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There's nothing like a recession for sorting the sheep from the goats: smart companies treat a downturn as an opportunity for innovation IS THIS WHAT YOU'RE THINKING: THE GROWTH TIMES ARE OVER, THE SLOW TIMES are here and there's nothing you can do about it? All you can do is sack a few people, cut costs to the bone and lie low until the gloom lifts and you start doing business again. Until then you're pretty much stuffed, whatever you do, so you might as well go home early. Well, I've got news for you. I recently found an obscure little book, written after the 1990s UK recession, that will be scary or exciting, depending on how lazy you are. It has the catchy little title Coping with Recession, UK Company Performance in Adversity and was written by Paul Geroski and Paul Gregg. And the bad news is that if you suffer during slow times, it is your fault. Most companies did OK during the last recession and some did appallingly. For the sample studied by these authors, profits decreased by a total of £20bn between 1989 and 1991, but this was entirely the fault of the bottom ten percent, whose profits fell by nearly £30bn, while the top ten percent increased profits by around £10bn and the vast majority in the middle hovered around zero change.
There is, however, an opportunity here. It's not the case that companies that were good in the boom just carry on being good, and the previously weak companies just lose more. In fact, recessions see a much greater shuffling of company performance than happens during normal times. Some 11 percent of top corporate performers in 1986 had joined the worse performers by 1991. This sort of scrambling is unheard of in booms, and provides a fabulous chance for hungry newcomers to knock complacent incumbents off their perches. Which is great, as long as you're not an incumbent. So, like a typical consultant, I've just borrowed someone else's alarm clock to give you a wake-up call. Have I got anything more positive to say? Well, if you're reading this on a flight out of the UK, you have just walked through two companies that are great examples of thriving during recession. The first is the British Airports Authority (BAA). In 1988, half its revenue was derived from airport fees fixed by government and a quarter from duty free sales, which would be reduced by £60m with the EU's planned abolition of duty free in 1996. To make things worse, the late 1980s and early 1990s would see not only the recession and a steep reduction in UK retail sales, but also the Gulf War, which would further hit the airline industry. Did BAA collapse? Did it cut "unnecessary" costs? No. In 1990 alone BAA spent half a million pounds on customer research, and used the results to reinvent its business model. It introduced brand-name shops to airports and changed its charging structure to take a percentage of sales from its tenants. In the depths of the recession in 1990, it increased its revenue per passenger by six percent. The result of all this activity was a completely changed customer experience (remember all those awful Skyway shops?) and a company that now operates 16 airports in the UK, US, Italy and Australia and in 1996 was able to acquire World Duty Free. As its then CEO commented, "The recession actually helped us. It was cheaper to build and our staff were more open to change." Think now of The Body Shop. Most of its phenomenal growth took place during the last recession. In 1990, when the UK cosmetics market was collapsing by eight percent, The Body Shop increased its profits by 38%. This goes to show that it doesn't matter that the overall economy is collapsing if you've created your own new market. And The Body Shop is hardly the cheapest shop around — so you don't just need to chase the low-cost niche during recessions. There are a few lessons here. the first is that successful companies don't focus solely on cost cutting during recessions. A little-known fact is that post-war recessions in the UK have lasted an average of only 10 months. Thus, by the time you've cut all your costs (and cost cutting is, of course, notoriously expensive), the economy's coming out of recession and you've damaged any potential to grow. If you must cut costs, the recession's a good time to reinvent your business model and, like Dell, cut them by 80 percent, not 20 percent. Second, if you don't get too hung up on costs you can focus on the other element of the bottom line, and concentrate on expanding revenues. Staff are cheap, infrastructure is cheap, capital is cheap, and this should be the perfect time to be experimenting with new business models and new markets. You shouldn't have any of those tiresomely high hurdle rates that you face during booms that tend to kill any radical new ideas. So, if you want a price war that you can't possibly win because demand always contracts faster than supply in a recession, if you want commoditisation of your product and destruction of your ability to compete in the future, then take the normal response — do nothing and wait for the "inevitable". However, if you want to expand your business, then this is the perfect time to establish some differentiation by innovating and creating new markets. The incumbents are vulnerable, the top performers increase their profits during recessions and the losers lose big. It's all up for grabs. Good luck.
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And
before you complain, yes the sample was representative of the UK
economy as a whole -- these people are serious economists. What's
worse, the profits and losses were unrelated to sector and company
size, there were no factors to suggest that some companies were
more inherently vulnerable to recession than others, and there was
no evidence that a company that suffered in one recession could
not recover and prosper in the next. So you really have no excuses.
