Article #5 in a series exploring the business world’s response to the COVID-19 crisis. This series was inspired by the America Reopens Handbook, which was created by the BizBreakthru team and is available to members.
In a previous article we explored the attributes that the Federal Reserve used to define business health, at least for one 2019 survey. The focused on (emphasis ours)
profitability, credit risk, and business funding. Among these three facets, [they] categorized ‘healthy‘ firms as those that are profitable, have higher credit scores (low credit risk), and use retained business earnings to fund the business. Firms that meet only two of these criteria are ‘stable,’ one of these criteria are ‘at risk,’ and none of these criteria are ‘distressed.’
They then applied this classification schema to a survey of 3,267 firms come to the conclusions that we discussed in that article. This was one attempt to study business health, but of course it was conducted well before the COVID-19 pandemic broke out. It turns out that research into the specific characteristics that allow businesses to survive economic downturns is hard to find. But it does exist.
Back in 2010, as the U.S. was emerging from the “Great Recession,” three researchers who published their findings in HBR set out to create that data set. Finding a dearth of empirical studies of recession recovery, they set out to put aside “folksy wisdom” and conduct hard research on past recoveries:
[We] decided to mount a yearlong project to analyze strategy selection and corporate performance during the past three global recessions: the 1980 crisis (which lasted from 1980 to 1982), the 1990 slowdown (1990 to 1991), and the 2000 bust (2000 to 2002). We studied 4,700 public companies, breaking down the data into three periods: the three years before a recession, the three years after, and the recession years themselves.
Their findings were “stark and startling”:
- Seventeen percent of the companies in their study didn’t survive a recession. They went bankrupt, were acquired, or became private.
- The survivors were painfully slow to recover from the battering. About 80% of them had not yet regained their pre-recession growth rates for sales and profits three years after a recession; in fact, 40% of them hadn’t even returned to their absolute pre-recession sales and profits levels by the end of that time period.
- Only a small number of companies (roughly 9%) flourished after a slowdown. They did better on key financial parameters than they had before the slowdown, and outperforming rivals in their industry by at least 10% in terms of sales and profit growth.
They went on to explore various facets of two broad approaches: defensive moves and offensive moves, and found that the most successful companies leveraged a specific mix of defensive and offensive moves. They illustrated this dynamic as follows:
They labeled companies that mix defensive, “prevention-focused” “operational efficiency” improvements with offensive, “promotion-focused” “market development” and “asset investment” improvements as progressive, and gave these companies a 37% chance of “significantly outperforming (by 10% or more)” their rivals during a recession, based on both top- and bottom-line growth.
Progressive companies, they argue, don’t just survive recessions. They “can ride the momentum after a recession is over [and] lay the foundation for continued success once the downturn ends.”
In their analysis, they offered the following advice:
- Don’t be too defensive. “A focus solely on cost cutting causes several problems. One, executives and employees start approaching every decision through a loss-minimizing lens…. Two, instead of learning to operate more efficiently, the organization tries to do more of the same with less…. Three, cost-cutting decisions become centralized…. Four, pessimism permeates the organization.”
- Don’t be too aggressive. “When positive groupthink permeates an organization, naysayers are marginalized and realities are overlooked. That’s why promotion-focused organizations are often blindsided by poor financial results.”
- Strike a balance, but strike the right balance. Take a pragmatic approach to the crisis by balancing both defensive and offensive moves. “Companies typically combine three defensive approaches—reducing the number of employees, improving operational efficiency, or both—with three offensive ones: developing new markets, investing in new assets, or both.” But not all combinations are effective, as we saw.
We encourage you to read the whole HBR article.
We have more advice to share with businesses, and we’ll do so in future installments of this series.
What advice do you have for surviving and thriving during difficult economic times? Let us know! Share your comments below!