Moving upward in a downturn

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Downturns are a recurring fact of life in every industry. Sooner or later, demand for an industry’s products or services declines – often dragging prices down along the way – regardless of the state of the economy as a whole. While it’s true that many more industries suffer downturns during recessions, it’s a mistake to think that any industry is safe during periods of normal economic growth. In the past two decades, at least 20% of all U.S. industries have battled a downturn in any given year but 1984, when GDP growth soared to more than double the norm.

Given these apparently gloomy facts, what should executives do to help their companies weather a slump? As in so many instances, there are conventional approaches that appear to make sense in the short term. For example, company leaders often approach impending trouble with overconfidence, denying that their industry faces any real danger. Then, when the downturn is an established fact, they make across-the-board cuts of everything from R&D spending to employee head count. Finally, when signs of recovery are everywhere, they turn on the spending spigot to rebuild morale. Although these approaches seem reasonable in the heat of the moment, they can eventually damage competitive positions and financial performance.

Better outcomes are possible, however, if a company’s leaders exploit industry downturns to harness their unique opportunities for upward mobility, the same way Apollo 13’s astronauts exploited the moon’s gravitational pull to escape disaster. Both Arrow Electronics and Emerson (formerly Emerson Electric), for example, followed this path to emerge stronger following downturns. In the late 1980s, financially troubled Arrow launched a series of audacious but intelligent acquisitions during an industry downturn that allowed it to increase sales by more than 500%, turn operating losses into profits, and seize market leadership from a competitor that was once twice its size. Emerson, too, pressed ahead with an investment in a major air-conditioning-processor plant in Thailand during the Asian economic crisis of the late 1990s. While competitors mothballed projects, Emerson ramped up production, exported the plant’s products, and secured a strong position for itself in the Asian market when the crisis ended.

To understand how successful companies combat declines in demand, Bain & Company analyzed 377 Fortune 500 companies that lived through industry slumps and economic recessions over the last two decades and interviewed nearly 200 of their senior executives. The research found that a downturn evolves through three separate phases. An examination of these phases reveals both the pitfalls that come from following conventional approaches and the rewards that can be reaped by exploiting contrarian opportunities.Successful players in a downturn place counterintuitive bets in order to dramatically transform their market positions, but these bets are not lucky gambles that miraculously win big against the odds. Instead, they are rigorous and systematic moves that shift the odds in management’s favor.

Read the full article on Harvard Business Online.