This recession will be different.
It will arrive at a time when decision makers will still be struggling to manage through the onslaught of major disruptions that didn’t all exist simultaneously during previous recessionary periods: supply chain constraints, geopolitical tensions in key markets, a historic labor shortage, the uncertain path of a global pandemic, and the looming possibility that inflation will persist even amid recession, resulting in the first stagflation environment since the 1970s.
We examined how successful companies are adapting their playbooks for inflation in our recent brief titled “Accelerating Performance Despite Inflation.” Now, companies need to transition that approach to prepare for a downturn—and in a way that reflects what’s different about this pre-recessionary period. Many of the recession plays will be the same moves that are now helping proactive companies get out ahead of inflation. But there are critical nuances and a few important additional plays that will determine whether companies can ride out the recession and emerge from it more successful than when they began. While recessions are inevitable, what’s hard to predict is the timing and depth of a downturn (see Figure 1).
Figure 1
Recessions are a certainty—only the timing and depth are hard to predict
One need only look to past recessions to see what doesn’t work. Companies typically got caught in three traps. Some took a burn-the-furniture approach: Assuming that aggressive, across-the-board cost cutting would get them through the downturn, they slashed R&D budgets, for example, or they cut spending on sales and marketing activities that were key to growth, or they let go of valuable talent and ruled out acquisitions. Other companies made a misguided spray-and-pray move, straying from the company’s core by betting on everything in a desperate bid for growth. And some companies simply waited too long before acting, so they were late to the party. The reality is that such a reactive approach is the wrong answer. Our research has found that companies usually make more dramatic and sustainable gains and losses during a downturn than during stable periods (see Figure 2).
Figure 2
There is more movement in company performance to capitalize on during a downturn than during a stable period
What do winning companies do to prepare for recessions? Again, we look at what has worked in the past. They surgically restructure costs before the downturn, trimming the fat and preserving the muscle. They put their financial house in order, diligently managing liquidity and the balance sheet. They play offense by selectively reinvesting for competitive outperformance. And in a key move that enables them to emerge stronger than competitors, they aggressively pursue M&A opportunities.
Companies transitioning from an inflation playbook to a recession playbook must make these moves in a way that also considers the host of complexities that will make this recession different—including the rising cost of capital; the ambitious environmental, social, and corporate governance (ESG) commitments that are now becoming standard practice; and the material shortages that have increased lead times to 70% longer than pre-pandemic lead times.
Here’s what should change and what won’t in the new recession playbook. READ MORE
By Jason Heinrich, Simon Henderson, and Melissa Lee
Source: bain.com
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