Managing your business during a tough economy is not always easy, especially when making the change from an expanding economy. As a recession takes hold and sales plummet, companies that have flourished beneath bold, offense-based growth strategies are forced to make sharp directional changes to keep the doors open. As the COVID-19 pandemic continues to threaten the global economy, companies in every sector are looking for navigation strategies that won’t just prevent them from shuttering, but will also allow for rapid re-growth when the proverbial skies start to clear.
Research regarding companies that went through the 2008 Great Recession can give us insights into what it takes to survive a recession and thrive afterwards. Here are some lessons researchers learned that recession and other economic downturns about what companies can do during a recession to keep the doors open and to be poised to have strong growth when the economy rebounds.
1. Play Both Offense & Defense
The first step in developing an effective recession plan is splitting the strategy in two: deft defense and a nimble offense. At least that is the strategy suggested by a group of professors at with the Harvard Business School, who shared their research in a 2010 article for HBR.org. Their study analyzed nearly 5,000 public companies in the period before, during and after the Great Recession. What they found was startling: In the three years after the recession, nearly 80 percent of companies surveyed had still not recovered pre-recession growth and profit rates. According to the research, the companies that had a higher chance of fully recovering within that three-year period were the ones that struck a balance between defensive strategies and offensive strategies. By increasing operational efficiency while maintaining investments in marketing and R&D, these companies greatly reduced that amount of time it took to snap back into profitability.
2. Invest in Your Marketing Techniques
No matter what sort of business you are in, maintaining cash flow during extended periods of reduced spending is likely going to require some creative thinking. In a paper published in the Journal of Business & Industrial Marketing, a group of researchers detailed their study of how companies’ marketing strategies during the Great Recession affected performance and survival. Their findings show that companies that increased their marketing engagement were more likely to survive the recession. In times like these, boosting marketing engagement with key client groups could be essential to maintaining cash flow and potentially expanding your customer base.
3. Decentralize Your Company’s Decision-Making
When the going gets tough, owners, managers and CEOs have a tendency to want to grip the reigns even tighter. After all, who better to lead the organization through the recession than someone who understands the macro-picture of what the company is going through? While strong leadership is crucial for times like these, exerting greater control over your company’s decision-making processes may not be the most reliable way to get to the other side. That’s according to the research presented in “Turbulence, Firm Decentralization and Growth in Bad Times.” In this study, researchers from Harvard, MIT, Standard and more found evidence that manufacturing firms that delegated more decision-making power to local plant managers were significantly out-performing more centralized firms in the follow up to the Great Recession. Even smaller businesses can take advantage of this theory of decentralization by allowing urgent and critical decisions to be made by the manager or employee that is most familiar with the issue.
4. Consider Layoffs Carefully
According a McKinsey survey of U.S. companies during 2008-2011, 65 percent resorted to layoffs. However, research by Ranjay Gulati and his colleagues, Roaring out of Recession, found that companies that emerged from the 2008 Recession in the strongest shape relied less on layoffs to cut costs and leaned more on operational improvements. Firms that cut costs faster and deeper have the lowest probability of pulling ahead of competition when times get better. By deep cost cutting and divesting themselves of key personnel, they often find that they have lost important customers and that their company lacks important skill sets due to employee layoffs. They come out of the recession unprepared to take advantage of the economic upturn and it can take years to catch up.
5. Invest in Technology
While it is tempting to avoid big purchases during a recession, investing in technology that increases operational efficiencies, improves sales team productivity and solidifies customer relationships will ensure that when the recession lifts, your company recovers quickly. Investing in ERPs, CRMs and other productivity apps can help you to survive the recession and recover quickly with minimal loss of customers and staff. Technology costs are greatly reduced during a recession and can be recouped by increases in operational efficiencies.
6. Innovate, Disrupt, Outmaneuver
With uncertain times comes no small amount of chaos, and with chaos can come opportunity. Leaders who have built an organizational strategy to conserve their cash flow, protect baseline revenue and support marketing initiatives have set the stage for an even more dramatic power play.
Consider the 2007-2009 financial crisis, during which some tech startups were experiencing financial conditions that would not have been possible even in an expanding economy. The combination of a poor housing and labor markets came together to create the sharing economy necessary for companies such as Uber, Square, Airbnb and more to take off. It was an unexpected boom that one researcher referred to as the golden age of tech startups.
You don’t have to be a startup to disrupt your industry, however. Tough economic times have a way of filtering out bad ideas and poor decision-making paradigms, creating effective leaders in the process.
While the temptation in a recession is to dramatically cut costs, including reducing staff and cutting marketing costs, research has shown that companies that take a more proactive approach survive and thrive. By increasing efficiencies, while also maintaining or increasing marketing and investing in technology, not only are companies more likely to survive the recession but also are more likely to return to or exceed pre-recession growth and profitability.
Executive Director | Globalfund Limited
Margaret Wong is the Executive Director of Globalfund Limited, a trusted source of capital for small, medium-sized and large businesses. For over 20 years, Globalfund Limited has specialized in providing financing for real estate, equipment, oil and gas, agriculture, software & technology across industries.