This blog was originally published on October 1, 2019 but has since been updated.
Since mid-2022, economists have asked themselves a pressing question: Are we headed for a recession? The truth is that, whether we’re headed for a recession or already in one, your organization must be well equipped to handle one; having the right technology is not only helpful but also the key to your survival.
Transforming and adapting are essential to your long-term growth and success—whether in a recession or not. So, how can you ensure you have the foundation you need to thrive? Let’s dive into what companies are saying about the recession and how you can utilize technology to become a recession-proof business and continue achieving your desired outcomes.
Current Challenges: What Companies Are Saying About the Expected Recession
Organizations struggle with significant challenges that affect their ability to thrive: talent shortages, unsupported growth, inflation, and a looming recession. In an August 2022 McKinsey survey, 81 percent of leaders reported expecting a recession.
Similarly, growing inflation rates put organizations in a tough spot. The majority of consumers cite inflation as one of their top three concerns. While this is already of concern, consumers’ perceptions of inflation may also exceed the rate of inflation. As a result, analysts expect EBITDA margins to decline throughout most industries.
According to JPMorgan Chase, businesses are already witnessing widespread impacts due to inflation, including the following:
- 83 percent of midsize businesses have passed at least some increased costs onto consumers.
- 94 percent of small businesses say inflation has impacted expenses.
- 84 percent of businesses expect to continue increasing prices to mitigate costs.
As they face reduced revenue, organizations struggle to fill talent shortages despite people rejoining the workforce. A Grant Thornton survey found that 58 percent of CFOs expect continued challenges in attracting the right talent, yet 43 percent report their organization is looking at human capital cuts to reduce costs.
It’s clear organizations across industries are in a tricky spot: How can they retain the right talent, optimize costs, and anticipate growth, all while preparing for a potential recession?
The Digital Transformation Imperative
Innovation and digital transformation must continue, and the commitment to improve one’s operations is critical to coming out of a downturn stronger.
As McKinsey asserts, “In times of disruption and great uncertainty, most organizations tend to protect what they have and wait for a return to ‘normal.’ That’s a high-risk strategy today because we may be on the cusp of a new era.” With organizations facing such challenges as supply chain issues, high interest rates, and inflation, it won’t be enough to simply cut costs and boost efficiency: Companies must find opportunities for growth and innovation.
In Exhibit 1, we see organizations that prioritize both growth and productivity far outperform their competitors. In times of disruption, such as the COVID-19 pandemic, those who innovated experienced a boost in performance—especially compared to organizations who simply carried on with business as usual.
While leadership may feel pressured to optimize to a specific set of global conditions, they’ll be more vulnerable to unforeseen change, preventing them from effectively riding out disruption. On the other hand, business models that invest in innovation open new paths for continuous improvement. Innovation—not playing it safe—is the key to long-term resilience and finding new ways to succeed.
The Lessons of Recession History
In 2010, the Harvard Business Review article “Roaring Out of Recession” explained a study of 4,700 companies. The study breaks down the data into three periods: the three years before a recession, the three years after, and the recession years themselves.
Studying the three recessionary periods from 1980 to 1982, 1990 to 1991, and 2000 to 2001, here’s what they found:
- 17 percent of companies did not survive the recession.
- 80 percent of companies had not yet gained their pre-recession growth rates.
- 40 percent hadn’t returned to their absolute pre-recession sales and profits levels.
- 9 percent flourished after a slowdown and were outperforming rivals by at least 10 percent.
One may think a company focused on cutting costs would benefit the most after the recession. As we can see in Exhibit 2, this is not true. Companies that cut back more than their competition—categorized as prevention-focused companies by HBR—had the lowest odds of being stronger in a post-recession market. The companies with the highest odds of flourishing after the recession are called progressive companies, which had reduced the cost of goods sold (COGS) but hadn’t cut employees more than their peers and had also allocated more resources, relative to their competitors.
According to global consulting firm Bain & Company, winners can accelerate results coming out of a recession.
In the past, those who lost in a recession were those who fell for the following mistakes:
- Making aggressive cost-cutting decisions like letting go of valuable talent, ruling out acquisitions, and cutting research and development
- Straying from the company’s core values by betting on everything, such as expanding in multiple directions without a key strategy
- Waiting too long before taking action, i.e., taking a reactive approach instead of a proactive one
On the other hand, winners were able to come out stronger than before by proactively planning ahead and innovating in the following ways:
- Restructuring costs before the downtown before firing key talent
- Preparing the financial house by managing liquidity
- Playing offense by selectively reinvesting
- Pursuing a proactive M&A pipeline
The big difference between organizations that thrive in a recession and those that don’t is clear: Winners don’t shy away from growth opportunities. The greatest risk a company can take before or during a recession is to play it too safe.
Companies often respond to recessions with corporate concern and operational contraction. However, different perspectives and approaches based on research are helpful. Markets run through cycles to better align themselves with reality. Many companies have lived through a few recessions, and their leaders know how to brace themselves and even take advantage of the new order. In 2023, companies can respond with boldness and come out the other side of the recession a little stronger.
Recessions are not a new phenomenon. Over the years, many leaders find that downturns provide a stress test of leaders’ actual habits and discipline. Recessions also help clean out the opportunists who benefited from the good times but weren’t committed to the long term. History shows recessions can be a catalyst for innovation since new answers are required. In short, operational excellence will need to increase across the board.
Are your capabilities ascending? How good is your company working together for the benefit of customers and all stakeholders? Recessions require leaders to be smarter, and being prepared to take well-researched defensive and offensive measures is smart. If you love to chase excellence, a recession doesn’t have to be a long-term adverse event. Your improved position on the other side of a downturn could surprise you.
Human history is about change, but growth is not assured. Achieving a stronger position requires company leaders to be agile enough to comply with a new reality after the recession. As always, there will be losers and a few winners, but most companies will continue to plateau and stagnate.
No one truly knows the future. We can, however, plan for the worst and hope for the best.
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