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Alec Levenson
Alec Levenson
 

Leveraging the Recession

In these uncertain economic times, leaders need to know whether their organizations are on the right path. Six key insights show how your firm can thrive in both good and bad times.

July 27, 2009
by Alec Levenson, PhD

Almost a decade ago — at the height of the last recession — the Center for Effective Organizations (CEO) at the University of Southern California launched a study on how companies’ strategy, structure and process impact their ability to weather an economic storm. The current recession that’s ongoing is both deeper and longer than the one that occurred in 2000– 2001.

However, the insights from that study have much applicability today. In this month’s article I divulge the lessons from that study that companies can follow today:

  1. Cost Containment

    In the boom years of the late 1990s, many companies outperformed their peers by focusing on growth — often at the expense of maintaining control of their spending. When the economy hit the wall, however, many of these companies couldn’t cut back their spending quickly to match the falloff in revenues. A different group of companies already had systems in place before the recession that enabled them to respond much more quickly to the signs of falling sales. These companies weathered the recession in 2000 – 2001 in much better shape.

    The lesson for today:

    Even before the meltdown in financial markets in September 2008, forward-looking companies had systems and processes in place to keep spending from outpacing revenue growth. Cost containment arguably is even more important today than before, given the reluctance of financial institutions to take risks in lending.
  2. Leverage

    When financing was cheap, many companies leveraged up to boost spending and earnings. The dangers of this were evident in the last recession when stock markets fell and banks pulled back on commercial lending. More highly leveraged companies were forced to make cuts quickly to keep their operations afloat — even if that meant deep cuts to core capabilities. Less highly leveraged companies had breathing room to wait out the initial wave of bad news before making big changes in their core spending. Cisco and other high-tech companies used this strategy effectively to weather the last recession. Companies that combined low leverage with quick-response cost-containment systems had a double advantage.

    The lesson for today:


    The dangers of leverage at the bottom of the business cycle have not changed for generations. The current recession is no exception. Leverage that supports critical investments with clear repayment paths can be strategic. But if the debt burden is high and chances of success low, high leverage can threaten a company’s ability to weather the business cycle.
  3. Margins and profit

    Keeping a laser-like focus on margins enabled many companies to successfully ride out the last recession. High-margin businesses like Intel thrive because they maintain a consistent focus on a high margin product mix; this includes keeping core R&D investment high to ensure the pipeline is stocked with future high-margin items. Low-margin businesses like many consumer products companies (P&G, PepsiCo, Unilever), retailing (Wal-Mart, Costco, Target) and temporary staffing (Manpower, Adecco, Kelly Services) fight daily for the smallest margin gains; the competitive advantage provided by small margins gains for such businesses keeps them lean, hungry and focused on profitability regardless of the economic cycle.

    The lesson for today:

    Preserving cash and keeping leverage low support strategic success only if margins are not eroded. Companies that successfully stay on top of the waves of the economic cycle keep a strong focus on the margins needed to maintain their economic advantage.
  4. Industry Experience

    Each business cycle is unique, but the differences can be exaggerated. Knowing what enabled an industry to successfully navigate previous downturns can be extremely valuable because competition within an industry often changes slowly. For every industry currently undergoing radical transformation due to disruptive technologies or business models (music distribution, advertising, cell phones), there are many more in which the changes are more gradual (consumer products, logistics, transportation, professional services). For companies in more slowly changing industries, a deep industry veteran leadership bench can provide invaluable insights on how to successfully adjust operations in response to a downturn. Businesses that entered the last recession with deep industry experience fared better than their competitors.

    The lesson for today:

    Leadership from outside the industry can bring a fresh infusion of new ideas and promote growth in the longer term. But the benefits of deep industry experience add a critical perspective when dealing with the short-run demands of business cycle ups and downs. This important lesson from the last recession is just as insightful today in an era of even steeper business decline.
  5. Performance management and accountability

    Performance management and accountability too often are treated as fads that come and go with the business cycle. Companies that fared best in the last recession had a strong commitment to both that long preceded the tough times. That commitment often could be traced to previous adversity that threatened the companies in clear and public ways that the leadership could not ignore. For Frito-Lay in the late-1980s and early-1990s, expense growth outpaced sales and market share dropped. The subsequent turnaround included setting aggressive industry-beating goals for both revenue and profit, and holding people accountable for those goals. The systems and processes set in place then served the company well through the last two recessions — and the current one. Intel reaped similar long-run benefits when it made the difficult change from memory chips to microprocessors — benefits that have endured for over two decades.

    The lesson for today:

    In a world with ever increasing competition, performance management and accountability are not luxuries in either good or bad times. Creating systems and processes that reinforce them are critical for strategic success regardless of the stage of the economic cycle.
  6. Customer focus

    The thread that ties everything together is an unwavering focus on what customers want and need both today and in the future. The more in touch an accounting company is with the needs and desires of its customers, the better it can respond to changes in purchasing behavior and differentiate long-run trends in spending from short-run deviations in those trends. IBM in business services and Nokia in cell phones are two examples of companies that used a strong customer focus to build organizations that successfully addressed both current and anticipated customer demands. Those organizations provided competitive advantage through both economic expansion and recession.

    The lesson for today:

    Companies maintained competitive advantage heading into the last recession by coupling a strong customer focus with an organization structure and systems that promoted success by emphasizing cost containment, leverage and margins through performance management and accountability. Doing so effectively is a complex task that requires discipline and perseverance. The potential reward from doing so, though, is a company that can better withstand the ups and downs of the business cycle.

Conclusion

By using these six key strategies to make bold moves, hold staff accountable and make your company more customer-centric, CPA firms will not only survive today’s recession, but will also thrive easily during any upcoming ones as well.

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Dr. Alec Levenson’s research and consulting work at the Center for Effective Organizations (CEO) at USC optimizes job performance through the application of organization design, job design and human capital analytics. CEO works with organizations to determine the connection between how they are structured and managed, and their performance. Levenson formerly worked as director of Labor Markets and Human Capital Studies at the Milken Institute.