Back in May 2019, Bain & Company predicted that a recession would likely hit in the coming months, especially with a current economic expansion that was more than 10 years old.
At the time, Bain saw signs of an overdue recession in over leverage in the corporate sector, geopolitical uncertainty involving U.S.-China trade and Brexit, and economic instability in some European countries.
As it turns out, a deep recession has finally arrived, but not for any of the reasons Bain expected. The culprit is the COVID-19coronavirus.
COVID-19 is having a monumental impact on the global economy as entire nations have shut down all but essential business and services, and the virus’ toll on populations and healthcare systems continues to rise.
This makes the current recession different from any other we’ve seen in recent history. And the potential for waves of outbreaks after an initial peak of infection and deaths makes things difficult to predict.
However, there’s one thing that remains the same in any recession. Smart businesses inevitably ask one key question: how can we survive a recession, take the lead, and potentially thrive afterward?
Fortunately, there are some key answers to this question, and they’re backed by research on the recessions of the past several decades. We’ve gathered some of the top recommendations from Bain, McKinsey, and HarvardBusiness School researchers, to unpack what we can learn from companies that succeeded during and after previous recessions.
Here’s a quick breakdown of what we found.
How Companies Typically Fare in a Recession
We all know that many businesses fare poorly during a recession, but one of the most startling indicators comes from a 2010 Harvard study that took a look at the recessions of 1980, 1990 and 2000. It found that 17% of 4,700 public companies fared particularly badly during these recessions. They went bankrupt, went private or were acquired.
However, researchers also discovered another striking statistic: 9% of companies in these recessions didn’t simply recover in the three years after the recession. They flourished and outperformed competitors by at least 10% in sales growth and profit.
Subsequent research by Bain, which focused on the 2009 GreatRecession, found that the top 10% of companies saw their earnings climb steadily throughout the recession and continue to climb afterward.
These companies grew by 14% over a 10-year period from 2007 to 2017, whereas the other 90% were flat over the same period. As Bain partner Jeff Katzin put it, “The difference between being one of those out-performers versus not was three times the enterprise value for the organization.” A third study by McKinsey found similar results.
According to Bain’s analysis of the Great Recession, the difference maker was preparation. Among the companies that stagnated in the aftermath of the Great Recession, “few made contingency plans or thought through alternative scenarios. When the downturn hit, they switched to survival mode, making deep cuts and reacting defensively.” Many end up limping through a recession, are slow to recover, and never catch up.
This brings us to the best ways to avoid that fate, and they start with preparation. Even though we’re already in the midst of a recession, it’s important to understand the right steps to take before a recession hits, to avoid being caught unprepared when the next one inevitably arrives.
Key Strategies to Survive and Thrive During and After a Recession
1. Prepare and Deleverage
Companies with high levels of debt are some of the most vulnerable during a recession. A 2017 study by Xavier Giroud of MIT’s Sloan School of Management and Holger Mueller of NYU’s Stern School of Business found that the vast majority of businesses that fail due to falling demand are highly leveraged. Quite simply, they have too much debt and run out of money.
“The more debt you have,” Mueller explains, “the more cash you need to make your interest and principal payment. It puts you at risk of defaulting.”
To keep up with payments, debt-laden companies are forced to cut costs more aggressively, which usually happens through layoffs. Deep cuts then impair their productivity and ability to fund new investments, and it limits their options with minimal capacity to act opportunistically.
Of course, many companies have debt going into a recession, and debt isn’t always such a negative risk. For example, research has shown that companies owned by private equity firms, which often require their portfolio companies to take on debt, fared better during the Great Recession than similarly leveraged non-PE-owned firms. PE-backed firms emerged in better shape because their owners were able to help them raise capital when they needed it.
Companies can also issue equity as another way to avoid the burden of debt obligations, so the problem of defaulting is less pronounced.
But Mueller suggests that, if a company thinks a recession is coming, it should consider deleveraging. And shedding assets is one way to do it without necessarily cutting core aspects of operations.
