4 Tough Actions You Must Take in a Down Economy – plus 2 You Must Reject at All Costs

A version of this article originally published in March 2010 Issue of Harvard Business Review and curated here.

Most states are reopening and easing Coronavirus restrictions to various extents.

We trust that occurs only where suitable to stay protected and ensure a safer reopening so employees and employers can return to being productive and contributing to an economic rebound.

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Yet, with about 40 million out of work, businesses and workers have been hammered and it will take time to recoup losses.

There will likely be a phased recovery cycle.  It will not be like a miracle with the economy snapping back to normal. It will continue to require hard business choices along the way.

We have been discussing internally the best steps forward, studying what our peers are doing, and researching what was effective in past recessions.

There are some specific decisions you can take to improve the likelihood your organization will survive, hit the ground running and rebound strong when this pandemic eventually passes by.

In doing our homework, we came across an attention-grabbing study from Harvard Business Review that pretty much addresses the decisions to take now and shows effectively how to do it. Actual data, drawn from the study of 4,700 companies during recessions, highlights what business should be addressing now.

Harvard researchers were aware of the traditional “recession marketing advice,” but, they began a project to identify the strategies actual companies used in past recessions to come up with the most effective moves:

What is the best path forward for a business during and after a tough economy?

To answer that question, they embarked on a year-long project to analyze what different companies did during three global recessions, namely the major slowdowns that took place during these years:

  • 1980 to 1982
  • 1990 to 1991
  • 2000 to 2002.

NB: their research began prior to the 2008/2009 recession, hence why that recession isn’t included in their HBR article.  But, a more recent analysis by Bain and a third study by McKinsey using data from the 2008/2009 recession reinforced these earlier findings.

An overview of the Harvard Business Review article methodology was:

  • Harvard researchers studied 4,700 public companies
  • They analyzed their key financial metrics from 3 years before, during, and 3 years after the recessions they studied
  • They summarized their findings, and revealed strategies you can use effectively.

Caveat:  the research project studied companies listed in S & P Compustat database which may not directly relate to your business, but the advice is nonetheless instructive of what strategies are effective in this downturn.

You should be interested in this research, to see how other companies survived 4 major recessions, and what they did, so your business can incorporate their successful actions.

Here were the statistics:

  • 17% of the analyzed companies perished from the recession (closed, bankrupt, etc.)
  • 80% didn’t regain their pre-recession growth rates (sales and profits) even 3 years after the recession ended
  • Only 9% GREW after the recessions, with better numbers after than before
    • Those same 9% outgrew their competitors by 10% annually in sales AND profit growth after-recession

Only 423 companies effectively managed an economic slowdown — while 4,277 companies mismanaged the recessions and shrunk or went out of business.

Before sharing from the HBR article what that 9% did, it’s important to know what NOT to do, so your company doesn’t follow the path the 17% of those businesses did.

Here are 2 FAILS from the study that you should avoid during a business downturn:

  • Avoid narrow-minded cost-cutting, like deep layoffs as your only tool
  • Don’t just spend brashly (overly opportunistic culture leads to denying the emergency at hand ) thinking as long as they spend that sales and profit will continue to improve

Firms which took a sharp knife to expenses quicker and more extreme than their competitors performed poorly overall. They became too hung up on just surviving in the moment.  They had the lowest probability — 21% — of pulling ahead of the competition when the economy opened up and improved, their findings pointed out.

We’re not advocating that you don’t tighten finances right now. You must, of course.

But what you cut — and where you take those savings and where you then commit those resources — can mean the difference between surviving this recession and gaining market position.

OK, then what SHOULD you do? What do Harvard researchers recommend?  What works based on the winners and losers in the three recessions?

There are 4 strategies that should position your organization in the best situation possible for growth and to get ahead of competition coming out of this meltdown.

1. Combine BOTH Aggressive and Defensive Strategies in Response to Recession

So, what management strategies worked best for businesses facing recessions? This is a direct quote from evidence the researchers uncovered:

“According to our research, companies that master the delicate balance between cutting costs to survive today and investing to grow tomorrow do well after a recession. Within this group, a subset that deploys a specific combination of defensive and offensive moves has the highest probability—37%—of breaking away from the pack. These companies reduce costs selectively by focusing more on operational efficiency than their rivals do, even as they invest relatively comprehensively in the future by spending on marketing, R&D, and new assets.” HBR

The best approach – and this may sound obvious – is finding the right balance between using defensive and opportunistic strategies during this economic downturn.

And of course, you can also be TOO defensive or TOO aggressive — neither of which is ideal.

Example Too Aggressive Behavior

One example from the research is Hewlett-Packard (HP). At the height of the 2000 recession, HP’s then-CEO Carly Fiorina said this:

“In blackjack, you double down when you have an increasing probability of winning. We’re going to double down.”

HP unquestionably doubled down in 2000. They spent tons of money aggressively in many sorts of directions — they purchased Compaq, their computer rival, they expanded R&D spend, they entirely rebranded HP plus they spent seriously in developing new markets.

By 2004, HP’s EBITDA earnings (8.4%) fell behind IBM’s (16.8%) and Dell’s (9.3%). Why?  They were stretched too thin by responding too aggressively to a decline in the economy and too many directions for executives to successfully manage them.

