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BW Businessworld

"Focus On Your Core Strength"

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Grexit may have been averted for now, but the euro zone continues to be in chaos, and uncertainty rules everywhere — from Italy to Spain to the Netherlands to France. The US is still nursing wounds of the post-Lehman meltdown and continues to be in a low gear. Meanwhile, India saw its GDP growth fall to a nine-year low of 5.3 per cent in January-March 2012, and the rupee has been finding ever new lows. The financial sector moves from one bout of uncertainty to another. What should businesses do in such uncertain environments when crisis is almost business-as-usual? BW's Prasad Sangameshwaran spoke to Steve Almond, global chairman of audit at consulting major Deloitte Touche Tohmatsu. Excerpts:

How do companies cope with an uncertain business environment?
There are tall challenges. Crisis has become almost ‘business as usual'. A lot of our clients have been busy strengthening balance sheets, improving cash management, focusing on effectiveness, efficiencies and core competencies, being very clear in their investment priorities. They are quite resilient.

Unlike in the past, this time, there have not been too many corporate shocks. What started as the sub-prime mortgage crisis in the US became a contagion for the financial meltdown, which became a sovereign debt crisis. Now we have the euro zone crisis. The shocks have been at a macro level. Of course, we have seen some major financial services firms go out of business, but elsewhere there has been a reasonable degree of resilience.

Have businesses adapted rather well?
Not universally. It's harder for widespread, loosely-connected conglomerates, who were growth engines historically. The Western businesses that have access to growing consumerism in markets such as India or China or other high-growth economies have an advantage. Those businesses with core competencies in high-end engineering and more niche businesses or those with a competency in large infrastructure projects can also do well. Governments will increasingly invest in large infrastructure, as it creates jobs and a better business environment.

It's very tough on the high-street retail front. Even in the retail sector, those companies which have built a real engagement with customers beyond the price promise will survive and may even benefit as others exit.

Are the concerns any different among businesses in this environment?
Businesses need to be much more thoughtful about what their core competency is and be clear on where they focus their energies. That means a lot of divestment in non-critical businesses. They also need to focus more on the cost of production and sales, and a more efficient supply chain, etc. Those companies will get good returns rather than extravagant returns on capital.

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How long will the current bout of uncertainty last?
(Laughs) I can understand the view in India, because if you look at the euro zone crisis, the concern is what is the end game? People can speculate about that and there is impatience and frustration and loss of confidence. But it's more about the lack of clear and decisive political leadership. Businesses that we talk to are generally confident about their own business, but lack confidence in the environment they operate in. And in this environment of crisis as ‘business as usual', one little indicator is what happened when Standard & Poor's downgraded France and Austria. The markets barely moved. They are probably impatient about the lack of clear political leadership.

I cannot speculate on how long this uncertainty will last, but I can say 2012 will continue to be a very interesting year.

What makes you say that?
It's hard to imagine that the indecision can continue throughout 2012. Sooner or later, there will be definitive action and consequences. It has been a rocky ride so far. And we should not expect things to be comfortable again in Europe. We have to anticipate a low-growth environment for long. With many governments embracing austerity packages, many citizens in Europe will see no real rise in living standards for another five years. Actually, as the crisis is sustained, businesses adapt, governments adapt and hence people adapt.

What are the common concerns among your Indian clients?
Certainly, the continuing malaise in Europe is one, for big exporters. Also, there is a concern about the pace of change within the Indian business environment. I come from the UK. It has definitely provided benefits to the UK in terms of FDI, such that the biggest employer in the country's manufacturing sector is an Indian company, Tata. There is confidence and optimism in a lot of emerging global players based out of India.

Are your clients worried about the rupee's volatility?
Not especially. Currency volatility is just one aspect of the shock. Some economies have found ways to insulate themselves from currency shocks. It's easier for developed economies to manage currency. For an economy like India, which is better placed, the more diverse you get, the more you can achieve sustained stability through the economic cycle.

(This story was published in Businessworld Issue Dated 02-07-2012)