What did the winners in the last recession do right?

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Recession
What did the winners in the last recession do right?
By Jane C. Linder & Brian McCarthy
Sep 1, 2009 - 1:42:18 PM

Although the past decade’s record-setting economic growth temporarily obscured the reality and, indeed, the importance of recessions, recessions are a fact of business life. The current business environment is a reminder that managing during times of economic turmoil is a critical business capability.

So what did those companies that came out of the financial gate most strongly after the recession of the early 1990s do?

To find out, Accenture Institute for Strategic Change researchers interviewed senior executives who experienced the global recession of 1990-1991. We then coupled those quantitative findings with analysis of the financial performance of 850 of the largest companies in the United States based on return on invested capital.1

Setting the stage

Our interviews made clear that the vast majority of executives at the time of the last recession thought of a recession as an opportunity to improve business performance. Yet despite this resounding consensus, their companies’ performances varied dramatically, indicating that many were unable to turn the downturn into an advantage.

We found that taking advantage of a recession was as much about what companies did in the good times as the bad. The most successful post recession companies built financial strength during the good times. They amassed liquid assets, limited debt and focused on cash flow in order to remain flexible and unencumbered. The Accenture research shows that 83 percent of those executives whose companies came out of the last recession the strongest described their approaches to financial management as conservative. In contrast, only 45 percent of the poorly performing companies took this stance.

Successful companies also prepared themselves strategically during the good times. They forged resilient strategies designed to work in good times and bad. They tended to narrow, rather than to broaden, their business portfolios, focusing on areas in which they could establish a clear lead. They also favored profitable internal growth over acquisitions, except when they were in a position to consolidate operations expertly.

But the research also indicates there was something else in addition to conservative financial management that separated the last recession’s winners and losers.

Execute distinctively

Both the winners and losers of the last recession shopped for bargain assets, reduced costs and delayed or eliminated some spending. But while these are important and prudent tactics during a recession, these actions did not spell the difference between good and poor performance.

What does appear to be a driver is openness to innovative perspectives on existing knowledge, tools and relationships. Our research and analysis shows that winning companies took some actions not taken by others. These decisive actions strengthened a company’s strategic position. These high performing organizations:

Set priorities based on detailed knowledge of how the company creates value.
Companies did not just cut costs— they cut the right costs. They diverted resources to activities that actually created value. How did these companies make the right calls?

Unlike most executives, the leaders and everyone else in their companies knew explicitly how their companies made money. They knew how their products and services stacked up against those of the competition, why customers preferred doing business with them and exactly what they had to do to turn a profit. This kind of knowledge at all levels meant that recommendations and decisions about budgets were made with a clear understanding about the potential impact.

Leveraged unique information systems.
The high performing companies invested in information systems, such as computer based modeling, designed to give them the ability to manage and gain insight about their key value drivers. More importantly, they used the output. The poorly performing companies did not have the same responsive systems.

Collaborated with customers to improve value propositions.
The winners of the last recession reached out to customers to better understand their challenges. Gathering this information allowed the companies to create new products and services that were uniquely suited to the pressures customers were facing during the downturn.

Priced for profitability.
Winners worked themselves into an advantaged cost position during good times, and then used their pricing flexibility to pick up market share in a downturn. However, in the downturn, winning companies walked away from bad business and losers did not. The companies that performed poorly accepted unprofitable sales in an attempt to hold onto market share.

The Accenture research shows that savvy executives changed their companies’ competitive position and created value by managing the last recession effectively. Their actions gained market share, forged new customer relations, strengthened product and service positions, and helped build a platform for profitable growth into the expansion that followed.

In fact, we found that companies with the highest return on invested capital for the three-year period following the recession tended to maintain their lead despite other factors in the market. This correlation shows that companies that pull away from the competition during a downturn have lasting advantages, not just a fragile edge (see Figure 1).

Companies that are not well positioned in the current uncertain economy can still turn the downturn to their advantage by receiving unvarnished answers to vital questions. Executives have a chance to learn what is important to customers, what is essential for delivering value and what actually distinguishes their company from the competition.

Companies can, of course, ask these questions at any time, but the pressure of a difficult economic environment puts a much finer point on the responses. Organizations that seek and apply these answers may well be in a better position to take advantage of the next inflection point.

This Outlook Point of View is based on “When Good Management Shows: Creating Value in an Uncertain Economy,” an Accenture Institute for Strategic Change Research Report available on www.accenture.com.

Jane C. Linder, senior research fellow-Accenture Institute for Strategic Change, was a Harvard Business School professor in the information management area. She can be reached at jane.c.linder@accenture.com.

Brian McCarthy, senior manager-Accenture Finance & Performance Management, has extensive experience in value management and financial reengineering. He can be reached at brian.f.mccarthy@accenture.com.

Accenture is the world’s leading management consulting and technology services company. Committed to delivering innovation, Accenture collaborates with its clients to help them realize their visions and create tangible value. With deep industry expertise, broad global resources and proven experience in consulting and outsourcing, Accenture can mobilize the right people, skills, alliances and technologies. Its home page is www.accenture.com.

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