Economic recessions are a natural part of the business cycle. During a recession, businesses suffer from declining sales, shrinking margins, and reduced consumer demand. However, some companies have managed to come out stronger from a recession by investing in people, R&D, and digital transformation. This article will discuss some examples of companies that have weathered economic downturns and emerged stronger than ever.
After all just like the seasons change recessions are temporary periods followed by rapid growth as laid out in this chart by the federal reserve bank of New York with our without Covid-19:
Organizations that plan strategically now with the big picture in mind can weather the storm and prepare for better times.
Develop a Recession Response Plan
Step 1: Form a dedicated crisis management team
Just like a critical incident response team (CIRT) in cybersecurity the crisis management team (CMT) needs to come up with a plan to contain the damage, isolate yourself from the market dynamics as much as you can and restore operations after reviewing scenarios and come out stronger than before. It is a continuous improvement cycle that technology teams apply to their services, dev ops and cybersecurity.
The same needs to take place for the pending recession which is further accelerated by Covid-19.
This is really a strategic planning and risk management exercise for the CMT to soften the impact on your organization and come out strong after.
This CMT team is comprised of individuals from various branches of your business including Finance, Supply Chain, HR, IT and other departments based on the industry you are in. This team will then develop different economic scenarios and determine how they might affect your business.
There will be an opportunity to identify recession-related risks and opportunities followed by prioritizing initiatives designed to mitigate the risks and capitalize on the opportunities.
This team should monitor progress and report back to the board on milestones and any changes needed.
Step 2: Analyze the data to forecast the severity of a potential recession:
The CMT should determine if we are facing a
- Modest downturn
- A more severe recession
- of a full blown depression
For each of these scenarios, for example, how would customer demand for your product and services be impacted by limited capacity with 10, 20 or 30%% sales reduction, limited production, limited credit and price decline of 10 or 20%? Would declining stock markets make it more difficult to raise equity, and how would higher boworring cost impact your cost of capital?
Here is an overview of the Economist and World Bank on economic impact of a flu pandemic:
Step 3: Cash is king
Staying afloat with adequate cash flow and access to capital is key. Establish a central cash management system to monitor, prioritize and postpone spend depends on the severity of the downturn and to what degree spending is discretionary.
- Manage customer credit risk – evaluate higher risk customers and assign customers a credit rating
- Reduce working capital – but be careful – firms that cut costs faster and deeper than rivals don’t necessarily flourish. According to a Harvard study they have the lowest probability—21%—of pulling ahead of the competition when times get better.
- Implement hour reductions, furlough workers to save jobs, and pay for performance.
The British government realized that proactivley addressing layoffs by covering up to 80% wages to keep workers employed is as chancellor Rishi Sunak put it: “a great national effort to protect jobs. We want to look back on this time and remember how in the face of a generation-defining moment we undertook a collective national effort and we stood together. It’s on all of us.”
According to a recent Harvard Business Review article a study of public companies concluded that “companies that emerged from the crisis in the strongest shape relied less on layoffs to cut costs and leaned more on operational improvements”.
Step 4: Analyze the market, your competition and seize the moment
What is your competition doing and how can you set yourself apart?
- Pricing strategy – companies should consider offering low-priced versions of popular products— just like consumer products companies are doing. Is there a version of your products or services that is equal to the McDonald’s Dollar Menu by offering the same but limited service for less
- Explore subscripton and pay as you go versions of your services including pricing models that would allow a customer to rent equipment, services by the hour rather than by the day
- Pursue opportunistic mergers and acquisitions – some organizations exploit competitors’ vulnerabilities to redefine their industry through consolidation during a recession.
- Explore if divestiture of noncore businesses selling off peripheral and poorly performing operations is a viable option – divestitures rose modestly from 30% in 2007 to 36% in 2009 during recesssion
- Anticipate change where the economics a business may change because of increased competition, changing input costs, government intervention, or new trade policies. This requires companies to re-evaluate their business model
Step 5: Invest into the future
Companies that thrive after a recession understand that investment in product development, information and production technology will bear fruit only after a recession is past.
However, delaying investments can compromise the ability to capitalize on opportunities when the economy rebounds.
During this pending recession we can already see that companies are becoming more digital investing in collaboration, infrastructure and bring your own device (BYOD) to enable continued work from home as compannies and businesses are asked by government to close down stores, offices and self isolate.
With the historical recession bull and bear market cycles there is an opportunity to invest anti cyclical and come out strong riding the wave of average 9 years of growth following a recession:
In a way recession is an opportunity in wolf’s clothing since there is surplus capacity due to a lack of demand for services and product. That capacity can and should be strategically redirected for strategic investments into people, process and technology.
