Accelerating Out of the Great Recession: How to Win in a Slow-Growth Economy
David Rhodes and Daniel Stelter, senior partners at The Boston Consulting Group (BCG), provide a clear-eyed look at the slow-growth business environment that is now emerging and is likely to last for years to come. They offer insights about, and practical suggestions for, making the most of the opportunities that will arise in the aftermath of what they term the Great Recession.
In Accelerating Out of the Great Recession: How to Win in a Slow-Growth Economy (February, 2010, McGraw-Hill), the authors argue that the Great Recession and the upheaval it has caused are without equal in the working lives of today’s executives and managers, who have enjoyed—except for a few brief downturns—a long period of growth, profitability, and minimal government intervention. Now, although the worst of the downturn may be over, the underlying problems and weaknesses that led to the recession linger on—including global trade imbalances, unstable financial institutions, and overleveraged consumers. As the economy seeks to steady itself and consumers focus on reducing their debt, businesses must expect to be operating for several years, even a decade, in a slow-growth environment.
In this changed world, businesses will have to adapt to a number of what the authors call new realities, including greater government involvement in commerce and trade worldwide; a new kind of value-conscious consumerism; and a shakeup of whole industries as consolidation takes place and outdated business models fade away.
Perhaps most important, business managers must adopt a new mindset. They should not anticipate a return to the “old normal,” nor should they expect that the worldwide economy will be dramatically rescued by the growth of emerging economies such as China and India. The contribution of the U.S. consumer has been so great that it cannot be quickly or easily replaced.
The authors point out, however, that companies that protect their financial and business fundamentals and then adapt quickly to the new realities of the slow-growth economy can seize new—perhaps once-in-a-lifetime—opportunities that will enable them to grow, outperform their competitors, and even take a leadership position for many years.
In developing their recommendations for accelerating out of the downturn and into success, the authors drew from two BCG surveys of senior managers in large corporations, one fielded in March 2009 and the other in September 2009. (Unless otherwise stated, reported results are from the September 2009 survey.) They also carefully studied past downturns—including the Great Depression, Japan’s “Lost Decade” (the 1990s and even beyond), and the U.S. stagflation period of the 1970s—and identified practices and approaches that enabled certain companies to succeed and which are highly relevant to companies today. These include a focus on innovation, capitalizing on changes in the external environment, investing in the future through mergers and acquisitions, and employing game-changing strategies.
The book tells us that…
Uncertainty Remains: We Will Be Operating in the Aftermath of the Great Recession for Years to Come
Current initiatives to “reflate” the global economy amount to an unprecedented and historic experiment; some of the measures have never been put into practice before. So, the big question remains: Is this the end of the crisis, or will the Great Recession simply follow a different pattern than previous downturns?
There remains a problem with “zombie banks”—that is, banks that don’t or can’t make loans—and it may take years for banks to become truly healthy again. The resulting shrinking of credit will be troublesome for economies around the world; conventional wisdom says that it takes from $3 to $6 in credit for every $1 of GDP growth.
Even in the best-case scenario—with job-creation rates reaching the 1990s boom level—it could take until 2014 for unemployment in the United States to return to its prerecession level of around 5 percent.
U.S. consumers generate a very large share of global GDP—on the order of 18.8 percent—and there is no obvious short-term replacement for this mainstay of global commerce. Even China’s economy will not have sufficient strength to save the economy: a 32 percent increase in private consumption in China would be needed to offset just a 5 percent reduction in U.S. consumer spending.
Executives grew more pessimistic over the course of 2009. According to the March BCG survey, a majority (63 percent) expected a “U”-shaped recession with an upswing in 2010 or 2011, and 22 percent expected an “L”-shaped recession, similar to Japan’s Lost Decade. But in September, 46 percent expected an “L”-shaped recession and 43 percent expected a “U”-shaped recession. (Notably, in September, nearly half of U.S. executives, 50 percent of those in Germany, and 74 percent of those in Japan expected an “L”-shaped recession.)
