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Pulling Your Company out of Recession
- By Chris Uba
- Published March 1st, 2010
- Business School
- Unrated
IN 2007, the world witnessed distortions that sparked recession that can be compared only to the one in the 1930s. The problem, which originated from the real-estate sector ravaged the global economy as organizations, ordinarily regarded as invincible, were quickly harried out of existence. It was only the strong-hearted CEOs that survived the recession.
In their article titled “Roaring Out of Recession”, Ranjay Gulati, Nitin Nohria,professors at Harvard Business School and Franz Wohlgezogen, a doctoral student at Northwestern University’s Kellogg School of Management, give an inkling on how companies can wriggle out of recession. Here are their views:
“Great leaders know that how they fight a war often decides whether they will win the peace. Yet as CEOs continue to combat the myriad challenges thrown up by the Great Recession of 2007, they are increasingly unsure about what strategic approaches to deploy, “ declared the authors. “Many 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.”
According to gulati et al, “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. Their priority, when they get a moment’s respite, must be to remake their organizations to cope with the “new normal.” But CEOs, like generals in the heat of battle, are so busy tackling short-term priorities that the future is obscured by the fog of war.”
Unfortunately, little research has been done on strategies that can help companies survive a recession, get ahead during a slow-growth recovery, and be ready to win when good times return. Folksy wisdom abounds (how many times have you read that Procter & Gamble, Chevy, and Camel flourished during the Great Depression because they advertised heavily?), but empirical studies are few.
That’s why we decided to mount a yearlong project to analyze strategy selection and corporate performance during the past three global recessions: the 1980 crisis (which lasted from 1980 to 1982), the 1990 slowdown (1990 to 1991), and the 2000 bust (2000 to 2002). We studied 4,700 public companies, breaking down the data into three periods: the three years before a recession, the three years after, and the recession years themselves.
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 per cent of them had not yet regained their prerecession growth rates for sales and profits three years after a recession; in fact, 40 per cent of them hadn’t even returned to their absolute prerecession sales and profits levels by the end of that time period. Only a small number of companies—approximately 9 per cent 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 per cent 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 per cent —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 per cent 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 per cent are toppled during bad times.
Just who are the post recession winners? What strategies do they deploy? Can other corporations emulate them? 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 per cent —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. Their multipronged strategy, which we will discuss in the following pages, is the best antidote to a recession.
Companies, not surprisingly, don’t all follow the same strategies during a recession. That could be because of differences in executives’ cognitive orientation during a crisis. According to Tory Higgins, a Columbia University psychologist, human beings are hedonistic—we avoid pain and seek pleasure—but they differ in how they try to achieve those aims. There are two basic modes of self-regulation. Some people are driven most by goals, such as achievement, advancement, and growth.
These promotion-focused individuals are motivated by ideals and aspirations that provide pleasure if realized and disappointment if not. Other people are prevention-focused—concerned mainly with safety, security, and responsibility. They strive to avoid bad outcomes, experiencing relief if they succeed and pain if they fail. Situations have a potent influence on cognitive orientation: A recession, for example, can trigger a response that overrides a person’s usual orientation.
Further Reading
Harvard Business Review March, 2010
In their article titled “Roaring Out of Recession”, Ranjay Gulati, Nitin Nohria,professors at Harvard Business School and Franz Wohlgezogen, a doctoral student at Northwestern University’s Kellogg School of Management, give an inkling on how companies can wriggle out of recession. Here are their views:
“Great leaders know that how they fight a war often decides whether they will win the peace. Yet as CEOs continue to combat the myriad challenges thrown up by the Great Recession of 2007, they are increasingly unsure about what strategic approaches to deploy, “ declared the authors. “Many 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.”
According to gulati et al, “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. Their priority, when they get a moment’s respite, must be to remake their organizations to cope with the “new normal.” But CEOs, like generals in the heat of battle, are so busy tackling short-term priorities that the future is obscured by the fog of war.”
Unfortunately, little research has been done on strategies that can help companies survive a recession, get ahead during a slow-growth recovery, and be ready to win when good times return. Folksy wisdom abounds (how many times have you read that Procter & Gamble, Chevy, and Camel flourished during the Great Depression because they advertised heavily?), but empirical studies are few.
That’s why we decided to mount a yearlong project to analyze strategy selection and corporate performance during the past three global recessions: the 1980 crisis (which lasted from 1980 to 1982), the 1990 slowdown (1990 to 1991), and the 2000 bust (2000 to 2002). We studied 4,700 public companies, breaking down the data into three periods: the three years before a recession, the three years after, and the recession years themselves.
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 per cent of them had not yet regained their prerecession growth rates for sales and profits three years after a recession; in fact, 40 per cent of them hadn’t even returned to their absolute prerecession sales and profits levels by the end of that time period. Only a small number of companies—approximately 9 per cent 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 per cent 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 per cent —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 per cent 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 per cent are toppled during bad times.
Just who are the post recession winners? What strategies do they deploy? Can other corporations emulate them? 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 per cent —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. Their multipronged strategy, which we will discuss in the following pages, is the best antidote to a recession.
Companies, not surprisingly, don’t all follow the same strategies during a recession. That could be because of differences in executives’ cognitive orientation during a crisis. According to Tory Higgins, a Columbia University psychologist, human beings are hedonistic—we avoid pain and seek pleasure—but they differ in how they try to achieve those aims. There are two basic modes of self-regulation. Some people are driven most by goals, such as achievement, advancement, and growth.
These promotion-focused individuals are motivated by ideals and aspirations that provide pleasure if realized and disappointment if not. Other people are prevention-focused—concerned mainly with safety, security, and responsibility. They strive to avoid bad outcomes, experiencing relief if they succeed and pain if they fail. Situations have a potent influence on cognitive orientation: A recession, for example, can trigger a response that overrides a person’s usual orientation.
Further Reading
Harvard Business Review March, 2010
