Financial Times

Creating shareholder value in times of uncrtainty

Whether it is in Sri Lanka or in the world at large, one factor that all firms have to deal with is the issue of uncertainty. Frequent elections, terrorism, war and even assassinations have become a global norm.

This means that instead of complaining about it, firms may have to develop their competencies to survive and be successful in such a setting. In the 1980s and 1990s, Sri Lanka went through very challenging times by way of political uncertainty, economic turbulence and uprisings.

However, during this period, many stable organisations such as the Commercial Bank, Hayleys, MAS Holdings and Ceylinco have developed themselves and reached admirable standards. In order to understand how this can be done, we will try to look into what the environment of a business is and how firms can manage uncertainty successfully.

What is the business environment?

The business environment, which has to be faced by organisations, comprises of what is known as the general forces as well as the competitive forces. The general forces are political, economic, social, cultural and technological factors whereas the competitive forces comprises of new entrants, suppliers, existing rivalry in the market, substitute products and customer reactions. All these forces are dynamic and today they keep changing fast, thus creating tremendous challenges and uncertainties for businesses. No one in the US or anywhere else in the world expected the September 11 attack or the chain of events, which took place subsequently.

How can uncertainties be managed?

Gone are the days when firms could be managed in a stable and simple business environment.

Therefore management will have to undertake certain proactive activities in this direction. I believe that the following approaches would help an organisation to successfully manage business uncertainty.

* Reduce Planning Horizons

* Develop Scenarios

* Minimise the level of debt

* Diversify into many products or markets

Reducing Planning

Horizons

Nowadays, no company can plan for a year and implement the plan without experiencing any hiccups. The tool for annual planning has traditionally been the budget.

However, during recent times, many successful companies globally have been seen moving towards what is known as the concept of rolling budgets. This means that a budget is prepared for the year and is then updated quarterly. At any given time there would be an updated budget for the whole year.

Scenario Planning

This is a technique that has been employed by multinational organisations such as Shell for many years. A scenario would be a detailed forecast for the future, which would be based on certain assumptions.

Multiple scenarios are created based on different but likely situations, which may arise in the future, and plans are developed accordingly. In times of political uncertainty or an election this may prove to be an ideal tool for organisations.

Minimising the level of debt

When a company has a high level of debt in its capital structure, it becomes what is known as 'highly geared'. Highly geared companies tend to face a high level of business risk since a fall in their earnings can lead to a situation where it may be difficult to service debt.

In times of uncertainty, earnings can dip due to sudden changes in the environment. A manageable level of gearing would help the firm to weather the storm.

Diversifying into many products and markets

Since uncertainty may be related to a product line or a geographical area, it may be prudent to diversify into many products, business lines or even cover as many geographical areas as possible.

Hayleys has diversified its product and service portfolio, Ceylinco Consolidated is currently in many lines of businesses and MAS Holdings not only operates in many countries today, but has even relocated its production bases.

Message for the investor

Uncertainty is there to stay and it is not just a local or a temporary phenomenon. If you are investing and you want to increase your wealth, invest in companies that can weather uncertainty and make your wealth grow.
This is the only way forward in an investment climate where tomorrow may never be a certainty.

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