With the whole world entering choppy waters, now is a good time to remember the words of Franklin D. Roosevelt: “A smooth sea never made a skilled sailor.” The truth of that statement is underlined by the fact that during every period of economic turmoil, there is a silver lining. A Bain & Company report, published in 2019, analyzed the financial performance of more than 5,000 companies over a ten-year period, including the global financial crisis, and has revealed what that silver lining is. Some 10% of the companies included in the study saw their EBIT growing at an average rate of 17% during the economic recession and go on to outperform their competition by an average of 13% in the years following.
While there is no recipe to follow to be part of this winning 10%, the same study revealed three guidelines that were followed by these companies during and immediately after the recession:
The first guideline seems obvious. Commenting on how to respond to a recession, Harvard Business School’s Rebecca Henderson puts it simply: “Rule one is: Don’t crash the company.” This can mean managing working capital in the same way as a start-up, which has to survive from one day to the next.
For the second guideline, the key word is “smart”. All companies will have to restructure. But this does not necessarily mean laying off people or slashing the R&D budget. Instead, organizations should gain insight into which of their business activities are producing limited value and reduce the spending on those. Also, they should reduce the complexity and volume of work. Implementing these changes can also enable businesses to bring an updated offering to consumers. And that updated offering will include a combination of the following:
The most surprising guideline is the third one, playing in the offensive. The Bain & Company report noted that the winners of the recession period invested substantially in R&D instead of dialing back, and focused their sales efforts on top priorities. They also maintained their marketing spend, while competitors cut back. And they focused on improving the customer experience, making it simpler and more personalized through investments in digital capabilities.
As a result, these organizations re-invented their value proposition and continuously updated it throughout the entire period in response to the ongoing evolution of their clients’ needs – and their continuously evolving understanding of those needs.
And here we see the importance of being agile. Because having to update the value proposition from practically one month to the next requires the entire organization to move in sync, at a fast pace.
In order to achieve this, organizations will have to:
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