Investing into technology and people during recession might be the most critical success factor to come out roaring after a recession – Carsten Krause
The Power of Investing in People
One of the most significant ways that companies can emerge stronger from a recession is by investing in their people. This investment can take many forms, including training, education, and professional development programs. By investing in their people, companies can create a more skilled and adaptable workforce that is better able to meet the challenges of a rapidly changing business environment.
One example of a company that has successfully invested in its people is IBM. During the 1990-1991 recession, IBM faced significant financial challenges, and the company’s future was uncertain. However, IBM’s management decided to invest heavily in its workforce, creating a massive training program for its employees. The program, known as the “Skills Initiative,” was designed to provide employees with the skills they needed to adapt to a rapidly changing business environment.
The Skills Initiative was a massive success, with IBM employees completing over 20 million hours of training between 1993 and 1998. The investment in people helped IBM transform its business and emerge from the recession stronger than ever.
Digital Transformation and R&D
Another critical factor in emerging stronger from a recession is investing in R&D and digital transformation. By developing new technologies and digital services, companies can create new revenue streams and increase their market share. Digital transformation also helps companies become more agile and adaptable, allowing them to respond quickly to changing market conditions.
One example of a company that has successfully embraced digital transformation is Amazon. During the 2008-2009 recession, Amazon invested heavily in its digital infrastructure, creating new services like Amazon Web Services (AWS) and Kindle e-readers. These investments paid off, with AWS becoming one of the company’s most profitable business units and Kindle e-readers revolutionizing the publishing industry.
Another example is Apple. During the 2001-2002 recession, Apple invested in the development of the iPod, a revolutionary digital music player. The iPod was an enormous success, transforming the music industry and becoming one of Apple’s most profitable products. Apple’s investment in the iPod helped the company emerge from the recession stronger than ever, paving the way for future successes like the iPhone and iPad.
Complementary Technology Services
Finally, companies can emerge stronger from a recession by developing new technology services that complement their physical products. By offering new and innovative services, companies can create new revenue streams and increase customer loyalty. Complementary technology services also help companies differentiate themselves from their competitors and maintain a competitive edge.
One example of a company that has successfully developed complementary technology services is John Deere. During the 2008-2009 recession, John Deere invested in the development of FarmSight, a suite of digital services designed to help farmers increase productivity and profitability. These services included tools for optimizing crop yields, reducing costs, and improving overall farm efficiency.
The investment in FarmSight helped John Deere emerge from the recession stronger than ever, with the company’s revenue and market share increasing significantly. By offering complementary technology services, John Deere was able to differentiate itself from its competitors and create new revenue streams that helped offset the decline in sales of physical farm equipment.
The CDO TIMES Bottom Line
In conclusion, economic recessions can be challenging for businesses, but they can also be an opportunity to invest in people, R&D, and digital transformation. Companies that make these investments can emerge from a recession stronger than ever, with new revenue streams, increased market share, and a more skilled and motivated workforce that will not leave you in better times.
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In this context, the expertise of CDO TIMES becomes indispensable for organizations striving to stay ahead in the digital transformation journey. Here are some compelling reasons to engage their experts:
- Deep Expertise: CDO TIMES has a team of experts with deep expertise in the field of Digital, Data and AI and its integration into business processes. This knowledge ensures that your organization can leverage digital and AI in the most optimal and innovative ways.
- Strategic Insight: Not only can the CDO TIMES team help develop a Digital & AI strategy, but they can also provide insights into how this strategy fits into your overall business model and objectives. They understand that every business is unique, and so should be its Digital & AI strategy.
- Future-Proofing: With CDO TIMES, organizations can ensure they are future-proofed against rapid technological changes. Their experts stay abreast of the latest AI advancements and can guide your organization to adapt and evolve as the technology does.
- Risk Management: Implementing a Digital & AI strategy is not without its risks. The CDO TIMES can help identify potential pitfalls and develop mitigation strategies, helping you avoid costly mistakes and ensuring a smooth transition.
- Competitive Advantage: Finally, by hiring CDO TIMES experts, you are investing in a competitive advantage. Their expertise can help you speed up your innovation processes, bring products to market faster, and stay ahead of your competitors.
By employing the expertise of CDO TIMES, organizations can navigate the complexities of digital innovation with greater confidence and foresight, setting themselves up for success in the rapidly evolving digital economy. The future is digital, and with CDO TIMES, you’ll be well-equipped to lead in this new frontier.
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