How Entrepreneurs Can Win During A Recession
The COVID-19 pandemic ended a record 11-year bull run of the U.S. stock market. This, coupled with an oil price crash instigated by Saudi Arabia and Russia, has all the signs of an imminent global recession. Depending on who you trust with your forecasts, most experts are predicting a global contraction that can last anywhere between 6 months up to 2 years.
The word ‘recession’ strikes fear in the hearts of startups and established businesses alike—and for good reason. Long-running studies from dozens of countries indicate that global recessions drive a doubling in bankruptcy and unemployment rates, as well as a sharp decrease in the number of new businesses formed. On the other hand, new evidence is now showing that—over the longer run—recessions do not impact the eventual success of a business. In a study by the Kauffman foundation, 8,464 U.S. companies were analysed against a backdrop of nine recessions, and found that their propensity to do an initial public offering was not impacted by economic contractions. In fact, powerhouse tech and non-tech firms such as Apple, Microsoft, Morgan Stanley, Walt Disney and Krispy Kreme can trace their origins back to various recessions.
As part of my consulting practice, I work closely with entrepreneurs, CEOs, and PE and VC boards over a wide range of corporate strategy and organizational change topics. These days, their number one concern is about making the right strategic calls now so as to better navigate the upcoming recession and come out of the other end poised for growth. To ensure that there was enough scientific rigour in my feedback to them, I conducted extensive research literature review, analysed dozens of companies that bounced back successfully from the 2008 financial crisis, and interviewed several entrepreneurs on how they are adapting to these changing times successfully.
Here are the four insights that stood out the most:
1. One strategy does not fit all, especially for smaller firms
Given the current news cycle, it is easy to imagine that a recession hits all businesses equally, resulting in similar levels of underperformance. Studies show that this assumption could not be further from the truth. Some businesses do suffer from a sales downturn thanks to a recession, while others end up with a sharp increase in sales. Furthermore, the popular doctrine of small businesses being especially vulnerable to recessions is open for debate as well. What small businesses lack in resources and cash, they more than make up for in terms of speed and flexibility. We can be sure of one thing: Irrespective of size, your company’s ability to adapt quickly is your biggest defence against a recession.
Therefore, make sure you are fully aware of the forces that your business will be exposed to during this time and then pick your battles strategically. You can do so by tracking the health of your biggest customers and their changing needs, investigating the stability and relevance of your existing supplier base as well as deepening your understanding of your company’s competitive advantage in this new world order. Work with an independent sounding board—say, an advisor or a mentor—who can analyse and co-create your new strategy with you. The last thing you want to do is to make big decisions with a lens of either excessive pessimism or optimism without checks and balances for either in place.
2. Aim for transformational jumps in productivity—not just cutting costs
Recessions are usually triggers for large-scale layoffs and cost cutting, irrespective of sectors and company sizes. In fact, as of now, the US is tracking towards historic unemployment levels in the face of the COVID-19 lockdown. Ironically, in research done on recessions by HBS, it becomes quite clear that following a single-minded, "cost cut only" strategy is a recipe for disaster. This is because such an approach assumes that talent, technology, and opportunity would be easily available for a company once the recession is over. This is usually never the case, and a company that only follows a cost-cutting strategy will struggle to regain capabilities and capacity when the economy returns to normal. That's why performance never bounces back to pre-recession levels.
It is much better to gear up your organization for a sharp jump in productivity during this lull period. So how do you begin? Start off with the customer. Which of your current customer-facing operations can be simplified or digitized to deliver products and services faster, cheaper, and better? Can you simplify propositions and sunset underperforming product lines? Can you invest in technology, equipment or training that will improve performance reasonably quickly? Such a strategy will not only lower your cost structure, but will help you leapfrog your competition thanks to better-quality products and services. During this process, you will need to let go of some employees who you no longer need. However, these number are likely to be lower than what you would have lost if you were just cost cutting.
3. Be strategic when discount shopping for assets
Companies, buildings, equipment, and land—all of this become cheaper to acquire during a recession. However, just because an asset is cheap does not mean you should buy it. For example, retail stores losing sales to ecommerce companies should not go on a shopping spree to buy more low-cost store locations—even if the prices appear to be a steal. Such purchases will become a drain on cash and managerial focus when the economy bounces back, creating a drag on your company’s performance. Instead, such retailers could use this time and resources to invest in upgrading their technology stack and digital talent. In the process, they'll accelerate their shift towards an ecommerce-centric business model.
4. Selectively increase R&D and marketing spend
As with the point above, doubling down on all pre-recession R&D and marketing spend is not a good idea. However, if done selectively, increased spends in these areas are incredible drivers for growth. When it comes to R&D, increase spend on projects that help you double down on your relevant competitive advantage in the new world order. For example, if you are a furniture producer and your customers have become both fashion- and price-sensitive thanks to the recession, now would be a good time to invest your R&D budget in to exploring new material types and production equipment that can help deliver lower priced, but fashionably made pieces of furniture. On the other hand, doubling down on R&D regarding premium materials would not be such a good idea.
The same holds true for marketing spend. If it is not relevant to solving customer problems from the lens of the economic crises, do not put marketing dollars behind it. If your spend is solving customer problems, double down quickly for market share gain. A good example is Hyundai’s Genesis, which became a runaway success during the financial crises thanks to a clever marketing campaign and a sharp positioning towards ‘accessible luxury’—something the other car manufacturers simply could not follow at that time. Hyundai won the prestigious North American Car of the year award in 2009 and gained record market share and increased shipments in the face of an otherwise shrinking automotive market.
The best time to change is now
Recessions are a tough time for most businesses and many companies will fold during this period. Recessions are, however, also an incredible time to drive change in your organization—for the better. We all have many things to improve on or many promising opportunities to explore, but we hadn't had the time to do so before. With the status quo effectively now over, we should use this time to take some creative risks and take our companies’ long-term performance up a notch.