Business Strategies Column: How To Succeed In A Downturn

Here we are again my friends. The mortgage industry is cyclical, and we are headed for a downturn. But fear not, you can still grow your business in a downturn. In the article “How Companies Should Invest in a Downturn” written by Vijay Govindarajan and Anup Srivastava, they rightly say that technology firms’ stock prices have declined recently, bringing memories of the early 2000s’ dotcom bust.

How should companies respond to these economic developments? A natural impulse is to cut costs across the board by postponing new projects; reducing discretionary expenditures like research and development, marketing, and employee training; freezing new hiring; and reducing headcounts. And because digital stocks have suffered the most dramatic declines in stock prices recently, one may erroneously conclude that this is the end of the digital revolution, and some firms could start cutting back on their digital transformation efforts accordingly. We believe that these aren’t necessarily the best strategies for the current times. On the contrary, current developments offer unique opportunities to judiciously invest in the future. Here are three ways managers can benefit from and even plan for growth in this volatile environment.

1. Study success cases.

First, recessions are typically short-lived and followed by long periods of growth and prosperity. The period after World War II, for example, is considered the greatest expansionary phase in modern history. Similar points can be made for the years after the OPEC oil embargo recession (1973 to 1975), the energy crisis recession (1981 to 1982), the Gulf War recession (1990 to 1991), the dotcom bust (2000 to 2002), and the Great Recession (2008 to 2009). Each recession was followed by a longer period of growth than the period of recession.

But more important, recessions present an opportunity because they separate wheat from the chaff, the winners from the losers. Recall that the dotcom bust was a reversal of the large-scale listing of companies, many of which had nothing more than a promising business, like Pets.com, eToys.com, and Webvan, all of which had little or no revenues. They were burning cash while experimenting with half-baked business ideas. The number of such listings increased dramatically during the early 1990s, leading to a peak in the number of listed firms in 1997, at about 7,400. The dotcom bust led to bankruptcies and delistings of numerous companies that had been buoyed by euphoric markets, and the technology companies that survived went on to become the greatest wealth creators for investors in the recorded history (for example, Facebook, Apple, Amazon, Netflix, Nvidia, Google, and Microsoft).

So, our appeal to managers is, despite the undeniable adversity, dream big to separate yourself from the crowd, and plan for the next expansionary phase. Begin by studying what the surviving companies did differently during past recessions. More importantly, study the examples of those that not only survived but emerged from recessions as winners.

For example, consider Samsung. During the great recession of 2008 to 2009, Samsung reorganized its business to focus on profitability and efficiency, as did most other players. But it also did something different by redoubling its efforts to improve the quality of a reduced set of products: semiconductors, LCDs, and mobile phones. It aimed to be a global leader in that limited set of products and anticipated that consumers would shift to higher-quality products out of fear that companies with low-quality products wouldn’t last as long in a recession. It increased its R&D and marketing spend and hired the best brand managers and emerged as a formidable player in all three markets.

2. Expand while competitors are cutting back.

A recession is the best time to acquire resources for the forthcoming expansion, all while your competitors are cutting back. The biggest and most important resource — talent — is more readily available now than during an expansionary phase. As firms cut R&D and new projects, reduce headcounts, and cut down employee salaries and bonuses and as declining stock prices pull stock options under the water, the same talent that was joining startups or fintechs and enjoying hefty bonuses and stock options is now looking for steadier job opportunities.

It’s also an opportune time to acquire companies and buy assets at fire-sale prices. In addition to gaining employees and assets, it’s the right time to gain market share by attracting dissatisfied customers from competitors as they cut down on customer services.

3. Accelerate digital transformation.

A decline in digital stock prices does not mean the end of the digital revolution. Almost every company has a digital strategy, which enabled companies to run their operations as normally as possible during the Covid pandemic. The benefits of a well-thought-out digital strategy are well documented: improved visibility of resources and better resource management, enhanced flexibility and organization agility, lower costs, smoother supply chain management, better customer experience, improved productivity, faster product development, and superior human resource planning.

A meltdown in digital companies’ stock prices does not mean that those benefits don’t accrue. It is not the time to slow digital transformation. On the contrary, it’s the time to accelerate it. The volatile environment is throwing up more challenges that can best be addressed by digital transformation, as well as opportunities that facilitate digital transformation. Take the example of traditional retail companies that now face complex supply chain issues, which have deteriorated their revenue fulfillment and increased costs. Digital transformation may not solve all the problems, but it can mitigate them. For example, machine learning can enable retailers to identify shopping patterns, understand buying behaviors, adjust promotions and special offers, personalize product recommendations, tweak pricing on the fly, and balance supply with fast-changing demand and customer preferences.

More importantly, companies can now hire those engineering and information technology professionals who are being laid off from the tech sector as they begin looking for steadier employment

So, what’s the point I’m trying to make? Now is not the time to pull back on things like R&D, marketing and advertising, now is the time to move ahead with all of those things so your company can thrive in this downturn.