Legitimate incentives

However, there is a danger reformist zeal may go too far in some areas; for example, incentivisation, with UK politicians and media castigating the "bonus culture" that developed in financial services.

Understandably, financial collapse or near collapse at several institutions draws attention to remuneration structures that appear to foster short-term risk-taking by executives. However, a bonus culture of itself is not destructive, reckless or unethical.

Judicious use of incentives is not a threat to the long-term sustainability of a business. Often, it is a key mechanism for ensuring sustainability. In the current environment we must be careful not to stigmatise the use of executive incentives. Similarly, we should not demonise the risk-taker.

The entrepreneur who seeks profit in new areas is by definition a risk-taker. If there were no risk, there would be no opportunity and no profit. We should celebrate those wealth-generating individuals who take and manage business risk.

These issues are particularly pertinent in a country like South Africa where incentivisation has a key role in retaining the country’s entrepreneurs create a disproportionate number of jobs. Bonus payments have a place and entrepreneurship is essential to economic growth. We should not lose sight of these facts of business life.

Right and wrong

Issues such as these illustrate how much soul-searching will be involved as the new normal is established. Values as fundamental as our understanding of right and wrong come into play when regulators and organisations decide how a business defines and encourages excellence.

I have no doubt that regulation and governance requirements will be reviewed and new rules will be introduced, but let us keep a sense of proportion.

Private enterprise

Huge wealth has been created over the last two generations. Poverty remains, but living standards, nutrition and life expectancy have gone up in nation after nation – driven higher by trade, industry and entrepreneurship. Substantial wealth was destroyed in the recent market meltdown, but most of the gains made these last 60 years remain in place.

The most reliable engine of growth remains private enterprise. The object of new regulation should be to make this engine more efficient. We should avoid any new requirements that simply throw grit in the machinery.

In South Africa, private enterprise can and will play a significant role in working with government to uplift the living standards of the underprivileged. For its part, government has the responsibility of ensuring that training and education equip our people for employment.

Sustainability through adaptability

Regulation may change; business must change. Business is confronted every year with a new disruptive influence demanding a new business approach. In 2008, energy became a major constraint, manifested through electricity shortages in South Africa and rocketing oil prices. The pace of events is increasing. The abruptness of the liquidity squeeze and the scale of some organisational casualties are a warning that companies have to respond faster to change.

Business can’t wait for events; business must anticipate them. Organisations have to become more flexible and adaptable. Thinking sustainably means thinking long term. Entrepreneurs are better prepared for the new future than most. An entrepreneur is a future-spotter, and Bidvest is already looking ahead to the next sources of business disruption; in particular, the converging social and environmental demands for responsible business behaviour.

Bidvest companies have many opportunities to position their services at the forefront of sustainable development, building sustainable characteristics into branding and corporate reputation while benefiting from increased efficiencies and lower costs.

This approach reinforces the philosophy we defined in last year’s report: way of thinking. It inspires and enables a new generation of entrepreneurs to create business value that integrates evolving financial, social and environmental needs and expectations.

New structures

Restructuring for a new future has already begun. The guiding principle is that structures have to be aligned with the new base of business following the stress-testing of the recession.

Staffing levels also have to be appropriate to activity levels. Thankfully, this is being achieved without engaging in major retrenchment programmes.

Never waste a crisis

The adage “never waste a crisis” has been used to describe the proactive response of the US administration to the global challenge. It could equally describe the Bidvest approach. We are refitting our businesses for a new future and positioning ourselves for renewed growth.

Investment was kept to prudent levels, but we did not impose a freeze on new spending. Several businesses were engaged in strategic expansion just as the downturn struck. Bidvest strategy is often anti-cyclical, and we have not been afraid to continue these programmes. In total, the Group invested R2 241 million.

Trimming costs

One lesson of the last 12 months is that making a business fit for the future requires lean cost structures.

Bidvest has never been hierarchical. Executives stay close to their teams, customers and markets. Though there are no unnecessary layers within our business, we cannot afford to relax expense control. Working capital management must be stringent.

In a world in which credit lines to customers can be severed in short order, we have to ensure that our businesses remain strongly cash-generative and that debtors are well controlled.

Restructuring is not an ad hoc response to inventory issues or credit risk. For us, developing lean, flexible structures capable of taking the business in entirely new directions. We cannot afford to be rigid in our approach to our markets. Nimble, unblinkered organisations have the best chance of success in a changing world.

Changing fast

One of the defining characteristics of the new business era will almost certainly be volatility.

In the last year we witnessed an international move from high food inflation to food deflation with very little pause in between.

Deflation after inflation also occurred in other sectors – a warning that inventory management has never been more crucial.

We also saw a swing from a weakening to a strengthening rand; a trend that impacted the translation of foreign earnings in the second half of the year.

We switched from growth to recession. In the first quarter of the 2009 calendar year, South Africa’s by an annualised 6,4%, a major shock to the system.

Setting targets

The abruptness and magnitude of changes to the economic climate complicate the task of setting targets. In future, benchmarking may call for greater flexibility and the traditional tool of annual budgets may require modification.

At the moment, divisions create various targets using the best available information. This objective assessment is influenced by macro-economic forecasts, industry trends and other data. It may be helpful to supplement this objective budget with an intuitive budget that draws on the feelings and instincts of the divisional head and his team.

Parallel formal and informal budget-setting processes may be needed.

We have seen in the last 12 months that professional forecasters such as economists frequently misread changing trends. Mobilising the best guess and the gut-feel of the top Bidvest managers in their respective industries would be at least as helpful and would create healthy debate about what can be achieved.

Moving targets

Our focus has tended to be on the long term and budgets are traditionally for a 12-month period. Increasingly, however, opportunities and threats present themselves with surprising suddenness. Speed of response is important; so is the ability to measure the effectiveness of actions taken in the short term.

A system of monthly targeting within the framework of annual budgets seems to be indicated. This would create rolling monthly targets that would help us measure just how nimble and opportunistic our operations have become.

Engaging risk

The catalogue of business casualties this last year is testimony to increasing business risk. Does this mean business – specifically Bidvest – should become totally risk averse?

Risk and opportunity are two ends of the same stick. In a time of change, there is a strategic need to explore new opportunities and directions, despite the attendant risks.

Bidvest has a history of prudence. In the past, this has not prevented us seeking growth when others seek safety. In future, Bidvest may find itself engaging greater risk; not in a cavalier fashion, but in a manner calculated to achieve advantage in the face of adverse conditions.