Of course, other companies were too dependent solely on defensive strategies.

Example Too Defensive Behavior

Sony, for example, in the 2000 slowdown only slashed heavily — they cut their workforce by 11%, their R&D by 12% and their capital expenditures by 23%. This may have helped their profit margins when times were tough, but once the economy picked up steam, they were caught flat-footed.

In the years prior to the 2000 recession, Sony’s sales had been growing by an average of 11% per year for the three prior years.

But In the years after the recession — and after their cuts — average sales growth contracted to a meager 1%.  They were still under pressure for several years beyond this as well – falling behind competition because they had changed to a defensive-only strategy during recession. They surrendered their ability to continually innovate and develop new exciting products and lost their lead to competitors.

Balanced Strategies

What’s a company facing economic slowdown to do?  Find the right balance and you’ll be okay.  Piece of cake… Right?

Clearly businesses realize it isn’t that simple.

So, there are a few initiatives your organization can adopt to reinforce your businesses now for the anticipated economic uptick whether that happens in the 4th quarter of this year or more gradual over some longer timeframe.

The winners who used a delicate balance of operational efficiencies, market development and asset investment were termed by the researchers as progressive companies. They were the leaders in sales and profits growth post-recession.

2. Improve efficiency instead of only cost-cutting for up to a 10X better return

Some layoffs are fairly inevitable in a slump.

The Harvard Business Review research explained that cutting workforce during an economic downturn only delivered a small probability — just 11% — of getting ahead after the recession.

In addition:

Cutting workforce alone did not translate into better post-recession profits.

Firms that used layoffs less to cut costs and more to right-size and relied more on operational improvements came back from recession in the strongest shape.

The study showed that post-recession profits raised $600 million on average for the businesses that were excessively defensive-minded.

But for businesses that focused on efficiency vs. making cuts increased sales by an average of $6.6 billion — an improvement of 1,000%.

How to translate that into action…

Rather than cutting back to save capital right now, focus on creating new efficiencies to either save money, or even generate new reach for your business, whether now or in the future.

In terms of value, invest now in systems to streamline and organize processes, practices and procedures.  Then continue to enhance them to generate savings in your operations today and even more in future.

No matter your business situation at this low economic point, there is some area in your operation that can be made more efficient, likely by adding some economical technology to give you enhanced performance at lower cost in the future.

3. Invest in strategies and assets that can bring in new business

According to the Harvard researchers, during a recession, establishments that kept their eyes open to new trends and persisted in adapting their services to those shifting customer needs perform better in the years following the slowdown than companies that didn’t change, but simply repeated their same pre-recession strategies.

Example of Sales Growth Strategies

Let’s take Target, Inc.that  increased capital expenditures by 50% and focused on developing into emergent markets and increasing online virtual business.

As a consequence, sales grew by 40%, profits by 50% during a recession, and their profit margin even improved 1% in the years subsequent to the down economy.

Example of Not Tailoring Strategies to shifting Market Trends

However, TJX Companies (with brands TJ Maxx and Marshall’s) increased capital expenditures by nearly 100%, concentrated on expanding retail space because they could purchase empty or underutilized real estate inexpensively.

Although TJX enjoyed increased sales in the midst of a down economy, it didn’t really innovate – so it didn’t improve their bottom line.  In fact, bottom line growth was 9% lower in the years after a recession because they were saddled with assets that didn’t significantly boost returns.

Target and TJX are not like most companies, so how do we translate their experience to your strategy?

Essentially: Look Forward.

Continue engaging your customer base. Don’t stop communicating with them. They need you more than ever during the Covid-19 outbreak. They still want help through some of the challenges they’re going through.  They would like to know what ideas you have now and plans for support after this is over — but they likely need a virtual option for the time being to connect with you.

  • The current quarantine has some companies using online video software so if you can meet customers virtually
  • Take the time to learn Zoom or Facetime, etc.
  • Maybe this is a perfect time to freshen up your website
  • A simple eblast out to your customer list can generate sales
  • Don’t forget the power of social media as an engagement tool
  • Take this time to invest in R&D and expand into a new area that your clients ask for.
4. Find new business opportunities by discovering what your customers need right now

For the time being, this pandemic has changed businesses, but what you may not see is that not all industries have been shut down, and thus:

You may have expansion possibilities which could bear much fruit when the pandemic ends.

Companies are still expanding, which is exactly what the Harvard study suggests you do.

Businesses that survive recessions and flourish afterward invest in:

  • Market research of what their customers/prospects need
  • Development of relevant solutions for now
  • Development of new solutions for future
  • Marketing more than their competition

Don’t stop communicating with your customers and prospects.

Reach out by email, social media, and direct mail to let them know you are still operational. Find out what they need so you can innovate to supply solutions that could make your business better than your competition.

You HAVE to let your customers know that you’re open again for business and market your business however you can.  It’s the ONLY way your customers and prospects will know you’re open while some of your competitors may go down in this pandemic.

Plus, restrictions continue to lift, so you want to be ready and top of mind for your prospects.

If Flexicrew can assist you at all during this time, we’re still offering our free one-on-one workforce consultations  866.720.FLEX (3539).

Or you can  Email Us for more information.