Making The Most of a Recession
There’s no sugarcoating it. We’re suddenly in a recession triggered by a plunge in consumer spending due to voluntary and mandatory quarantines to limit the worldwide spread of COVID-19. The impact has spread across nearly all business sectors.
How quickly will the global economy bounce back? I’ll leave that to the experts and the guessers. I’ll focus instead on what business owners should be doing right now to come out even stronger on the other side.
The other day, I came across in my files what I consider a classic study, “Roaring Out of Recession,” from the March 2010 Harvard Business Review. It’s dated but timely as they say!
The first thing that struck me when I reread it is that it’s nearly impossible to predict the turning point in a recession as well as post-recession conditions. Two-plus years after the onset of the 2007 recession, here’s what we read in that article:
Many [CEOs] worry that the 27-month slowdown is far from over in the United States. Others feel that although a recovery may have begun, it could prove to be short-lived, and they would do well to brace for a double-dip recession. Almost all business leaders reluctantly admit that the current crisis also marks an inflection point: The world after it is unlikely to resemble the one before it.
No doubt most of these CEOs as well as the authors of the article, distinguished academic economists, were pleasantly surprised!
Recession winners and losers
Regardless, the bigger lessons in the article are much clearer. Yes, recessions pose huge challenges for most businesses. It’s a time for hard decisions. Many companies fail, others barely survive. But still others use the economic downturn as an opportunity to strategically and carefully retrench and make cautious pro-active moves so they come out stronger. Macro-economic cycles are hard to predict, but there are smart and strategic ways to act in the midst of them.
The article describes the results of a rigorous study of how companies responded to the prior three recessions at the time: 1980-1982, 1990-1991 and 2000-2002. In short, just 9% of the 4,700 companies in the study not only survived the recession but flourished during the recovery and beyond.
What made the difference? I encourage you to read the entire report, but here are the lessons at a very high level.
Loss-prevention and drastic cost-cutting alone aren’t the answer
Companies that were relatively high cost-cutters in the recent recessions had slower recoveries and were unlikely to ultimately outperform within their industry moving forward. Why?
- This approach creates a siege mentality. Innovation is quashed. Keeping your head down leaves the company frozen in time, and thawing out takes even more time.
- Trying to do more (or the same) with less inevitably affects quality.
Doubling down across the board isn’t the answer either
You have to admire the courage and moxie of a business owner who chooses to go all in and significantly expand or invest in new markets during a recession. Granted, it’s a good time to hire great people who may be available. You might even get a fire-sale price on a synergistic company that’s not able to weather the storm.
But as the study points out, there’s a difference between optimism for the future and denial about the present. Markets are shrinking. Customers are demanding value, not necessarily bells and whistles and upsells.
The right mix of short-term steps to drive long-term success
Okay, so far so good: Avoid the extremes. It should be no surprise that the right steps to take during a recession encompass a little bit of caution and a little bit of aggressiveness. But how much of each and what type?
The authors propose three conservative (“Prevention-Focused”) strategic moves a company might take during a downturn: Employee Reduction, Operational Efficiency and a combination of both. On the more aggressive side (referred to as “Promotion-Focused”), they suggest three other likely initiatives: Market Development, Asset Investment and a combination of the two.
The study plugs in the data from 4,700 companies to see how they acted in these six areas during recessionary periods and how they fared in the longer term beyond. It turns out that the best possible combination of these six approaches (i.e., the recession operating plan that’s most likely to trigger the best post-recession rebound) is:
- Implementing operational efficiencies (Prevention-Focused)
- Developing new markets (Promotion-Focused)
- Making prudent asset investments (Promotion-Focused)
The companies that had the courage to adopt this balanced, multi-pronged strategy in the worst of times enjoyed, on average, a 13% increase in sales and a 12% increase in earnings in the three years after the recession, generally outperforming others in their industries.
Let’s learn from the past! I hope this gives you a high-level idea of what you should do right now during this challenging time. The devil is in the details, though. Please contact me as soon as you can to discuss specifically what this strategy should look like within your company.
Now is the time to think about long-term success, not just survival!
Need help with this topic or leadership coaching? Contact Mission Critical Teams.
