A tropical storm viewed from a weather satellite looks more or less uniform, as if it is affecting every area it touches with equal force. On the ground the picture is different. One home loses its roof while others on the same street come through intact. One community is devastated while its neighbour a mile away escapes unscathed.

Bain Brief

Beyond the Downturn: Recession Strategies to Take the Lead

The next crop of leaders are acting now to restructure costs and go on offense.

The same is true of economic downturns. Even a sharp downturn affects everyone differently. Each company has particular strengths and vulnerabilities. Each will have different answers to three critical questions: How is the slowdown affecting the industry I compete in? What is my company's strategic position within that industry? And what level of financial resources can my company draw on? Your most powerful moves in a downturn depend on where you stand on these three dimensions.

In considering the first question, executives need to know: Will the downturn hurt my sales and earnings harder than the overall GDP? Will it force bankruptcies and capacity reductions? Recessions hit some industries harder than others, so staying alert matters. The variations get amplified in a globalizing, interdependent economy. Here, history doesn't repeat itself, but it does provide context. The US economy provides a compelling example of the way boom-and-bust cycles affect industries differently. From 1987 to 2007, it experienced two recessions. But the apparel industry weathered negative growth in 13 of those 20 years, petroleum and coal in 10 of the 20. Insurance carriers also suffered 10 years of negative growth, compared with eight years for automobiles, while health care had no down years at all. Recovery times also vary dramatically. Following the 2001 recession, the S&P 500 index for construction staples bounced back to positive growth in only three months while computers took nine months. The telecom index took almost three years.

We're seeing the same variability today. Though the financial services industry entered an acute slowdown with the collapse of Lehman Brothers, especially in the United States and Europe, most health care-related industries have continued to grow—albeit at a slower pace. One indicator of the difference: between February 2007 and February 2009, the S&P pharmaceutical index sank only 33%, while financials dropped by nearly 80%.

The second facet for executives to consider: How strong is our strategic position? Are we one of the most viable long-term competitors? Will this downturn favour our competitive advantages? Do we have the opportunity to gain significant market share?

Within a given industry not every company suffers equally. The returns of market leaders on average are both higher and more stable than those of followers. As prices decline in a recession, followers typically see profits turn to losses and may be forced to cut costs sharply.

Leaders may record lower returns, but their profitability will usually remain above the cost of capital, which provides them greater flexibility to maintain or even increase spending on research and development, advertising, capacity expansion, or acquisitions.

And the third consideration: what are our financial resources? What is our leverage and how much debt does it carry? Are we highly confident that we can meet all of our financial obligations and still invest for growth? Will competitors face serious financial challenges long before we do?

Money provides options to navigate through a downturn. As Virgin Group founder Sir Richard Branson recently commented, "There are enormous opportunities in recessions. And we've got financial resources." Virgin, he said, is considering setting up airlines in Brazil and Russia. "It's a good time to get brand-new planes at reasonable prices."

An important step for any company in a downturn this deep is to run a series of short-term and long-term downside scenarios to determine the resources required for survival.

Your best strategy depends on where you stand on these three dimensions. For example, if your company has a strong financial, strategic and industry position, then your options are more plentiful. You could out-invest competitors in marketing to increase customer loyalty.

You could attack or even acquire weaker competitors; you could price products to gain share. You may be well-positioned to lead consolidation within your industry, or to dominate critical market niches by concentrating your financial and marketing strength.

During the last recession, UK retailer Tesco quickly moved its advertising focus from its "Finest" line of products to "Value" products. Then it began to invest. It expanded its sales area by 10% annually from 2000 to 2002, triple the expansion rate of a leading competitor. It deepened its talent pool.

Thanks to strategic acquisitions, it was able to roll out a new express-store format quickly. These moves enabled Tesco to avoid massive cost-reduction plans and helped it double its market-share lead over its closest rival.

If your company has a weaker financial position, by contrast, you face a different set of possibilities. Depending on your strategic position and your industry's volatility, your best options may be to divest non-core assets and restructure the balance sheet, or accelerate decisions around reducing cost and debt. You may need to seek alliances or merger partners and dispose of anything that is not essential to survive. Or you may choose to reposition your business by selling weak operations and focus on a sustainable core business.

With the economic storm gaining intensity, companies around the globe naturally feel exposed and vulnerable. Some firms won't rise to the occasion. They'll fall back in the pack, be acquired, or face bankruptcy.

But downturns create opportunities as well as risks. By understanding clearly your strengths and weaknesses as a firm, and how this downturn will affect them, you can focus your actions on the areas of the business you control.

Ashish Singh is managing director of Bain & Co. in India and leads the strategy and retail practices for the New Delhi office. Darrell Rigby is a partner with Bain in Boston and leads its global retail and global innovation practices. Adapted from the forthcoming book Winning in Turbulence by Bain & Co., published by Harvard Business Press. This is the first in a Bain series on managing turbulence that will be published by Mint.