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Companies that plan ahead before a recession hits can boost both growth and profitability during a downturn. Jeff Katzin and Tom Holland, partners with Bain's Performance Improvement practice, describe the moves that businesses can make now to prosper during the next recession.
Read the Bain Brief: Beyond the Downturn: Recession Strategies to Take the Lead
Read the transcript below.
JEFF KATZIN: When we look at the last downturn, one of the most dramatic economic events of the last 80 years, we actually studied 3,900 companies where 10% were really able to use the period and outperform. Those companies grew by 14% over a 10-year period from 2007 to 2017, while the other 90% were flat over that period. And when you translate that into economic terms, in terms of enterprise value growth, the difference between being one of those outperformers versus not was three times the enterprise value for the organization.
TOM HOLLAND: One thing that the winning companies did during the last cycle was early cost management. So they did not wait for the recession to hit or the downturn in their own volume and pricing. They really managed costs well before the recession, and managed it intelligently. A good example of this is Costco.
They got ready for the last recession by managing costs very effectively in the store and in their entire supply chain network. They took down their SKU count dramatically, they managed in-store labor, and they took a hard look at their entire supply chain network to take costs out before the downturn hit. Another thing that winners did in the last cycle was very actively manage cash and balance sheet.
So rather than just focus on P&L, they took a hard look at working capital, and took out costs to create a cash war chest to get ready for the cycle. A good example of this is John Deere. During the last recession, they took a hard look at the balance sheet and were able to free up quite a bit of cash by managing working capital, refinancing long-term debt with low interest rates and revising their entire capex policy to get more efficient. And as a result, they were actually able to raise their return on capital during the cycle to an all-time high of 40%.
JEFF KATZIN: A lot of the companies that we see grow are taking a cost and mindset, and thinking about how do we drive efficiency to then reinvest in the business and drive both growth of the core and, for those companies that are able to, the Engine 2 of the organization. Samsung's a great example of this. They both looked at cost and growth.
On the cost side, they reduced the number of subsidiaries to really focus the activity of the business. But during the downturn, they also increased their investment, driving up R&D 8% during the downturn, increasing the number of patents they filed by 400%, launching the first Samsung Galaxy, to really reshape the business. And over the subsequent 10 years, they went from being the No. 21 global brand to the No. 6.
The last thing that we see companies do is that if they're in a position, they look aggressively at M&A, and they use this as a period to say, where do we want to make acquisitions to either fuel growth or build new capabilities for the business that we have today, and the business for tomorrow? Stanley Black & Decker is a great example of this, where Stanley actually, in the last downturn, purchased the larger Black & Decker organization to increase the scale and scope of the organization.
TOM HOLLAND: So we recommend management teams take action now, before the recession hits, both a proactive cost plan to help create fuel to get through the recession, as well as a specific competitive plan to invest in the business and outperform competition both during the cycle and after the cycle.
Beyond the Downturn: Recession Strategies to Take the Lead
The next crop of leaders are acting now to restructure costs and go on offense.
First published in Juni 2019