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March 28, 2008

So You Think You're a Smart Business-person? Pass This Test...

When Bad is Good, and The Recession Trap

Everyone talks about recession like it's a bad thing. Many businesses do in fact cut back on their spending. But is this 'run and hide' approach the right way to respond to a recession?

What if a recession were viewed as good instead of bad?

Boston Consulting Group's recent press release sheds some interesting light on these questions.

The press release starts out by sharing some hard data from a recent BCG survey of business leaders.

"Most U.S. business leaders believe the economy is in a recession now, or that one is inevitable within six months. That's according to a survey conducted by The Boston Consulting Group (BCG) of 101 senior decision makers at U.S. companies with at least $500 million in annual revenues."

But recessions are best viewed as opportunities, according to BCG. Huh? How can a recession be an opportunity when everywhere you look there are news stories with a doom and gloom slant?

"We believe companies should approach signs of a recession as an opportunity - to prepare. Downturns magnify relative strengths and weaknesses, so companies that gird themselves intelligently can leverage a change in the dynamics of an industry - something that always happens in a recession - so that it works in their favor," said Hal Sirkin, global leader of BCG's Operations practice

What do most companies do when a recession inevitably comes? They cut their costs to try and push up profits. But what do they cut? Often the larger items like marketing and advertising are cut. Why is that a problem? For one thing, these are the very measures that drive demand and build brand strength. Cutting them can magnify the effects of a recession over the long run.

"Unfortunately, many of these companies are ... headed for the recession trap. Based on our research, most of the measures these companies say they're taking - 80% of the steps, in fact - are conventional and related to cost cutting," said Sirkin, a Chicago-based BCG senior partner. "By mainly focusing on cost reduction, they're not taking advantage of the opportunities a recession can provide. What they need to do is pull out all the stops now so they can move ahead of their competitors soon and be well positioned when business softens further."

The message here is clear: keep the long term picture in mind. Cutting costs during a recession leaves you vulnerable.

"In a recession, everyone feels short-term pain. But companies that successfully approach a recession as an opportunity have the potential to realize long-term gain"

Want some hard data as proof? Here is a tidbit:

"In the last recession, 30% of the companies that had been among the top 10 players in their sectors dropped off that list. So, viewed the right way, a downturn presents a strategic opportunity to leapfrog the competition, rather than simply posing a threat,"

Posted by Jeff Small & Brett Astor at 03:20 PM | Permalink