Economic Uncertainty Sharpens Case for Companies' Transformation

Developing countries must step up efforts and implement better strategies to prepare for the impact of increased automation and the implementation of smart technologies in Industry 4.0, a technology expert said. (Antara Photo/M. N. Kanwa)

By : Martin Tonko | on 8:02 PM March 20, 2017
Category : Opinion, Commentary

Despite an uncertain economic outlook over the past two years, there are positive signs that Indonesia may continue its current growth streak. Bank Indonesia, the nation's central bank, boosted the economy with several rate cuts last year and the country's inflation rate slowed to a seven year low in 2016.

The country is targeting a growth rate of 5 percent for 2017, similar to previous years, and this will be buoyed by the tax amnesty implemented last year and a low public-debt-to-GDP ratio at 27 percent in 2015. The latter will enable the government to boost growth through further public spending and infrastructure improvements, since the ratio is well below the constitutional limit of 60 percent.

Businesses in Indonesia could benefit from these indicators but they must begin efficiently transforming in order to fully capture the growth and revenue opportunities presented. Why is this necessary in an upturn scenario?

Returning to business-as-usual may be risky, as competition improves efficiency and will use these gains in a downturn to put pressure on its competition. Additionally, as a result of products and services commoditization and general price competition, constant price pressures are set to continue. This means cost optimization programs, among others, will need to be made to improve efficiency and margins.

There is no shortage of exemplifying the need for transformations aimed at cost optimization and efficiency boosting. In 2015, a major oil company in Indonesia was forced to lay off 25 percent of its workforce, given the downturn in oil prices. Though some experts believe 2017 will revive oil prices, others believe it will not return to its previous glory due to promises of an emerging renewable energy sector.

Additionally, an electronics manufacturer was recently forced to sell its television division – an industry known for razor thin margins – reducing that company's manpower by the hundreds.

There are other signs that companies need restructuring. The average ratio of nonperforming loans rose to 1.93 percent in 2015 from 1.57 percent in 2014 for the top four banks in Indonesia. For the years 2013-2015, nonperforming loan volumes spiked 16 percent, highlighting the declining quality of balance sheets.

Determining Baselines, Strong Core

There are three major challenges for corporate Indonesia; an uncertainty in the overall economic outlook; increased business challenges, such as compensation costs and price pressures; and the possibility of disruption in business models by game changing technologies.

To weather sudden downturns or disruptions, companies must develop a strong core by transforming themselves.

But before that begins, analysis must be conducted on how to restructure a company not only financially, but operationally as well. Companies should not limit restructuring to only savings in cost categories, but should also challenge existing processes and operating models to augment the bottom line, because the impact will be significantly larger.

Through exhaustive external benchmarking and internal analyses, appropriate baselines can be determined to serve as goalposts.

While focusing on cost efficiency, companies must not be shackled by the dollars and cents cost, but must gun for a mix of revenue improvements and cost efficiency. An excessive focus on cost savings must be prevented to ensure that the company will not eliminate capacities and capabilities it needs to properly function with customers and suppliers.

In ideal situations, ambitious management teams should obtain an external opinion to get not only an uncompromisingly objective view, but also to avert sanctuary thinking and to benefit from external best practices.

Only after an exhaustive analysis has been conducted can a new program be designed and implemented. This may even entail adopting potential disruption thrusts for specific business divisions, such as digitization and Industry 4.0.

The earlier, the better.

While some believe that transformations should be mainly applied to large cap companies, mid-cap companies too would benefit from augmented efficiency since disruption can also occur from startups and other small-mid-cap companies of just a few thousand employees.

Above all, transformation to boost efficiency should not be left to the last minute.

Often, efficiency programs quickly turn self-sustainable because quick wins in cost and headcount capacity can fund the effort of continuing the program. Companies should also initiate their transformation program early, since phases of analysis, benchmarking and transformation design will take time to study and create. Transformation programs can take anywhere from several months to a year or more, especially if there are multiple phases.

By strengthening their core and becoming leaner, companies that are facing pressure can rise from the current low profitability and liquidity state to realize and achieve their fullest potential.

Martin Tonko is president director at Roland Berger Indonesia, a strategy consulting firm.

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