Article - Who Survives the Looming Economic Depression? What You Need to Read
READ: 10 mins
AUTHOR: Robert Craven
In this article I am using ‘researched’ articles and publications to understand what has happened in the past. An attempt to separate fact, opinion and guesswork. I am fully aware that most management research is not as rigorous as one would like, but this seems to be the best we’ve got and it gives us a good starting point for trying to assess what happened in the past and what may happen now (May 2020).
Roaring Out of Recession
Ranjay Gulati, Nitin Nohria, Franz Wohlgezogen, Harvard Business Review, 2010
https://hbr.org/2010/03/roaring-out-of-recession
“Our findings are stark and startling. Seventeen percent of the companies in our study didn’t survive a recession: They went bankrupt, were acquired, or became private.
The survivors were painfully slow to recover from the battering. About 80% of them had not yet regained their pre-recession growth rates for sales and profits three years after a recession; in fact, 40% of them hadn’t even returned to their absolute pre-recession sales and profits levels by the end of that time period.
Only a small number of companies - approximately 9% of our sample - flourished after a slowdown, doing better on key financial parameters than they had before it and outperforming rivals in their industry by at least 10% in terms of sales and profits growth.
These post-recession winners aren’t the usual suspects. Firms that cut costs faster and deeper than rivals don’t necessarily flourish. They have the lowest probability - 21% - of pulling ahead of the competition when times get better, according to our study. Businesses that boldly invest more than their rivals during a recession don’t always fare well either. They enjoy only a 26% chance of becoming leaders after a downturn. And companies that were growth leaders coming into a recession often can’t retain their momentum; about 85% are toppled during bad times.”
Approaches to managing during a recession:
“Prevention-focused companies, which make primarily defensive moves and are more concerned than their rivals with avoiding losses and minimizing downside risks.
Promotion-focused companies, which invest more in offensive moves that provide upside benefits than their peers do.
Pragmatic companies, which combine defensive and offensive moves.
Progressive companies, which deploy the optimal combination of defense and offense.
Few progressive business leaders have a master plan when they enter a recession. They encourage their organizations to discover what works and combine those findings in a portfolio of initiatives that improve efficiency along with market and asset development. This agility, even as leaders hold the course toward long-term growth and profitability, serves organizations well during a recession. An analysis of the stock market performance of companies that use progressive strategies reveals that they can also ride the momentum after a recession is over. Their approach doesn’t just combat a downturn; it can lay the foundation for continued success once the downturn ends.”
How to Survive a Recession and Thrive Afterward
Walter Frick, Harvard Business Review, 2019
https://hbr.org/2019/05/how-to-survive-a-recession-and-thrive-afterward
“Companies that have already made an investment in digital technology, analytics, and agile business practices may be better able to understand the threat they face and respond more quickly.
Recessions can create wide and long-standing performance gaps between companies. Research has found that digital technology can do the same. Companies that have neglected digital transformation may find that the next recession makes those gaps insurmountable.”
Hit 'em where they ain't: What history can teach us about marketing during COVID-19
Alex Langshur, Cardinal Path, 2020
https://www.linkedin.com/pulse/hit-em-where-aint-what-history-can-teach-us-marketing-alex-langshur/
Companies who used recessions to strategically invest, manage their workforces with an eye to the future, and unlock their balance sheets far outperformed those that did not. On average these companies had a 17% compound annual growth rate (CAGR) during the 2008-09 recession compared to just 0% for those that cut beyond fat into the muscle, shed key people and their knowledge, hoarded cash and did not prudently invest for the future (Bain, 2019)
Beyond the Downturn: Recession Strategies to Take the Lead
The next crop of leaders are acting now to restructure costs and go on offense.
Tom Holland and Jeff Katzin, Bain & Co, 2019
https://www.bain.com/insights/beyond-the-downturn-recession-strategies-to-take-the-lead/
“A recession will likely land soon, and structural trends will influence a new cycle, notably the accelerating technology revolution in many industries and the end of decades of low interest rates.
Preparing now enables companies to gain market share and accelerate: Winners pulled away from losers during the last recession and widened the profit and market-cap gap during the subsequent expansion, Bain’s analysis of nearly 3,900 companies worldwide shows.
The winners excelled in four areas: early cost restructuring, financial discipline, aggressive commercial plays and proactive M&A.
A four-point recession-readiness plan based on a company’s strategic and financial strength can help leadership teams prepare now.
Bubbles pop, downturns stop
Martin Hirt, Kevin Laczkowski, and Mihir Mysore, McKinsey & Co, 2019
The Lessons
With perfect hindsight, this is what you would have done in January??
Restructure costs before the downturn, without cutting muscle
Put the financial house in order
Play offense by reinvesting selectively for commercial growth
Pursue a proactive M&A pipeline, identify M&A targets early.
Start with the end in mind.
Stress test the P&L and balance sheet…
Manage costs, now.