Session Preview: Dan McQuiston: Roaring out of the Recession
How you act going into a recession can make all the difference in how well you come back out, if you do at all.
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WHEN AND WHERE:
University of Industrial Distribution faculty member Dr. Dan McQuiston will discuss tactics to help you manage future recessions. His sessions runs from 1:00 to 2:30 p.m. and again from 3:00 to 4:30 p.m. on Monday, Nov. 11.
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It’s 20XX and all the economic indicators are pointing to yet another recession. You remember the last recession and the impact it had on your company and the people who work with you and for you. You don’t want to go through that again. So what can you do?
Companies have survived recessions before. Some have even thrived. If there is one good thing about a recession, it’s that it forces you to rethink your business model and how you can position your company to not only survive but perhaps even thrive. You need a solid, well thought-out strategic plan to take advantage of the opportunities that may arise, to allocate what may be scarce resources and to reduce or eliminate operating costs that are draining those resources.
Some sobering statistics
So, how have other companies successfully come out of previous recessions? Professors Ranjay Gulati and Nitin Nohia of Harvard, along with one of their students, conducted a research project on actions that companies have taken in the past three recessions. They came up with some sobering statistics:
- 17 percent don’t survive.
- 80 percent had not regained their prerecession growth rates for sales and profits three years after a recession — 40 percent never did.
- Only 9 percent of companies actually came out of a recession better than before, doing better on sales and profits.
Those who came out the recession in better shape did not take many of the actions you would think they did. Those companies who cut costs faster and deeper than their rivals had the lowest probability — only about 21 percent — of pulling ahead of their competition when things got better. On the other end of the spectrum, those that boldly invested more than their rivals only had a 26 percent chance of becoming industry leaders after the recession. Fully 85 percent of industry leaders did not keep their momentum and lost position to competitors.
So, what did the ‘winners’ do?
There was, however, one group of companies — that small nine percent — who did better. Those were the companies that were able to master the delicate balance between cutting costs to survive in the short term with investing to grow in the long term. The companies that were able to employ the best combination of defensive and offensive moves had the highest probability — almost 40 percent — of breaking away from the pack after the recession was over.
How companies deal with recession
There are basically four classifications of how companies tend to deal with recession — prevention-focused, promotion-focused, pragmatic and progressive.
Prevention-focused — These companies make primarily defensive moves with their main concern being to avoid losses and minimize downside risks. The CEO’s of these companies swing into crisis mode and believe their sole responsibility is to prevent their company from getting badly hurt. They tend to quickly implement policies that lower head count, reduce operating expenses, shrink discretionary expenditures and preserve cash. They also postpone or cancel making any fresh investments in R&D, in developing new business and markets and purchasing capital equipment. These companies cut back on almost every item of cost and investment and reduce expenditures significantly more than their competition.
However, the long-term effects of taking such measures often end up being less than positive. Every decision is approached with a loss-minimizing perspective. Instead of learning how to operate more efficiently, the organization tries to do more of the same, but with fewer resources. Cost-cutting becomes centralized and a general sense of pessimism pervades the organization, which results in an organizational and personal focus on survival.
Promotion-focused — These companies are almost the exact opposite of prevention-focused companies. CEO’s of these companies invest in moves they feel will provide more upside benefits than their peers did. They will use the recession as a pretext to push through changes, get closer to their customers who they feel have been ignored by their competition, make strategic investments that they feel will have long-term payoffs, and act opportunistically to acquire talent, assets or other businesses that might be available.
What often happens here is that the company develops a sense of optimism that can lead their leadership to deny the gravity of a crisis for a long time. They can ignore warning signs and believe that as long as they act innovatively, sales and profits will continue to rise. They tend to foster a culture of constant product improvement rather than lowering prices, even though customers may wish the latter.
However, if product innovations do not resonate with customers, these organizations can run into trouble. They often do not realize they have to get a bigger piece of an ever-shrinking pie. Positive groupthink permeates, and naysayers can be marginalized. The result is that such companies often have bloated cost structures and are usually blindsided by poor financial results.
Pragmatic and progressive — finding the elusive right balance — There is a fine line between a pragmatic and progressive company. CEO’s of these companies realize that cost-cutting is necessary to survive a recession, but that wise and prudent investment is equally necessary to spur growth. Both must be managed at the same time if their companies are to emerge as post-recession leaders.
These companies typically have some combination of three defensive approaches — reducing the number of employees, improving operational efficiency, or both. They also use some combination of three offensive approaches — developing new markets, investing in new assets, or again, using both.
Pragmatic companies tend to have a bit more of a “trial and error” philosophy in trying to find the right combination of moves to employ. They also tend to rely a bit more on implementing defensive measures, especially reducing the number of employees rather than improving operational efficiency.
Defensive moves made by progressive companies, on the other hand, are very selective and well thought out. They cut costs mainly by improving operational efficiency rather than by slashing the number of employees relative to their peers. They carefully examine their operations and work to improve those actions that are necessary to achieving customer satisfaction and reduce or eliminate those that don’t.
Their offensive moves tend to be very comprehensive, but again very well thought out. They have an excellent sense of the competitive advantages they have in the marketplace, and are ruthlessly honest with themselves in evaluating when those competitive advantages have run their course.
Progressive firms develop new business opportunities by making greater investments than their rivals in the pursuit of new markets and the capital assets that support them. Taking these actions can often lead to meeting unmet customer needs, which in turn can allow them to create new competitive advantages.
The researchers at Harvard found that companies that focused simultaneously on increasing operational efficiency, enlarging their asset base and developing new markets on average showed the strongest performance in sales and EBITDA growth after a recession.
For example, during the 2000 recession, Target set about to relentlessly reduce costs, improve productivity and enhance the efficiency of their supply chain. They were an original founder of a global business-to-business electronic marketplace that facilitated trading between retailers and vendors.
- They consolidated Dayton’s and Hudson’s stores under the Marshall Field’s brand to increase operating efficiency and take advantage of a well-known brand name.
- They increased marketing and sales expenditures by 20 percent and capital expenditures by 50 percent over pre-recession levels.
- They increased the number of stores by roughly 10 percent and added almost 100 SuperTargets.
- They expanded into several new merchandise segments, ramped up investment in credit-card programs and grew their internet business.
Target also wisely decided to partner with Amazon.com to sell products and teamed up with such well-known designers as Michael Graves, Philippe Starck and Todd Oldham to enhance Target’s reputation for upscale yet reasonably-priced merchandise.
All of these moves solidified their position as an upscale discount retailer and helped the company grow sales by 40 percent and margins by 50 percent over the course of the recession. Target’s profit margin increased from nine percent to 10 percent after the recession.
Be prepared
Companies can never know when a recession will hit, how deep it will be or how long it will last. What they can do, however, is think carefully about what measures they will take when a recession does come and the best way to implement those measures.
By carefully balancing increasing operational efficiencies with prudent investment in assets and markets, companies can position themselves to emerge from a recession in just as good a position or perhaps even a stronger position than when the recession started.
It’s not a sure-fire guarantee, but companies that made such moves have been shown over time to perform better in post-recession years than those that did not. CS
Butler University marketing professor and University of Industrial Distribution faculty member Dr. Dan McQuiston takes a look at smart strategies that distributors can put in place now to insulate yours compnaies from the next recession, including cost cutting measures and building your competitive difference. contact him at dmcquist@butler.edu
CONTRACTOR SUPPLY MAGAZINE
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