Recession Lessons #1- Look Who is Growing!

Recessions are opportunities for firms to move up as well as slow down.  While most firms hunker down to weather the storm, it is quite common for market leadership to permanently change.  A significant amount of research confirms this. 

Some Bain Consulting analysis of the1991-92 recession found that twice as many laggards (bottom quartile firms) made a leap to market leaders (top quartile firms) in the recession versus non recessionary times.  Furthermore, a US McKinsey study discovered that one-third of banks and two-fifths of industrial firms fell out of the top quartile of their sectors during the 2001-2 recession.  Significantly, most of these shake-ups became permanent.  According to Bain, 70% of the companies that improved share and performance in the 1991-92 recession preserved those gains into the subsequent market expansion.  On the other hand, less than 30% of the companies that fell back in the recession were able to recoup their losses in better times.

The current recession is unlikely to buck history.  While it is too early to identify winners and losers, I can draw on my learnings from earlier recessions to identify several conditions that increase the propensity and potential success of major strategic moves:

  1. Growth imperative – Some companies traditionally emphasize growth regardless of immediate economic conditions. Firms like Goldman Sachs, Intel and Google would support Craig Barrett’s (former CEO of Intel) philosophy:  “You can’t save your way out of a recession;  you have to invest your way out.”  Moreover, these Type-A firms rarely carry out expensive, skills-gutting and demotivating “purge & binge” hiring practices.
  2. Corporate muscle – Size matters, especially in recessionary times.  Strong market shares, buying power and cash reserves can be leveraged to vertically integrate key parts of the supply chain, outflank competition or extract deeper discounts from suppliers.  For example, McDonalds is opening up to 1000 new stores; P&G is undertaking its biggest expansion in 170 years, building 19 new factories globally and; PepsiCo is investing $6B to take control of its two largest bottlers.  Well-heeled corporate buyers can also take advantage of challenging times to make acquisitions at lower valuations. A BCG study of US M&A activity between 1985-91 showed that deals done during recessions generated 15% higher returns to shareholders than those during boom times.
  3. Competitive weakness or retrenchment – The natural tendency of many firms in recessions is to focus on short term results and abandon or defer important business-building activities and initiatives.  This strategy is often self-defeating.  It leaves firms vulnerable to more aggressive or forward looking players (see point 1).  And, retrenching companies end up being less prepared to take advantage of the inevitable upswing. 
  4. Customer and market openness – Customers and markets are often most open to change during difficult times.  Aggressive and innovative firms will exploit powerful market forces like sustainability, social media and globalization to serve customers better and cheaper, and potentially create new markets.  In fact, many of today’s leaders  (e.g., CNN, FedEx and Microsoft) were launched with disruptive offerings during bear markets. 

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