Strategies to win during an economic recession

31 October 2019 3 min. read
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Slowing economic growth and growing political tensions mean that the risk of a downturn is increasingly finding its way into boardroom agendas. While an economic dip is bad news for practically all businesses around, new research shows that those that succeed in putting in place a number of proven downturn strategies are much more successful in weathering the storm.

Predicting the onset of a recession is notoriously difficult, but signs hinting at a next economic downfall are on the rise. Major countries such as Germany, China and the United Kingdom have in recent months seen their economies slow down, governments and central banks are cooling their expansive policies, and over-leveraged corporates are being more selective in their major investments.

According to a growing group of experts, the next recession is overdue, and therefore not far off. For private sector businesses, the effects of a recession can be catastrophic, and to navigate the threat it is key that leaders are well-prepared. In a study by Bain & Company, researchers found that companies that deploy well-prepared strategies (significantly) outperform their peers financially, both during and post recession.

Winning companies accelerated profitability during and after the recession, while losers stalledThe authors analysed the financial performance of more than 5,000 companies over a ten year period including the global financial crisis, and found that ‘winners’ grew at a 17% compound annual growth rate (CAGR) during the downturn, compared with 0% among the losers. What’s more, the winners locked in gains to grow at an average 13% CAGR in the years after the downturn, while the losers stalled at 1%.

Analysing the differences between ‘winners’ and ‘losers', a number of strategies were found to adversely affect outcomes, including; post downturn heavy cost cutting, which often saw R&D reduced and quality talent lost; straying outside core business to find possible ways out of a core downturn; and a wait-and-see approach that wound up resulting in late action.

Top performers managed to restructure in a smart fashion. Bain & Company’s researchers: “All companies must manage costs in a recession. Yet some accomplished this by ratcheting down spending on lower-value processes and reducing the volume and complexity of work. They viewed cost management as a way to refuel the growth engine for the next stage in the business cycle.”

The winners locked in gains during the last downturn and reaped the rewardsSecond, they optimised their finances. Winners tightly managed cash, working capital and capital expenditures, all to create “fuel” to invest through the cycle. Many companies also divested non-core assets to further invest in the core business.

Third, they played on the offensive, but selectively. Coming out of the last recession, the strongest companies invested substantially in R&D instead of dialing back, and focused their sales efforts on top priorities. They also maintained marketing while competitors cut back. And they focused on improving the customer experience, making it more simple and personalised through investments in digital capabilities.

Jeff Katzin, a Partner in Bain & Company’s Customer Strategy & Marketing practice and a co-author of the report, said; “Once management has established its position, trying to react hastily in a crisis will not work. To raise the odds of success, it is more effective to map out a series of offensive moves for the next few years that aim to propel a stronger enterprise through and out of the downturn.”