Strategic Bust or Boom?

Understanding why some organizations boom while others bust.

In a recent article appearing in the Harvard Business Review entitled, “Roaring Out of Recession,” authors Gulatin, Nohria and Qohlgezogen analyzed both the strategies and resulting performance of organizations during the past three recessions. Their analysis revealed which strategies consistently returned up to 12.2% higher Earning Before Interest, Taxes, Depreciation and Amortizion (EBITDA). Their findings represent nothing short of a roadmap to success during these recessionary times.

The authors divided strategies into four categories. We will focus on two: Prevention and Promotion. Prevention strategies include cutting staff, and reducing costs of goods sold. They found organizations practicing this strategy only (21% of the total analyzed) had the lowest potential for success directly following the recession. Those utilizing promotion strategies- meaning they increased expenditures in key areas and did not decrease expenditures any more than their competitors had- have only a 20% chance of bettering their industry direct competitors after the recession passes.

According to this analysis, successful organizations use a hybrid of both strategies to catapult them into the lead during and after recession. Companies with the highest success rate adopt a strategy of selectively reducing costs to increase efficiency while investing smartly in marketing, R&D and new assets.

It is important to understand what prevention and promotion companies do so that these strategies can be identified for what they are: crippling mistakes When implemented alone.. Companies adopting prevention strategies typically only implement strategies that reduce cost. They reduce discretionary spending and reduce headcount. They cut what they view as frills and foolish expenditures wherever possible. They hold on to cash, postponing investments in new assets, developing new business and R&D. The organization focuses on accomplishing more with less, which is no easy trick.  Management and staff adopt a survival mentality, often resulting in lower quality and customer satisfaction.   This strategy produced the lowest  performance during and up to threes after the recession ended.

As you might guess, companies adopting promotion strategies do the exact opposite.  They seize opportunities to add product features, acquire talent, buy assets and implement M&A’s, all the while promoting customer service. While their customers cry out for lower costs, the motto of these companies might very well be “Damn the torpedoes; full steam ahead.” Managers and staff become overly optimistic, failing to respond to the inevitable pitfalls of this strategy.

What strategies do companies that roar out of the recession adopt? Organizations that are most likely to succeed during and after a recession are pragmatic. They look at potential opportunities with a view on short and long term consequences. They recognize the facts at hand and use rational decision analysis tools such as gap analysis, strategic mapping and Ishikawa cause and effect diagrams to make good, sound decisions.

Successful organizations use three main tactics in crafting winning strategies: First, these organizations cut costs by improving operational efficiency. They cut selectively reducing the chances of losing high performance individuals and dampening morale. This is much easier when an organization has effective leadership and a job specific performance management system. The more common one-size-fits-all appraisals force managers to use their gut in making these crucial decisions. I recommend using a more rational objective process rather than relying on someone’s gut reaction in determining the future of people. Only 23% of the most successful companies cut staff compared with 56% of the prevention companies. Second, winning organizations rely on increasing efficiency by encouraging staff to submit ideas displaying innovative thinking and efficient cost cutting. And third, they restructure business functions and suppliers to permanently reduce costs. They cut nonperforming product/service areas and use the money to carefully invest in new markets, R&D and assets. They adopt a mindset of courage and invest for gain versus one of sacrifice and share the pain.

Few business plans fully anticipate the effects of a crisis. However, effective leaders are also agile thinkers, keeping managers and staff focused on ideas that work. The best of these ideas are implemented by engaging everyone in increasing both efficiency and morale. The monies freed from increased efficiencies are invested for the future. After the recession, the company’s costs remain low and its investments pay dividends- but only if its leadership was bold enough to take tough times and transform them into transitional periods marked by top performance.