3 minute read
Although we tend to think of this pandemic as an unprecedented time, the world has seen its fair share of hard times before. When we encounter these momentous challenges, an inflection point follows, and changes the world as we know it.
In 2010, an HBR article examined three major crises to understand what types of organizations flourish through recessions: The 1980 crisis, the 1990 slow down, and the 2000 bust. The research followed 4,700 public companies, and their data was broken into three periods: the three years before a recession, three years after, and the recession years themselves. Overall, 17 percent of companies didn’t survive a recession, and those who did had a painfully slow recovery with 80 percent of them not regaining their pre-recession growth rate in the three years after. Only 9 percent of the companies flourished after the slowdown, outperforming their peers by at least 10 percent in sales and profit growth.
How did this small group of organizations successfully make it through?
These organizations weren’t the ones exclusively focused on defensive tactics, cutting costs faster and deeper than others. For example, in 2000, Sony aggressively cut its workforce by 11 percent, R&D expenditures by 12 percent, and capital expenditures by 23 percent over a two year period. These cuts helped Sony increase its profit margin by 4 percent over three years, but its growth in sales tumbled 10 percent, from an average of 11 percent in the years before recession, to 1 percent in the years after.
They also weren’t promotion-focused companies that boldly invested more than their peers during the recession. For example, HP engaged in an ambitious restructuring during the 2000 recession, and acquired Compaq and increased its investment in R&D by 9 percent. These promotion tactics diluted the strategic focus of the organization, resulting in lowered earnings compared to peers post-recession.
The organizations that flourished after a recession were progressive companies that balanced both the reduction of costs and invested in the future. Overly focusing on defensive tactics can cause leadership to frame decisions as loss-minimization, which can have detrimental effects on quality and innovation. On the other hand, organizations who only focus on promotion tactics end up ignoring warning signals and fail to consider alternative realities. By balancing both tactics, organizations were able to set themselves up for success as the economy improved. Instead of cutting costs by laying employees off, these companies focused on increasing operational efficiency. In fact, only 23 percent of progressive companies cut staff compared to 56 percent of prevention-focused companies. They also focused on promotion tactics that were more comprehensive, like spending on targeted marketing, R&D, and new assets. For example, in the 2000 recession, Staples increased its workforce by 10 percent, despite closing down a few underperforming stores, to support new high-end products and services they introduced. This resulted in Staples doubling its sales post-recession from $7.1 billion in 1997 to $14.6 billion in 2003 (30 percent more profitable than its peer, Office Depot).
Despite being a decade old, these lessons are relevant today. Applying these findings to our current crisis, it will be the organizations who possess the agility to balance a focus on operational efficiency and investment in future opportunities that will not only weather the storm, but also flourish post-crisis.
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This work has been funded by Viewpoint Foundation.