Recession is nothing new to economies; they are generally cyclical in nature and have manifested similarly in different periods of history. The current recession is possibly different in the speed with which it enveloped the globe; however it was the same in the way it shrunk global economies, led to lay offs in companies and downgraded their projected revenues and earnings. The bust of the iconic Lehman Brothers and the crisis in the financial markets took centre stage, but unfortunately this brouhaha has pushed to backstage a large number of companies that have waded through the recession, emerged stronger and have truly utilised this phase in ?just getting better?.
Normally, when times are lean, companies cut back. Eliminating excess and making do with less is simple common sense, whether managing a household or a company. However, the recession prompted some companies to cut so much and become so lean that they are no longer healthy?they suffer from what some experts call ?corporate anorexia.? Just like it is bad for businesses to over-hire and over-spend during good times, it is equally bad for businesses to have blinders on and feel that drastic cost-cutting alone is the answer when times are tough. These anorexic companies become so skinny that they?ll be the last to get healthy again.
The simple point is, no company ever shrunk to greatness.
Time and again it has been proved that the companies that emerge stronger at the end of a recession, actually invest through the recession and very wisely at that. Research by McKinsey showed that companies that beat the last recession actually increased spending in key areas. The research tracked almost 1,000 US companies over 18 years, including during those all important recession years. The companies that emerged in the top quartile after the recession actually increased spending on sales, innovation and marketing. Although this reduced their cash reserves, the companies traded short-term profitability for long-term gain. And it worked; the markets valued them 25% more than their less successful peers. Surely, no one can save their way to prosperity.
The companies that beat the last recession understood the ?value equation?. When times are hard, cash is in short supply; however, customers are in even shorter supply. Companies successful through a recession understand how value is created and that means they try hard to know what drives sales and margin growth and how they can deliver returns that shareholders expect. But that is not all that they do. They understand the customer-side of the equation, too. They work harder to understand customers; what they buy, which channels they use and how much they are willing to pay. In general, most customers trade downward during a recession and expect greater ?bang for the buck?. Good companies recognise this and do something about it to help themselves.
So, where do good companies invest during a recession?
According to a survey of IT decision-makers of 300 European enterprises and research from the London School of Economics (LSE), businesses that continue to invest in innovation and research are better positioned to weather the economic downturn, and are better equipped to capitalise on future economic recoveries.
Results of the 2009 European IT survey revealed that one in four companies ?the thrivers? are beating the recession by ?waging a war on waste? and reinvesting those cost savings into projects that drive new business. Many of the surveyed CIOs highlighted their belief that sustained investment is strongly linked to overall business performance. Further, these companies almost without exception invest in improving speed. They look for value buys and seize opportunities for bottom fishing.
What do good companies do with their people through a recession?
They invest in them. Managing people in a recession is as demanding as in times of rapid growth. Good companies invest in their people through a recession. For example they work hard and smart to have the right people and deploy them right. They take a hard look at existing processes and systems to increase the productivity and efficiency of people and they redesign development programs to deliver to the changing needs of customers.
The message is really very simple. ?Cutting muscle? to save costs can harm a company in this environment. Put another way, companies that become ?skeletal? to try and get through a recession will not have the strength to wade through choppy waters. If they still manage to wade out, they may not have what?s necessary to take on the smarter players who got it right. So why not use downturns as a time to stand back and take a good look at how to develop muscle?
The author is head, human resources, at Tesco HSC
