusion – basic assumptions

There is nothing better than a good concept – that is also

implemented!

There is nothing better than action! Just do it!

Successful companies are successful because they continuously

work for their success!

Those who are less successful often get in the way of their own

business. They prevent themselves from success!

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Wrong questions – right questions

Wrong questions:

• Why doesn‘t it work?

• What do the others have to do?

Right questions:

• What pushes me and my business?

• What do I have to do that it works out? (what in detail and

until when?)

• How can others help me to do so?

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Management in turbulent Times (Peter Drucker, Economic Crisis

1980)

Strategy: „Do the right things!“

Day to day business: “Do the things right!”

And:

Do it!

- 1 - O.Univ.Prof.Dr. Dietrich Kropfberger Management and Controlling in Times of the Economic...

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