Few companies are acting decisively enough in the wake of the global downturn and leaders should take their cue from companies that gained a competitive advantage in equally challenging economic times, such as the Great Depression and Japan’s “Lost Decade”.
There will be no return to the “old normal,” and, just as we won’t be able to count on the consumer to rescue the global economy, it’s unlikely that the growth of emerging economies such as China and India will be enough to generate a return to pre-2008 global growth.
As a result, companies need to prepare for a multi-speed global economy. While some countries, such as Indonesia, are maintaining or returning to pre-recession growth rates, the developed world will experience many years—if not a decade—of slow growth.
Companies face ongoing and long-term challenges brought on by global trade imbalances, unstable financial institutions, and overleveraged consumers who can no longer be counted on to drive economic growth.
Business will have to adapt to some “new realities”—including greater government intervention, the shakeup of existing industry structures, cost-conscious consumers inclined to save more, and an atmosphere in which stakeholders, ethics, and solid governance take priority over shareholders and quarterly results.
It’s important to remember that US consumers generate a large share of global GDP—nearly 19 percent. There’s no obvious short-term replacement for this mainstay of global commerce. Even China’s economy will not have sufficient strength to save the economy: It would take a 32 percent increase in private consumption in China to offset a 5 percent reduction in US consumer spending.
Companies will have to make some painful adjustments as they come to terms with the new realities.
To stabilize the financial sector, governments mobilized more than US$18 trillion, and they injected more than $2 trillion to stimulate the real economy. These initiatives to “reflate” the global economy amount to an unprecedented and historic experiment, and it is not clear what the long-term impact will be. There remain “zombie banks” that do not or cannot provide loans, making shrinking credit a problem that could last for years. And even with a 1990s-type job creation rate, it would take until 2014 for unemployment to return to its pre-recession level. Also, one of the side effects of all the government intervention is the increased influence of politicians in business affairs.
As part of the research for the recently launched book Accelerating Out of the Great Recession, BCG surveyed more than 400 executives in seven countries at companies with more than $1 billion in annual sales. The majority of the respondents expressed an appropriately sober view of the business climate. And most—between 50 and 70 percent—have made the basic defensive moves, such as increasing their focus on key customers, reducing administrative expenses and inventory levels, and renegotiating supplier contracts.
Far fewer have made the more difficult and important longer-term moves. For instance, only 44 percent plan selective exits from product lines, only 39 percent plan selective exits from customer segments, and only 43 percent have taken or plan to take action involving divesting businesses and exiting sales channels.
Leaders recognize the need to be both defensive and aggressive. But when it comes to taking action, they seem to be just playing around the edges of cost cutting.
In order to identify strategies with a proven record of working in the toughest times, we investigated some 100 companies during the Great Depression (constituting two-thirds of the 1929 capitalization of the New York Stock Exchange), all companies in the Standard & Poor’s 1500 Index in the 1970s and 1980s, and nearly 5,000 Japanese companies from the 1990s and early 2000s. Out-performers from these periods were subjected to an in-depth analysis in order to discern the roots of their success.
Although it may seem ironic given their recent performance, GM and Chrysler actually excelled in the 1930s and were able to grow their market share by a staggering 15 and 19 percentage points, respectively, during the Great Depression.
Companies, like IBM, that were able to sustain investment in R&D and innovation in the Great Depression created enduring advantage.
During the slow-growing 1970s, McDonalds dramatically outgrew Burger King by significantly increasing the relative number of new store openings. Burger King didn’t have the courage, and paid the price.
(Playing catch-up with a company that continues to invest through tough times is difficult).
Gaining a deep understanding of how consumers are responding to a prolonged downturn can lead a company to go beyond new-product innovation and even make changes to its fundamental business model. (Kimberly-Clark achieved great success with the Huggies brand by closely monitoring customers during the economically stagnant 1970s).
To survive in today’s challenging and highly competitive environment, companies need to protect their fundamentals as follows:
Rethink cost models. One way to make cuts—without damaging the core—is to restructure around profit centers and projects. In the 1930s, General Electric was able to outperform its competitor Westinghouse by cutting costs quickly and deeply while also retaining its top talent.
Synchronize inventories to shifts in the external environment. Simply cutting inventory, without reference to other factors, is a mistake.
Lower the perceived price of goods and services. By removing add-on features or unbundling them, companies can create the perception of price cuts while actually preserving margins and revenue.
After protecting their fundamentals, executives need to be ready to go on the attack.
Executives need to consider learning from, and keeping an eye on “challenger” companies in rapidly emerging markets. These companies will be able to accelerate faster because of cost advantages and comparable technical competence.
Simply cutting costs and slashing marketing expenditures is not enough. Now is the time to transform industries. Executives need to take the lead in employing game-changing strategies.
In the post-recession era, well-run companies will be characterized not by constantly improving quarterly earnings but by solid balance sheets, good cash positions, and strict management, all of which will result in lower profit levels as post-recession prudence replaces pre-recession leverage.
Running a company in an era of slow growth will feel altogether different from the way it has felt in prior years—and much will rest on how CEOs and management teams are willing to challenge their existing managerial mindset.
It will no longer be enough to play just to play—it will be necessary to play to win. Those who take the initiative, respond decisively to the challenge, find their own way of differentiating themselves from less fleet-footed competitors, and execute their strategies with single-minded determination can expect to grow.
David Rhodes is a Boston Consulting Group senior partner and the global leader of the firm’s Financial Institutions practice. David Stelter is a Boston Consulting Group senior partner and the global leader of the firm’s Corporate Development practice. Rhodes and Stelter are authors of Accelerating Out of the Great Recession (McGraw-Hill, February 2010) and the BCG white paper
Preparing for a Two-Speed World.
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