Roaring Out of Recession (Harvard Business Review)

The Joy of Finance curates and summarizes the best finance and operations content for busy folks. You can sign-up for the newsletter here.

Recession-Proofing Your Organization

Recession graphic

Harvard Business Review studied 4,700 public companies across three global recessions to discover what led to a company’s success following a recession…or its failure. The time period spanned three years prior to, throughout, and three years after the recession.

Recessions studied:

  1. The 1980 crisis (80-82)
  2. The 1990 slow down (90-91)
  3. The 2000 bust (00-02)

Quick Findings:

  • 17% of businesses didn’t survive.
  • 80% of the survivors hadn’t regained pre-recession growth rates within three years of the recession’s end.
  • Only 9% exceeded pre-recession growth rates.
  • Firms that focus most on cutting costs or approach a recession to aggressively didn’t do well.

HBR breaks down the the different recession approaches by company type:

Prevention-Focused

Prevention-focused companies concentrate most heavily on expense reduction as a way to mitigate risk. There are several problems with this approach.

  1. Innovation stalls and the company is not ready to emerge from the recession primed for growth.
  2. Operational efficiency is relegated to the back burner. Companies prioritize employee cuts, which are not targeted, and each function of the business is reduced to an arbitrary number. To top it off, customer service drops significantly.
  3. Members of the organization begin to focus on keeping their jobs, as opposed to succeeding at them.

 Promotion-Focused

Leaders of promotion-focused companies take a more aggressive approach, charging into a recession with a head full of steam and armed with the belief that they will capitalize on a sparsely-populated market space. Rather than cut costs, these leaders often increase them to deliver innovation. The problem is, they lose sight of customer needs and only admit to the grim realities of a recession after it’s too late.

 Pragmatic/Progressive

The right combination of caution and aggression emerges as the clear favorite to experiencing a post-recession boom. Specifically, progressive enterprises focus on cutting costs by improving operational efficiency first and reducing the labor force second.

Investment is also selective. Progressive enterprises will invest heavily in research and development so that they can develop their existing assets and raise their appeal to newer markets.

This is often easier said than done, and many companies have found it challenging to achieve this balance. When in the throes of a recession, it may be difficult to fully think through decisions, especially when they must be made quickly. That is why having a game plan in place before a recession hits can help your business successfully navigate rough waters.

 

Read the full article “Roaring out of Recession” here.