The best ways to business leaders to “survive and thrive” through the crisis … defensive and offensive strategies that worked best in previous economic downturns
August 1, 2020
The future might seem incredibly uncertain right now. It’s only human to be fearful and even initially paralysed to the point of inaction. But for leaders it needs to be more.
Andy Grove, former CEO of Intel, once said “Bad companies are destroyed by crisis, good companies survive them, great companies are improved by them.”
Change drives new attitudes and behaviours, new ideas and solutions. If we see innovations take off rapidly in good times, when there is no need to change, imagine how the right ideas can grow when there really is a burning platform.
57% of companies were founded in a downturn
A study by the Kauffman Foundation found more than half of the companies on the Fortune 500 list – 57% to be precise – were launched during a recession or bear market.
That means it’s likely that right now, amidst apparent economic chaos, some of tomorrow’s best companies are just getting their start. All of these companies started during the midst of recessions, seizing the opportunity of changing attitudes and behaviours, as other battled to survive:
- Disney … Walt Disney Productions launched their first animated cartoons in the depth of the 1929 Great Depression, bringing a smile to people in tough times
- Burger King … started as Insta-Burger in California, using a new machine called an Insta-broiler to cook meat faster and cheaper as post-war America struggled in 1953
- Microsoft … Bill Gates and Steve Wozniak launched their first software in the downturn of 1975 as companies sought efficiency through collaboration and speed.
- CNN … Ted Turner launched the world’s first 24 hour news channel in 1980 as USA plunged into a double-dip recession, and people had an urgent hunger for fast news.
- Apple … In 2001 Steve Jobs launched the iPod amidst the debris of the dotcom bubble bursting all around, reviving the fortunes of Apple which started in 1975’s downturn.
These companies typically jumped on moments of change, as moments to start anew. Not with the same old businesses as before, but with new concepts and new business models. Where it offered something at a much cheaper price, or faster and easier, or a latent opportunity just waiting for some airtime.
Innovators in downturns outperformed others by 14% over next decade
The companies that grew the most during the 2008 crisis were those that invested in innovation.
Some time ago, Harvard Business School’s Nitin Nohria joined forces with its business administration professor Ranjay Gulati looked into the financials of more than 4,700 public companies over three global recessions: 1980, 1990, and the 2000 bust.
Their results were brutal. 80% of companies endured a painful recovery, with only 9% of the sample group improving their performance and outdoing rivals in their industry.
So which companies make up this 9%? Were they the organizations increasing their innovation investments, as with the study of the 2008 financial crisis? Not necessarily. According to Gulati and Nohria, “Businesses that boldly invest more than their rivals during a recession don’t always fare well either. They enjoy only a 26% chance of becoming leaders after a downturn. And companies that were growth leaders coming into a recession often can’t retain their momentum; about 85% are toppled during bad times.”
So if investing in innovation during a downturn isn’t the key to success, what is?
Harvard Business School came to the same conclusion we did. The secret is striking the right balance between defense and offense. Successful companies are those that cut costs to survive while simultaneously investing in future growth.
Survive and thrive: defensive and offensive strategies
Nobody enters a recession knowing what’s going to happen, even less so when there’s a pandemic involved. The best you can do as a leader is to set up a portfolio of activities designed to improve efficiency and take advantage of opportunities. You’ll need closed feedback loops to move with agility.
When it comes to reducing expenditure, the research suggested that it’s better to work on improving operational efficiency rather than opting to fire staff, which can lead to dips in morale, problems scaling up, and additional costs down the line when rehiring.
- Re-configure your supply chain to cut out the middleman
- Change how your teams are organized and give them more decision-making power
- Set targets with a special emphasis on cutting costs
- Research what new entrants in your competitive arena are doing and what you can learn from them. By now, you should be looking at competition beyond your industry. If that’s not the case, do it now!
- Co-create solutions with your partners to improve efficiency
- Use capacity from underperforming units to help other parts of the business
To go on the offense, you basically want to do two things. Firstly, change as customer needs do. To achieve that, you’ll need to empower and protect your service design, user experience, and customer research teams.
Secondly, use the insights your team gathers to host a massive opposite thinking exercise – this will enable you to spot non-obvious opportunities.
- Taking advantage of depressed prices to expand in new markets and increase your asset base.
- Increasing investments in R&D and marketing to put yourself at an advantage when the crisis is over. The resources saved by improving operational efficiency (as we mentioned earlier) and the extra capacity you have lying around should help you finance much of this expenditure.
- If you must prioritize projects, focus on exploring business model innovations rather than shiny new technologies. Statistically, an ingenious business model is more likely to give you a competitive advantage as it will be harder to copy.
- Again, I can never stress it enough, stay closely connected to changes in consumer behavior and their needs. Use customer insights to guide your investments and strategies.