LONDON -
- PA Consulting Group launches new book The Zombie Economy: Leadership in times of uncertainty
We have avoided an economic apocalypse and a form of recovery is imminent but we must prepare ourselves to live in a world dominated by powerful forces of half-dead, half-alive zombies. These zombies will ensure business does not return to any kind of acceptable normality for at least several years, according to PA Consulting Group’s book ‘The Zombie Economy: Leadership in times of uncertainty’.
It will be at least 2011 before we return to pre-crisis performance levels and growth rates will remain subdued for longer still. In this zombie world business leaders have at least two years before they can start thinking about business as usual — and even then it will not be the same business as usual.
Why a zombie economy?
The zombie economy is made up of not quite dead banks, governments, consumers and companies staggering along, struggling to function in the new world:
- Zombie banks whose balance sheets are too weak to support sufficient lending. Banks may be declaring huge profits but their recovery is partly an illusion. Losses of US$3.4 trillion in the financial system have still not fully unfolded. - Zombie governments whose finances are too stretched to sustain expansionary policies. Highly expensive government intervention means debt to GDP rates are set to rise to levels not seen outside war-time. - Zombie consumers whose wealth is too depleted to allow them to consume. Because of the state of the economy in general, and bank lending in particular, US consumers are spending 5% less of their disposable income — they will be unable to act as the world’s ‘consumer of last resort’. - Zombie companies the combined impact of zombie banks, governments and consumers is exerting a powerful negative force on companies. They are saddled with debt that they cannot comfortably service, impeding growth and investment. UK Corporate insolvencies are now at record rates.
The impact of a zombie world on any recovery
The impact of zombies on the economy cannot be overstated. The zombies are set to create a vicious circle that prevents any rapid return to business as usual, and a recovery that feels more like a recession. Mark Thomas, author of the book and head of the strategy and marketing practice at PA, says:
“The simultaneous existence of the zombies is something that has not occurred before in the working lifetime of anyone in business today. Business leaders are struggling to assess the impact of the zombies on their organisation.
“Companies are battening-down the hatches and waiting for recovery — but in the zombie reality this is a high risk strategy. We must prepare ourselves to live in the zombie world and companies need to take radical action. Businesses need to take certain actions now to survive and thrive in the zombie economy.”
The winners and losers
The zombie economy will divide the business world into winners and losers. The winners are highly liquid and well-positioned to meet the needs of the zombie economy. They are more likely to benefit from competitor distress and they are unlikely to go under. While there will be winners and losers within each sector, some sectors overall have shown signs of resilience in the zombie world. Healthcare has so far been most resilient, though even here, the future will bring greater challenges.
In contrast the losers are companies who are not liquid or whose business model is unsuited to the zombie world. They could go under, and if they survive, are likely to struggle. Manufacturing, Banking and Construction are all sectors which face significant short term challenges and where further consolidation is likely.
How business leaders can overcome the threats from the zombie economy
There are four steps to thriving in the zombie world:
- secure liquidity - create a portfolio of potentially winning businesses - remodel each business to ensure that it can perform strongly in the new world - subject to the success of the first three steps, take bold action to stake out a massively enhanced market position in the new world.
To request a copy of ‘The Zombie Economy: Leadership in times of uncertainty’ please visit www.paconsulting.com
Notes to editors
About Living with Zombies: Leadership in times of uncertainty
Living with Zombies: Leadership in times of uncertainty is written by Mark Thomas, head of strategy and marketing at PA Consulting Group, with contributions from PA sector and function specialists. The book is based on a detailed analysis of the 2009 half-year results for over 600 US and UK companies, using data drawn from the Bloomberg database.
Who are the zombies?
We use the term ‘zombie’ because these individuals and institutions do not cease to exist, but they do become unable to perform the functions that we expect of them in supporting growth of the economy: zombie banks cannot lend as we need; zombie governments whose finances are stretched, zombie consumers cannot consume and zombie companies who are saddled with debt that they cannot comfortably service.
The book identifies winners and losers and the likely impact on industry restructuring, sector by sector. This analysis is based on two critical factors — the liquidity factor and intrinsic value. The liquidity factor is a compound index made up of a weighted average of: Acid-test ratio; Dividend cover; Gearing; Interest cover; with the greatest weight on interest cover. Intrinsic value is estimated using a simplified (and slightly conservative) form of the discounted cash-flow model assuming: long-run ROE equal to the average of the last 5 years’ ROE for each company; long-run growth rate in line with economic growth at 3 per cent nominal; cost of equity at 10 per cent.
About PA Consulting Group
PA Consulting Group is a leading management and IT consulting and technology firm. Independent and employee-owned, we operate globally in more than 30 countries and transform the performance of major organisations in both the private and public sectors.
From initial idea generation and strategy development through to detailed implementation, we deliver significant and tangible results. We have outstanding technology development capability; a unique breadth of skills from strategy to performance improvement, from HR to IT; and strong expertise in communications, media and entertainment, defence, energy, financial services, government and public services, healthcare, international development, manufacturing, transportation and logistics, and water.
Source: PA Consulting Group
Laura Hamblin, +44-207-333-6191, laura.hamblin at paconsulting.com, or Adam Adams, +44-20-7312-4602, adam.adams at paconsulting.com, both of PA Consulting Group
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