Recent McKinsey research supports this notion, pointing to the fact that firms that emerged in better shape from the Great Recession reduced their leverage more dramatically from 2007 to 2011 than less successful firms.
2. Focus on Decision Making
One interesting finding from recent 2017 research is that a company’s performance during and after a recession depends on who makes key decisions and not just the decisions it makes. Researchers found that companies that were decentralized performed better than those who were more centralized during the Great Recession.
“The recession introduced a lot of uncertainty and turbulence,” says Rafaella Sadun of Harvard Business School, who was part of the research team. Decentralized firms delegated decision making further down the hierarchy, and they were better able to adapt to changing conditions.
For example, they more aggressively adjusted their product offerings as a response to changes in demand. This points to the importance of taking a look at company structure to weigh the benefits and advantages of centralized vs. decentralized decision making.
3. Be Financially Disciplined
As Bain & Company has pointed out, virtually all companies must manage costs in a recession. But some did this during the GreatRecession by reducing spending on lower-value processes as well as reducing the volume and complexity of work.
According to Bain partners Tom Holland and Jeff Katzin, “They viewed cost management as a way to refuel the growth engine for the next stage in the business cycle.”
Bain’s findings reinforced that winners manage their balance sheet as strategically as they do the P&L. They tightly manage cash, working capital and capex to create “fuel” to invest through the cycle. Many companies also divested from non-core assets to further invest in their core business, or they explored new ownership models in typically capital-intensive industries.
However, it’s not easy in many companies to manage their finances with maximum strategic discipline. In Bain’s experience, “fewer than 15% of CFOs from companies in North America and Europe have regular visibility into the balance sheet of any individual unit or area below a division.” As a result, when management focuses disproportionately on the P&L, it’s more prone to make “ill-timed capital investments, retain unnecessary or unproductive fixed assets, or hold more working capital than necessary.
4. Avoid Layoffs
Certain layoffs are inevitable in a downturn, and the COVID-19 pandemic has forced some companies’ hands, given that all but essential services are being allowed to operate in many countries, states and jurisdictions. However, layoffs were negatively associated with post-recession business strength in Ranjay Gulati’s study of the Great Recession.
That’s because layoffs are often costly for companies in the long term. Hiring and training new employees to replace laid off workers is expensive, and it can hurt morale and damage productivity at a time when companies can ill afford it.
Companies that emerged from the Great Recession in the strongest position relied less on layoffs and instead focused more on operational improvements. For example, Honeywell, which laid off nearly 20% of its workforce during the 2000 recession and then struggled to recover, took a different approach in 2008. It furloughed employees for one to give weeks, providing unpaid or partially compensated leaves, depending on local laws and labor regulations.
This strategy saved an estimated 20,000 jobs, and the company emerged from the Great Recession in a much better position than in 2000, even though the 2008 downtown was much worse. Honeywell ended up coming out much further ahead in sales, net income and cash flow.
Companies can also use other strategies such as temporary furloughs, cutting back on hours, and using performance pay to help control labor costs without hurting productivity too much. But they should avoid across-the-board pay cuts or hiring freezes that fail to account for employee productivity because these can backfire, damage morale, and drive away your most productive employees.
5. Invest in Technology
Technology is one of the most effective defenses against a recession, as it provides ways to improve efficiency, cut costs, and increase agility at a time when they’re needed most. According to Bain’s Holland and Katzin, digital technologies provide new ways to move faster and simplify business processes with both step-change and continuous improvements.
“Recession winners can also deploy new technologies coupled with cost management tools, such as supply chain reinvention, complexity reduction and zero-based budgeting, to change the game on cost.”
Katy George, a senior partner at McKinsey, told Holland and Katzin that the first reason to prioritize digital transformation before or during a recession is to improve analytics that can help management better understand the business, how the recession is affecting it, and where there’s potential for operational improvements.
