We’re about a month into a nationwide lockdown now, and we’ve all learned a lot. We’re still learning about the virus, and no one’s really sure when we’ll get back to “normal.” As we’ve discussed here, “normal” may even look a bit different than it did before we ever heard of COVID-19. Although any loss of life due to the virus is tragic, the world won’t be ending and we will eventually get to the other side of this.
So we turn our attention to the other major issue in all of this: our economy. To be honest, it’s a little depressing to turn on the news lately, only to be bombarded with repeated mentions of “recession,” “unemployment” and the like. Not that we can deny the economic impact of something this big. But it’s not exactly uplifting.
After the economic meltdown of 2008, I came across a great article on Harvard Business Review. The article is now over 10 years old, but well worth the read. The authors conducted a study of numerous successful businesses and how they managed to weather the Great Recession (the results were published in 2010). They had several great strategic points about managing a business through an economic downturn, and I think several of his points are applicable now as well.
Don’t be Too Defensive: Let’s admit it. Our first instinct (and especially that of the finance types) is to cut, cut, cut when a market changes. Cash becomes king, and that’s not 100 percent wrong. However, this article points out that, having studied numerous strategies coming out of the Great Recession, they found that few “prevention-focused corporations do well after a recession.”
“A focus solely on cost cutting causes several problems. One, executives and employees start approaching every decision through a loss-minimizing lens. A siege mentality leads the organization to aim low and keep both innovation and cost cutting incremental. Two, instead of learning to operate more efficiently, the organization tries to do more of the same with less. That often results in lower quality and therefore a drop in customer satisfaction. Three, cost-cutting decisions become centralized: The finance department makes across-the-board cuts, paying little attention to initiatives that may be the nuclei of post-recession growth. Four, pessimism permeates the organization. Centralization, strict controls, and the constant threat of more cuts build a feeling of disempowerment. The focus becomes survival—both personal and organizational.”
Roaring Out of Recession, Harvard Business Review (Ranjay Gulati, Nitin Nohria and Franz Wohlgezogen): March, 2010.
Operational Efficiency: This was basically an argument against simply cutting heads when things went south. Although staff reductions do make some sense in a climate like this, the authors argue that the businesses they studied which reexamined their operational costs and worked to improve efficiency managed to keep their costs low when the market turned again, allowing them to increase profitability more rapidly than their competitors:
“Companies that rely solely on cutting the workforce have only an 11% probability of achieving breakaway performance after a downturn. There may be several reasons for this. In our experience, morale is usually better at companies that stress operational efficiency. Employees at these companies appreciate top management’s commitment to them, and they are more creative in reducing costs as a result. They don’t spend their time worrying about job security—as do people at companies that rely on deep staff cuts. And although layoffs may reduce costs quickly, they make recovery more difficult. Companies run the risk of scaling up too late, especially if hiring is more difficult than they anticipated. People are loath to work for organizations that reduce head count in difficult times. Moreover, as these companies rehire, costs shoot up.”
Roaring Out of Recession, Harvard Business Review (Ranjay Gulati, Nitin Nohria and Franz Wohlgezogen): March, 2010
The article further suggested that companies prudently (not haphazardly) increase (rather than blindly cutting) R&D and marketing, which obviously doesn’t bear immediate dividends in a down market. However, this approach “adds substantially to sales and profits afterward.” Similarly, investment in new and existing businesses can make sense as well.
If you have a moment, take a look at the article. It’s a great reminder that there will be another upturn, and that we have to think beyond the moment towards future success. Until then, hang in there!
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Until Next Week,