While predicting exactly when a recession will hit is nearly impossible, it’s certainly not unrealistic that one could arrive relatively soon, given that the economic expansion is now into its second decade. Also, there are other recent indicators that point to a downturn, such as the inversion of the yield curve which happened this week for the first time since 2007.
For San Francisco Bay Area based CFOs and other corporate leaders, however, the exact timing and duration of a recession matters less than their willingness and readiness to seize the moment now, when they have more options.
Prepared companies, Bain & Co. research and analysis shows, emerged as winners during and after previous recessions. These companies managed a strong defense and offense in parallel, reining in costs while simultaneously reinvesting in growth areas.
Going into the global financial crisis that exploded in 2008, the eventual winners and losers in a group of almost 3,900 companies worldwide that were analyzed experienced double-digit earnings growth, on average.
As soon as the financial storm hit, their performance diverged sharply. The winners grew at a 17 percent compound annual growth rate (CAGR) during the downturn, compared with 0 percent among the losers. After the economic downturn, the winners’ earnings grew at an average 13 percent CAGR, while the losers stalled at 1 percent.
In addition, recessions can swing future market capitalization by billions of dollars. For two companies with a similar enterprise value in 2007, the average winner’s value grew three times that of the average loser by 2017.
Playing offense almost always beats simply hunkering down. Think of a recession as a sharp curve on an auto race course. It’s the best place to pass competitors but requires more skill driving on a straightaway.
The best drivers brake just ahead of the curve (they take out excess costs), turn hard toward the apex of the curve (identify the short list of projects that will form the next business model), and accelerate hard out of the curve (spend and hire before markets have rebounded).
What specifically distinguishes eventual winners? Research identified several moves by companies that outperformed peers, such as:
Restructuring costs before the downturn hits, without cutting muscle at the core. All companies must manage costs in a recession. Yet some accomplished this by ratcheting down spending on lower-value processes and reducing the volume and complexity of work. They viewed cost management as a way to refuel the engine for the next stage in the business cycle.
Putting the financial house in order. Recessions can wreak havoc on balance sheets. The winners managed the balance sheet as strategically as they did the P&L. They tightly managed cash, working capital, and capex, all to create “fuel” to invest through the cycle.
Many companies also divested non-core assets to further invest in the core business or explored new ownership models in typically capital-intensive industries.
Playing offense by reinvesting selectively for commercial growth. The strongest companies coming out of the last recession went on offense early, while many of their peers focused on survival. Among the tactics used to boost commercial growth were optimizing the marketing mix to do more with the same or less, and improving the customer experience, making it more simple and personalized.
Pursuing a proactive M&A pipeline. For the well-positioned, the last recession presented a window to use M&A to reshape the portfolio of businesses. Acquirers bought new product lines, customer segments, or capabilities at lower prices.
With another recession on the horizon, planning those investments now helps to avoid paying a higher cost of capital later.
On the tail of the current economic cycle, scope deals have accelerated dramatically over the past three years and now represent 51 percent of all strategic deals. That trend will likely continue or even accelerate in a downturn, as companies use acquisitions to secure businesses that add capabilities to do old things in new ways - keys to growth in a downturn.
The magnitude and shape of a cost transformation will vary depending on a company’s starting position, but the approach should keep costs out while the company accelerates coming out of the curve. Seize the day and think of a recession as the best time to pass competitors.
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