The New Realities of Business Life Will Be Characterized by Increased Government Involvement, Higher Taxes, and More Protectionism—and Less Money for Consumers
Many experts, including Christina Romer, the chair of the U.S. Council of Economic Advisers, believe that several more years of aggressive government spending will be necessary to restore the economy to full health.
Significant government spending will likely lead to higher taxes in the future. Tax increases, in turn, will cause a reduction in consumers’ disposable income. As a result, consumer spending will remain constrained. Consumers will focus on necessities, become extremely value-conscious, and be much more conservative about when and how they spend.
Throughout the developed world, governments will most probably lean toward protecting their domestic labor forces and promoting reindustrialization, rather than encouraging foreign investment in their countries. This will likely constrict free trade and bring a dramatic change to the opportunities and challenges of globalization.
More than 70 percent of executives expected an increase in protectionism, according to the BCG survey.
The New Consumer Will Determine Many of the New Realities
Consumers drove the prerecession boom, and their spending was often fueled by taking on excessive debt. Their efforts to reduce debt will have a major effect on their spending and will largely determine the realities of business life in the aftermath of the Great Recession.
Consumers are also increasing their savings. The U.S. savings rate leaped to 5.9 percent in the fall of 2009, its highest level in a decade.
As a result of decreased home values, losses in their financial portfolios, and uncertainties about employment, consumers are growing accustomed to the idea that their working lifetimes will be longer than they had expected. And the next generation of “damaged-economy babies” will be characterized by a stronger propensity to save rather than splurge, less willingness to speculate, longer time horizons for investments, and also, perhaps, less interest in entrepreneurship.
Some 90 percent of the executives in the BCG survey cited the shift in consumer behavior as the primary challenge facing their company and industry.
The Tougher Climate Will Lead to a New Kind of Culture and Operating Mode for Business—and a Disconnect with Investors
There will be no quick return to the profit levels of 2006–2007. In fact, 68 percent of the executives in the survey believe that profit levels in their industry will be lower in the coming years.
In the new reality, 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 contribute to lower profit levels as postrecession prudence replaces prerecession leverage.
Investors will need to learn to focus more on a company’s balance sheet, liquidity, and cash position rather than on quarterly growth or share price increases.
In addition, the authors expect the pendulum to swing from favoring shareholders to favoring stakeholders: the culture of a company will assume new importance as organizations act to preserve their skill base and to be seen as proceeding responsibly in the aftermath of the Great Recession.
There Are Huge Rewards for Deft Maneuvering in the Aftermath
History shows that structural shifts in the pecking order of industries occur more often in difficult times than in prosperous ones—and that these shifts typically endure for a long time. The fight to sustain company performance during a downturn isn’t just about survival; it’s also about long-term positioning in the industry hierarchy.
Many companies that outperformed their peers in the Great Depression continued to do so for many years afterward—and by wide margins. Key examples include General Motors, Chrysler, and IBM.
The Great Depression and Japan’s Lost Decade underscore the fact that the basis for survival in tough times involves protecting financial fundamentals, business fundamentals, and revenues.
It’s a matter of concern that few companies, according to the BCG survey, are giving priority to protecting cash and taking a comprehensive approach to cash management: only 27 percent said that managing cash flow was one of their top three priorities in 2009.
Accelerating Out: Postpone Spending, Drive Down Costs to Gain a Price Advantage, and Then Use Pricing as a Strategy
Companies need to fundamentally rethink their cost models. The challenge is to cut costs in a long-term way without damaging the core. A good approach is to act quickly and to restructure around profit centers and projects.
Inventory management is critical. A company shouldn’t just cut inventory—it must synchronize inventories to shifts in the external environment.
Nearly all companies took easy, short-term measures to cut costs during the Great Recession, but few are taking longer-term actions, such as reducing capacity, improving efficiency, and doing more outsourcing. Seventy-seven percent of executives in the survey said that they had cut administrative expenses, but fewer than half had taken long-term steps.
Pricing is a good lever. But while the obvious response to consumer price sensitivity is to reduce prices, businesses should do so only if (or when) they develop a cost advantage.
