The 2-Pronged Strategy for Postrecession Success

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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It is probably safe to say that recessions mark hard times for everyone. Consumers cannot afford to spend as much as they used to; companies lose sales every day; employees suffer wage cuts or lose their jobs — and cannot afford to consume. The current round of this vicious cycle began in 2007, and though some say we are beginning to recover, the outcome will likely prove to be drastically different from what we used to know. What strategies can businesses use to help them survive a recession — and with enough health to thrive when times get better?

Ranjay Gulati, Nitin Nohria, and Franz Wohlgezogen launched a project in December 2008 to analyze corporate performance during three global recessions: 1980 to 1982, 1990 to 1991, and 2000 to 2002. In their article Roaring Out of Recession (Harvard Business Review, March 2010), Gulati, Nohria, and Wohlgezogen identify what they call "progressive companies" as the type most likely to come out ahead after a recession. Progressive companies utilize an optimal combination of defensive and offensive measures to help them succeed even as their rivals flounder in the tough economic landscape. The strategy most likely to produce results during — and after — an economic downturn involves improving operational efficiency and investing in both existing and new businesses.

Defensive Measures: Operational Efficiency

When a recession hits, this is often the first question that business executives would attend to: How do we cut costs? There are many ways to reduce expenditures: lower operating costs, eliminate frills, and reduce the workforce, for example. Business leaders implement these tactics in hopes that their company will save enough resources to ride out the downturn, but if the focus is solely on cutting costs, odds are good that the company will fall far behind their more aggressive competitors. Trying to do more of the same with less often results in lower quality products and services — major turnoffs for customers who are looking for better value for their money. Within the company, initiatives and innovations that may improve performance are left unfunded; employees see upper management slash head count and fear they may be next.

While it is undoubtedly necessary to cut costs when times are tough, the best way to enhance corporate performance is to increase operational efficiency. Rather than doing the same with less, companies need do better with less. Companies need to reexamine every aspect of their business models and come up with innovative and cost effective solutions. Although increasing operational efficiency is a difficult process, it is definitely worth a try. Companies that stress operational efficiency (instead of, say, reducing the workforce) enjoy better morale among their employees, who in turn become more creative in reducing costs. And when times get better, operational costs would remain low — allowing profits to grow significantly faster than those of rival companies.

Offensive Measures: Invest in the Future

Companies that are too defensive tend to fall behind competitors who are able to adjust their business models in accordance with the new economic environment. Companies that promote themselves too aggressively, however, also risk endangering the organization's welfare. Offensive moves that a company may consider include reaching out to untapped customer bases, making strategic investments with long-term payoffs, and taking advantage of depressed prices to buy talent, assets, or other businesses. While these investments may prove helpful in themselves, focusing too much on promotion may create a "culture of optimism" within the company where executives and employees ignore warning signs, taking too long to recognize and respond to crises.

Progressive companies invest in their future by spending on marketing, R&D, and new assets. They develop new markets and enlarge their asset bases by buying property, plants, and equipment at low prices so that they will be better equipped to fulfill increased demands after the recession. Investment tactics have the potential to help pull a company out of the recession rut, but only if they are implemented with customer needs in mind; adding bells and whistles at a time when customers want lower prices and greater value would only drain resources and decrease profits. If a company's executives want their business to thrive after a recession, they must make investment decisions based on how they can best meet their customers' needs.

According to the study, only 21% of companies that focus only on cost-cutting actually pull ahead of competitors after a recession; of heavy investors, only 26% fare substantially better than their rivals. Unsurprisingly, companies that perform well after a recession use a combination of both defensive and offensive measures — the best outcome results from the two-pronged approach deployed by progressive companies. Progressive companies cut costs in ways that would increase operational efficiency, freeing up resources that they would subsequently invest in marketing, R&D, and assets. The focus is always on how to improve the company's performance in the future, because once better times arrive, they will be the ones already at the top.