Recession Winner Or Loser: Which One Will Your Company Be?
By: Mark Mccarvill
Tags: Economy, Recession, Strategy, Business, Startup

This tale of two companies dealing with a recession is a stark, but very realistic, comparison. It is based on the research mentioned earlier by Bain, McKinsey, Harvard, and MIT.

They studied approximately 5,000 companies, looking in detail at what they did — before, during, and after the past 3 recessions. Then, they looked at how these companies fared, during the recession and in the following three years.

If recessions are like economic hurricanes, then the recovery effort by companies feel like marathons. They are long, painful, draining — and not everyone makes it across the finish line.

Based on the research, we can make some educated guesses about how companies will fare. In their marathon efforts to recover from the next recession, here’s what’s likely to happen.

About 75% of companies will just manage to survive the recession, the equivalent of a marathoner just limping across the finish line.

Another 15% of companies won’t make it anywhere near the finish line: they will either go bankrupt or be acquired by another, stronger company.

But about 10% of companies will achieve something quite spectacular. They will actually benefit from the next recession. They will emerge stronger, with higher sales and higher profit margins than they had going into the downturn.

Specifically, the winners will increase revenues during the entire recession, growing at roughly a 17% per year. The losers will see zero revenue growth.

And once the recession is over, the winners will keep on winning. They will grow at an average 13% in the years after the downturn, while the losers will barely manage 1% annual growth.

(Keep in mind, that the “losers” here were still in business when the recession ended. The capital L-losers went bankrupt or were acquired).

For companies, this means that the endurance race keeps getting longer and harder. It went from a marathon to an Ironman to, who knows, maybe one of those crazy 50–50–50 races.

So what separated the winners from the losers? It certainly wasn’t luck.

Yes, a small percentage of companies will manage to survive the next recession thanks to a lucky break.

Think of Amazon or PayPal in 2000, just before the tech bubble burst. In early 2000, right before the crash, Amazon.com sold $672 million in convertible bonds to strengthen its financial position. At almost exactly the same time, PayPal closed a $100 million funding round. A few days later, the bubble burst.

What if the crash had happened a little earlier? Amazon might have survived but PayPal probably would not have. According to David Sacks (PayPal’s COO in 1999), the company “would have died” (as quoted in Emily Chang’s book Brotopia).

Peter Thiel made his fortune and reputation via PayPal. It’s questionable whether his name and status as a role model for entrepreneurs would be what is it today had it not been for lucky timing.

If not luck, what explains the wildly divergent outcomes for the winners and losers?

Despite their somewhat different methods, researchers came to very similar conclusions. This adds to the robustness of their results. They collectively found about winning 25 strategies, which I’ve clustered into 10 themes.

1. Make a plan (or three).

Winning companies did scenario planning, taking a cold, hard look at what “best” and “worst” looked like. This helped them decide how to prepare.

2. Nail your “must have” value proposition.

The recession will separate the “must have” from the “nice to have” value propositions. You want to be selling the former.

3. Raise cash and cut debt.

Give yourself maximum flexibility during the recession. If you’re a startup, close that next funding round ASAP.

4. Trim the operational fat.

Audit business processes and supply chains. Look for ways to cut “the fat” but not “the muscle.”

5. Increase your financial discipline.

Stop dreaming about exponential, but unprofitable, growth. Unit economics are your new best friend: metrics like customer success, revenue churn, and customer lifetime value.

6. Choose operating efficiencies over layoffs.

Laying people off is lazy. Do the hard of work of detecting and fixing inefficiencies. Your people will work harder during the recession knowing that you’ve got their backs. Morale won’t suffer like at other companies that slash and burn.

Companies that only use layoffs as a last resort during recessions are 3x more likely to outperform during — and after — the recession.

7. Involve more of the organization in decision making.

An economic crisis is no time for centralized management. Leaders need to keep their ear to the proverbial ground and this means engaging regularly with your front-line employees. They are your early warning (and opportunity detection) system.

8. Reinvest cost savings and asset sale cash into technology and R&D.

When other companies were slashing innovation spending, the winners were investing — selectively. This paid off because it made these companies stand out during the recession — and for years after.

9. Plan a careful mix of offensive and defense plays.

This goes back to having a playbook. Companies that did the best were ready to pounce when they saw opportunities such as coveted assets or talented staff discarded by other companies.

10. Stay engaged with your partners, suppliers, and community.

This is an easy one to forget. Companies often get tunnel vision during times of crisis. But the winning companies never forgot that they were part of a larger community. They did things like sponsoring charity events and got a much higher ROI because other companies backed out to conserve cash.