Companies that react proactively to downturn can emerge even stronger

30 January 2019 5 min. read
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With the US and global economy poised to slow down in 2019, the research unit of strategy firm Boston Consulting Group – the BCG Henderson Institute – has released some tips to help organizations better weather the upcoming downturn.

Earlier this month, the IMF and UN downgraded their outlook for global growth in 2019. Stagnating stock markets and the oil price collapse between October and December have been linked to investor concerns over future global growth. In fall of last year, analysts were already predicting that the US would hit a mild recession at the back end of 2019 as it nears the end of its growth period in the business cycle.

Most signs point to the fact that some sort of recession is bound to arrive soon after a decade of growth. There’s no such thing as unlimited and uninterrupted economic growth, and the good times have to end sometime. Companies shouldn’t, however, stare blankly into the approaching recessionary wave.

In a recent survey from BCG Henderson Institute (BHI), the firm found that the average US company had revenue declines of 1% annually during the downturn vs 8% growth in the three prior years. According to the firm, typical reactions in past recessions have been defensive, delayed, and often insufficient. Actions are often reactive, waiting for the problem to hit before addressing it.

The stakes are high in downturns

Downturns can present huge opportunities for companies willing to take action. Competitive volatility increases – removing and promoting 50% more companies into and out of the Fortune 100 – while mergers and acquisitions generally become cheaper. According to BHI’s research, 14% of companies increased their sales growth rate and EBIT margin during the last four downturns – though 44% saw the opposite.

According to the report – based on a survey of 5,000 US companies across the last five downturns – preparing early, and being active and proactive, can yield the best outcomes for firms in trying economic times.

BHI cautions that firms need to prepare for the next downturn rather than past ones, as each one is unique. The current scenario is different than 2008 for a number of reasons; for one, it projects to be a much less severe downturn. Corporate profits are strong and cash reserves are historically high, though rewards are being filtered to smaller number of super successful firms. BHI believes this opens the avenue for more offensive moves, and wise investments in the right opportunities.

Long term perspective and outperformance

Technology has also altered the landscape, increasing potential risks and rewards. “Companies will need to continue pursuing their long-term digital agenda to keep up with the accelerating pace of technology,” notes the report.

The political and social landscape also appears to be less stable. Political gridlock, low interest rates, and high public debt leave less wiggle room for response. Increased scrutiny from social media also means that firms have to present social and economic value to the public, according to the report.

BHI also says that firms need to plan for a wide range of scenarios, stress-testing different projections to find the biggest risks across varied simulations. “The true range of possible outcomes is often wider than you may think,” cautions the firm.

The report further recommends acting early; according to the research, out-performers tend to anticipate impacts and make first moves. And research on corporate transformations shows that the biggest factor in the success of such programs in how early they were initiated.

Growth drives outperformance in downturns

Adopting a long-term competitive outlook is also important, rather than narrowly reacting to short term pain. Using natural algorithm processing algorithms, BHI analyzed company strategy statements and found that long-term focus was predictive of long-run growth in the aggregate. Even during the 2007-2009 recession, companies with long-term orientations achieved higher annual growth.

And rather than only pursuing cuts and efficiencies, the report finds merit in investing in ‘growth engines.’ In the last two downturns, revenue growth was the largest driver of successful companies’ performance, accounting for almost 50% of total shareholder return.

“To successfully grow over the long term, companies need to invest in R&D and other innovative capacities, and maintain a balanced ‘portfolio of bets’ across different timescales,” the report notes. “A downturn should not undermine the capacity for long term growth.”

A downturn can be a good time to kick into large-scale change. Apple launched the iPod during a recession in 2001, and continued to invest in R&D and innovation – launching iTunes and new iPod models in 2003 and 2004 which led to an era of super growth.

Opportunistic M&A strategy is also another tool to be used. The report expects cheaper buying opportunities for companies with the will and the cash to follow through. Most available targets will include poorer-performing companies in need of turnaround; BHI’s research suggests that the most successful turnaround deals involve companies with similar cultures in the same sector, as well rapidly initiated turnaround plans and aggressive synergy targets.

“The next downturn will test many companies, but it will greatly advantage the few who are able to adopt a strategic approach,” the BHI report concludes. “By maintaining a long-term strategic perspective, investing selectively, and pursuing transformative change, leaders can help their companies come out from the next downturn competitively stronger than they entered it.”