Smart companies will look for ways to lower the perceived price point without sacrificing revenue. Companies can remove features and slim down products, for example, or unbundle product and service offerings. Others will be able to lock consumers in at a low price and then sell upward.
Accelerating Out: Embrace Government Intervention and Changes in the External Environment, Hone Political Skills, and Rebalance Interests
One of the new realities is the heightened involvement—and intervention—of government in business affairs. Accordingly, executives in all industries and regions will have to put more emphasis on government relations in order to influence regulation and the scope of future stimulus programs.
It’s notable that two of the strongest companies of the last several decades, GE and IBM, were beneficiaries of opportunities created by New Deal programs during the Great Depression.
Executives must also embrace the likelihood that workers, and their unions, will regain some of their lost influence.
As politicians and workers gain influence, shareholders’ influence will dwindle. This means that executives will need to reassess the importance of shareholder value—and find a better balance among shareholders, customers, employees, and other stakeholders.
Accelerating Out: Going on the “Offensive” and Investing—and Divesting—Shrewdly
Protecting fundamentals and cutting costs will be necessary but not sufficient for companies to win in the slow-growth economy. Executives should also look for areas of attack. What distinguishes long-term winners during downturns, compared with the also-rans, is the courage to invest in the future of the business.
Companies like IBM that were able to sustain investment in R&D and innovation in the Great Depression created an enduring advantage. Downturn investments are often a better value because there’s more availability of, and less competition for, resources. During the slow-growing 1970s, McDonald’s dramatically outgrew Burger King by significantly increasing the relative number of new store openings. Burger King didn’t have the courage to keep pace, and paid the price. (Playing catch-up with a company that continues to invest during 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 to 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.
M&A activity can become more effective during a recession or slow recovery period, when premiums are lower and opportunities are richer and more abundant. Downturns can present unique and inexpensive chances to acquire rivals that find themselves credit-constrained. A BCG study showed that deals completed during downturns outperformed those during upturns by 14 percentage points on a relative total shareholder return basis.
Divest strategically. Other BCG research indicates that companies divesting assets enjoy substantial gains—and more so during downturns. Although the seller’s immediate concern is generally to obtain the best possible price for the asset, the additional increase in shareholder value achieved through the divestment usually outweighs any loss incurred in the sale.
Accelerating Out: Adopt a New Managerial Mindset—One That Includes Work-Life Balance, a Nose and Head for Sustained Differentiation, and a Sensitivity to the Impact of “Challenger” Companies in Developing Countries
Not only do leaders need to track progress rigorously against metrics and milestones and intervene when necessary to improve performance, they also need to communicate differently and more often. They need to celebrate successes and—whenever and wherever possible—recognize the contributions of individual team members who have achieved results.
In the 1930s, successful leaders focused on securing jobs for the most highly skilled workers (by lowering the number of working hours and shifting people to lower-paying jobs to keep them on the payroll) and also added social benefits that compensated for lower wages. Leaders in today’s recovery will have to come up with similarly innovative approaches in the field of work-life balance.
Leaders will also need to ensure that their organizations are truly differentiated. With the margin for error narrower than it has been in a long time, differentiation is key.
Keeping an eye on what challenger companies in developing markets are doing will be especially important. These companies will be able to rise faster because of their cost advantages and comparable technological competence.
Accelerating Out: Take a Stricter Approach to Compensation, Governance, and Ethics
Given that a slow-growth environment will lead to lower equity returns, stock options may lose appeal. It will therefore be necessary to redesign compensation systems so that they can continue to attract and retain talent and reward strong and sustained performance.
At the same time, there will be a call for executives to not only reap the benefits of an upside but also suffer the costs of the downside. Executives will increasingly have to put some of their own wealth at risk.
In terms of governance, board members at companies that succeed will need to be more familiar with the technical workings of the business so that they are better able to assess the risks that management is taking. In the BCG survey, 80 percent of executives expected a greater role for nonexecutive directors in holding management accountable and being involved in and understanding the company’s business.
The debate about what constitutes fair capitalist behavior is moving to the fore. More than two-thirds of the survey respondents expected an increase in public scrutiny of business ethics and personal actions that might be construed as improper or excessive.