I am a BCG senior partner writing on the future of leadership and work.
Now that I have your attention, let me make it clear that neither I, nor anyone else on this planet, knows for sure when the next recession will occur, how deep or long-lasting it will be, or whether it will be global in scope or more locally or regionally contained.
We do know for sure that both the U.S. and Chinese economies have slowed down. We also know that Italy’s, Germany’s and the United Kingdom’s, according to many analysts, already “are either in recession or … on the verge of it,” as Business Insider reported last month.
Many companies, including such U.S. biggies as General Motors and Ford, already are digging in, according to news reports.
Writing in Harvard Business Review earlier this year, Martin Reeves, Kevin Whitaker, and Christian Ketels—colleagues of mine at BCG’s Henderson Institute, our internal think tank—warned that “too many companies will prepare too little, too late, and too defensively.”
I was especially interested in the third of the three items they listed: preparing too defensively; what did they mean by that?
So I asked Reeves. What they were getting at, he told me, is the fact that even during recessions some companies manage to improve both their relative and absolute performance. While others are happy to make it through … these companies grow, coming out of the downturn healthier and wealthier than when the downturn began.
Here’s how the HBR article summarizes their research: “We studied all U.S. public companies with greater than $50 million in annual sales during the last four downturns—including not only recessions but also periods of substantially slowing growth [defined as periods of cumulative decline in annual GDP growth of at least 1 percentage point over two years]—and found that nearly three-quarters of those companies experienced a decline in revenue growth. However, 14% of companies were able to not only accelerate growth but also increase profitability.”
When I spoke with Reeves on the phone the other day we discussed this paradox: “the unusual idea,” as he put it, “that at a time when you might least expect growth—when most other companies are actually declining—might be the best time to grow.”
What do the paradoxical growth companies do that’s different than the others, I asked?
For one, he told me, they don’t focus exclusively on belt-tightening. While they’re not oblivious to the fact that it might be a good idea to economize during a downturn, companies seeking advantage in adversity realize that “cost reduction is only a small part of the story,” he said. While leaders of these companies certainly consider the threat a downturn may pose, they also look for the potential upside.
A second characteristic is that they act early, before there’s “definitive proof” of a downturn. “At the very time their competitors aren’t,” they act strategically. There are a number of colorful analogies for such behavior: buying real estate when there’s blood on the street, for example. I like to think of it as being smart when others are fearful.
A good example of this is American Express, which during the financial crisis focused on broadening its customer base— reinventing itself as a bank holding company—rather than just belt-tightening. But it was more than that. As AmEx responded to the crisis it also refocused on the consumer. How can they better serve them? What do they need?
Reviewing the actions AmEx CEO Kenneth Chenault took during the crisis, The New York Times concluded they should be viewed “pretty favorably,” noting that customer deposits as a result more than tripled, from $12 billion in 2008 to $37 billion at the end of 2012, when the Times story was written.
A third characteristic of companies that grow during downturns is that they map out multiple scenarios, keep their options open, and also strategically invest in those products or services that might “help their best customers when they need the help the most”—in other words, help get them through the economic storm.
As Reeves told me, “Most people assume that the main thing going on during a downturn is the downturn, when, in fact, the downturn is only one of the important things taking place.”
That has never been truer than today. Executives need to keep this in mind, because some of these other things—such as the continuing changes in demographics, technology, workforce preparedness and expectations, and policy and politics—will be happening concurrently. You can’t simply cut your way out of such a tangle.
Keeping this in mind, Reeves, co-author of the popular business book, “Your Strategy Needs a Strategy,” said the most important thing is to “be strategic at the very time your competitors aren’t.” Excellent advice, not only for the next downturn, but for good times as well.
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I’m a Boston-based senior partner and managing director at the Boston Consulting Group (BCG) and previously served as the global leader of BCG’s