“Digital technologies create much more flexibility around product changes, volume changes, etc., as well as around movement of your supply chain around the world,” she says.
To help with the costs of technology adoption during a downturn, George says “companies should prioritize self-funding transformation projects that pay off quickly, such as automating tasks or adopting data-driven decision making.”
Additionally, a recession is a good time to invest in technologies because they often cost a company less in indirect terms, if not from lower demand that drives down technology prices.
According to Holland and Katzin, “When the economy is booming, a company has every incentive to produce as much as it can; if it diverts resources to invest in new technologies, it may be leaving money on the table. But when fewer people are willing to buy what you’re selling, operations need not be kept humming at maximum capacity, which frees up operating budget to fund IT initiatives without dampening sales. For that reason, adopting technology costs less, in a sense, during a recession.”
6. Make Aggressive Commercial Plays
Bain’s research on the Great Recession has also highlighted the advantages of going on offense and reinvesting selectively for commercial growth. In the Great Recession, the strongest companies used a few common tactics to boost commercial growth while many of their peers were in survival mode and waiting for the economy to turn around:
- Invested substantially in R&D instead of dialing back.
- Prioritized sales accounts and prospects based on their all-in profitability and potential lifetime value.
- Realigned distribution by rebalancing the mix of current and new locations, or next-generation formats.
- Maintained marketing while competitors cut back.
- Focused on improving the customer experience, making it simpler and personalized through digital capability investments.
As we’ve seen with the COVID-19 pandemic, some companies are in a far better position to capitalize on opportunities during such an unfortunate and trying time, and much of it has to do with whether they’re equipped to serve customers digitally and remotely.
Digital tools and channels offer more cost-effective and customer-focused opportunities to capitalize on recession opportunities and pursue growth. And next-generation data analytics can help identify profitable opportunities and customer segments, set pricing at different levels, and move quickly to adapt to recession conditions.
7. Be Smart with M&As
Well-positioned companies came out ahead after the last recession by using mergers and acquisitions to divest or invest and reshape their portfolio. They bought new product lines, customer segments or capabilities at lower prices, or they divested from businesses that didn’t fit the company’s strategic future.
A good example was Stanley’s acquisition or the larger Black& Decker in 2009. It timed the deal well, after Black & Decker saw a22% drop in revenue and a 41% drop in EBIT in 2009. Since 2010, the combined company has produced healthy revenue growth, thanks to Stanley doing its homework and moving fast.
Undoubtedly, the COVID-19 recession is already clearly identifying vulnerable industries, businesses, products and services that maybe primed for divestment. And it’s also highlighting many opportunities to invest in capabilities, segments and products whose strength and value have become much more apparent during the pandemic.
Whether you choose to invest or divest or do a bit of both, a smart and quick M&A strategy could turn an unfortunate recession into a major win in the long-term.
BONUS STRATEGY: Get the Best Possible Advice and Guidance
We hope these seven strategies have gotten you thinking about the best ways to protect your business and not only survive but possibly even thrive during the current recession or any future downturn.
But we’d be remiss if we didn’t mention the bigger macro-level strategy to help you make the right moves as quickly as possible.
At Graphite, we’re connecting leading companies and private equity and venture capital firms with experienced former Big 3 consultants who can provide timely strategic guidance during the COVID-19 recession.
Our network of independent consultants includes some of the top business minds from around the world, many of whom helped guide companies and clients successfully through the Great Recession. They include some of the best available experts in financial management, operational efficiency, technology, mergers and acquisitions, and much more.
Each is pre-vetted according to our stringent requirements ,with an average of over 12 years of proven experience, at least two years at a major firm such as Bain, McKinsey, BCG, Deloitte, or Accenture. And they’re also ready and equipped to help your business virtually and remotely, with no need to worry about travel or social distancing.
Visit us now at www.graphite.com to create an account or log in, and you can post a consulting project and start receiving applications and interviewing candidates within hours.