The Upside of the Downturn

November 22, 2009

As a sound bite example of the Upside of the Downturn, Geoff Colvin suggested that death rates go down in a recession.  Regardless of the accuracy of the claim, it’s worth remembering that the recession provides new opportunities for companies willing to take risks.  To emphasize this point, Colvin subtitled his book “Ten Management Strategies to Prevail in the Recession and Thrive in the Aftermath.”

For those who don’t have time to read the book, here are the ten strategies interspersed with my thoughts:

  1. Reset Priorities
    Despite the name of the chapter, Colvin is not really suggesting that companies change priorities but rather that they adjust their strategy.  Changing priorities chooses which initiatives take precedence while changing strategy might eliminate or fundamentally change objectives. Regardless, I agree that strategy shouldn’t be static.
  2. Protect Your Most Valuable Asset
    While I don’t like comparing people to assets, Colvin’s point is that layoffs are often the wrong way to cut costs and that great companies hire star performers from competitors during downturns.  Toyota uses the lull to give employees extra training so that, when the economy turns up, their employees are better prepared than the competition.
  3. Engage the Outside World
    Companies must forge even tighter business relationships with their suppliers, distributors, partners and customers.  Consider the advice of Business Network Transformation.
  4. Reexamine Your Strategy and Business Model
    I struggled a bit with this chapter as it used lots of examples but provided little insight into how to change a business model.  Should companies expand from their core or chase a blue ocean strategy?
  5. Manage for Value
    Although Colvin doesn’t use the words, this chapter encourages companies to focus on the outcomes that have the most impact rather than the activities that produce the most output.  As a financial example, we points out that in 2008 Time Warner and Apple both had total enterprise values of ~$100B.  However investors had put $5B of capital into Apple and $142B into Time Warner. 
  6. Create New Solutions for Customers’ New Problems
    Be creative and address the downturn explicitly.  Unlike other carmakers that slashed prices, Hyundai allowed consumers to return cars – without a penalty – if they lost their job. Hyundai’s sales rose by double digits.
  7. Price with Courage
    Speaking of prices, most companies assume that they must cut prices in a downturn but studies have shown that the long-term damage can outweigh the short-term benefits.  This is because people have asymmetrical risk responses; winning $1,000 makes us feel good, but losing $1,000 makes us feel really, really bad.  Lower prices either becomes the new normal or cause disappointment when price levels return, even though they are no higher than they were originally.
  8. Get Fitter Faster
    Call it the return of operational excellence with a focus on cash flow.  American Express identified customers with high balances and low spending activity and offered them a $300 gift card if they paid off their balance. With rising credit card delinquencies that were difficult to forecast, Amex decided it was better to pay people to close their account than to risk those debts going bad which would cost Amex much more later.
  9. Understand All Your Risks
    Unfortunately, as I’ve previously mentioned, many companies have no enterprise-wide risk management process in place and have no plans to implement one.
  10. Don’t Forget to Grow Yourself
    Downturn or no downturn, this is good advice.  Take time for yourself and remember that every downturn is inevitable followed by an upturn.