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Diversification is Key to Success: Strategies for Firms in Financial Crisis

Firms around the world were tested during the financial crisis of 2008-09, and as Darwin said, "only the strong survived." But, today, years later, numerous financial obstacles are still challenging global business.

Robert Grosse, director for the Center for Global Business at George Mason University School of Business, and former Dean of the EGADE Business School at Monterrey Tec in Mexico, has used the crises of the past to help offer strategies for the future.

Robert GrosseGrosse says, "My research presents a conceptual basis for developing corporate strategy to respond to a financial crisis, and an empirical examination of strategic moves undertaken by a number of large Latin American (Mexican) firms during the crisis and subsequent recession."

The Global Financial Crisis of 2008-09 (beginning with the U.S. sub-prime mortgage crisis in 2007) hit Mexico the hardest of any country in Latin America. This was the fourth major crisis confronting Mexico in the past 30 years, offering a unique opportunity for research. As the only country in the world faced with this number of challenges in just three decades, an assumption was made by Grosse that firms in Mexico are more accustomed to critical situations and therefore, have developed strategies to better manage during a crisis than firms in other countries. In his research, Grosse studied six of the largest Mexican corporations (Alfa, Cemex, FAMSA, FEMSA, Proeza and Xignux) via interviews with key decision-makers, to see how each of them responded to the crisis.

Grosse's research focused on a firm's costs, revenues, and risks (CRR view). He says, "The CRR framework accounts for strategic responses ranging from changes in marketing strategies to changes in production and distribution strategies, as well as in risk management."

Overall, Grosse found that those firms that contained diversification of overseas operations and sales in multiple countries around the world (rather than solely in one market) helped mitigate the downturn. Following this same logic, Grosse also found that diversification into other industries also provided protection for firms. The firms that were diversified with sales in other Latin American countries did relatively well (for example, the bottling company, FEMSA). The firms that were diversified across sectors also tended to do better, such as business groups Carso and Salinas. The retail store company, FAMSA, found a very successful business in opening a retail banking division. The reasoning is that the reduction in demand pushes the firm on the "revenue" side to look for alternative sources of income or to consider moving into new markets. These strategies will not work in the short term (due to the time it takes to establish or acquire new customers), but rather are a medium- and long-term plan for success.

Grosse says, "Both sectoral diversification and cross-country diversification turned out to be significant contributors to explaining relative firm performance during the crisis."

In addition, Grosse found that the companies all followed the logical cost-cutting steps of reducing productions for products whose demand fell during the crisis, laying off some employees in the heaviest-hit businesses, and looking for lower-cost inputs, either by replacing imports with local supplies or finding lower-cost suppliers in general. Other innovation steps taken by some of these companies, included shifting production to lower-cost countries, setting up "floating crews" to work on a rotating basis in partially closed factories, changing packaging to less expensive options, finding more efficient shipping routes, and developing down-payment plans on purchases, allowing customers to pay over time as sales generated revenues.

Grosse said, "In addition, the firms listed on the Mexican stock exchange (112 firms) were examined to see if the strategies used by the interview sample also contribute to performance of the larger group of firms, which they do. In the sample of listed Mexican firms, both sectoral diversification and cross-country diversification turned out to be significant contributors to explaining relative firm performance during the crisis."

US companies certainly could benefit from these experiences, since just as the domestic market suffered in Mexico during the crisis; the domestic US market did as well. And US companies did better during the crisis when they were diversified into markets overseas, especially in Asia.

Professor Robert Grosse is Director of George Mason's Center for Global Business. The center is a part of the School of Business, focusing on academic research in global business and development of programs and conferences in all three areas of global business, innovation, and organizational transformation. Before joining George Mason University, Professor Grosse was the Director (Dean) of the EGADE Business School at Monterrey Tec in Mexico. Professor Grosse is a leading author on international business in Latin America. He holds a BA degree from Princeton University and a PhD from the University of North Carolina, both in international economics.

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