Lessons Learned: How to Prepare for the Next Recession
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Lessons Learned: How to Prepare for the Next Recession

February 26, 2020
7:57 am

During previous recessions, many startups and corporate giants struggled to survive, while at the same time, other companies flourished. What accounts for these differences in outcomes? What did resilient companies do differently that enabled them to expand their market share?

The U.S. has experienced nearly 10 years of consistent economic expansion since the end of the Great Recession. Many are now wondering when the next recession will strike. Forward-looking CEOs and boards have already taken steps to prepare for a less robust economy, while some have yet to plan for a downturn. Bâton Global has extensive experience in equipping organizations to weather any market condition. What can your company do now to prepare for the next recession?

A Look Back at Previous Recessions  

Great American philosopher, George Santayana once said, "those who do not learn history are doomed to repeat it.” As business leaders begin to consider a recession strategy, research on company performance and business strategies during previous recessions can serve as a great starting point. The three academic studies discussed below provide valuable insight into the approaches that companies took that allowed them to emerge as post-recession winners.

1. Optimal balancing between defensive and offensive measures.

The first study [1] analyzed the corporate performance of 4,700 public companies during the recessions of 1981-82, 1990-91 and 2001 and compared their performance before, during, and after the recession. They found that companies who utilized an optimal combination of both defensive and offensive measures emerged from the recession as winners. These “progressive” companies reduced costs by focusing on improving operational efficiency (rather than reducing the number of employees) and at the same time invested in the future by spending money on marketing, R&D, and new assets. This approach laid the foundation for continued success once the downturn ended.

2. Laser-focus on both customer experience and social responsibility.

The second study [2] examined the performance of family-owned businesses to that of non-family businesses between 2000 and 2009. They discovered that family businesses clearly outperformed non-family companies during both the 2001 and 2008 recessions. Differences in marketing strategies were thought to account for the various outcomes. During the recession years, family-owned businesses continued with new product launches, maintained almost the same level of ad-spending, and maintained high levels of social responsibility (e.g. continued health and safety programs for employees and no workforce reductions). This is in contrast to non-family businesses who reduced new product launches, cut ad-spending and had lower levels of social responsibility. Thus, the proactive actions and  long-term perspective that family-businesses took during the recessions proved to be successful.

3. Long term mindset to ensure survival.

The third study [3] analyzed the performance of all U.S. public companies with greater than $50 million in annual sales during the last four business cycles. They found that there were common success factors among the 14% of companies who benefited competitively during and after a downturn. First, these companies acted early, proactively addressing the possibility of a downturn before the economic recession official began. In addition, these companies approached business activities with a long-term perspective in mind. Finally, they went beyond survival mode to focus on business growth and not just cost-cutting measures. Such actions enabled these companies to not only accelerate their growth but also increase their profitability.  

Preparing for Future Recessions

What can we learn from this research that can help your organization thrive during the next recession?

1. Building a recession proof strategy is essential, but integration of the strategy is key to success.

Companies must have a recession business strategy in place before a recession hits. Organizations should focus on understanding their core strengths and protect and build upon these capabilities. Stress testing against various economic and business scenarios can help build resilience, enabling companies to move beyond survival mode once the recession hits. The next critical steps involve smoothly integrating the strategy within the organization, ensuring alignment and buy-in among different stakeholders.

2. Put great customer experience in the center of strategy development.

Often times, organization tend to focus on the process and procedures within their products and services instead of the customer experience journey in buying their products and services. To future proof your organization, leverage Design Thinking and Agile methodologies to put your customer in the center of the strategy development. Given the rise of the UN SustainableDevelopment Goals trend, most customers demand that organizations do better to support the UN SDGs, allowing organizations to kill two birds with one stone through Design Thinking and Agile tools.

3. Invest for the long-term.

Companies must also adopt a long-term perspective, focusing on large-scale transformation rather than just short-term gains. Companies who emerged as winners during previous recessions cut costs by focusing on operational efficiencies while at the same time invested in marketing, R&D, and innovation efforts. Efficiency can be scaled through investment in technology. It is important to note that in today’s environment, investment in technology before and during a recession should not be understated. Companies that undergo digital innovation efforts are more transparent, flexible, efficient, and agile. Not only that, digital transformation can help leaders better understand the effects of a recession on business operations and where there is room for operational improvements. Technology will not stop progressing during a downturn and companies cannot afford to fall behind.

Conclusion

Moves made before and during the crisis are key to determining a company’s trajectory once the market turns. Nobody knows for certain when the next recession will occur but what is clear is that companies need to prepare now in order to come out on top.

Is your organization ready for the next recession?

References

  1. Gulati, R., Nohria, N., & Wohlgezogen, F. (2010). Roaring out of recession. Harvard Business Review, 88(3), 62-69.
  2. Kashmiri, S. & Mahajan, V. (2014, April 7). Why family businesses come roaring out of recessions. Harvard Business Review Digital Articles, 2–4.
  3. Reeves, M., Whitaker, K., & Ketels, C. (2019). Companies Need to Prepare for the Next Economic Downturn. Harvard Business Review Digital Articles, 2–6.

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February 26, 2020
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