04 Feb 08 The lights are going out

And so after a vacation of seven years the ‘R’ word – recession - has re-entered the business vocabulary.

As many observers are pointing out, there are real tangible reasons to fear the emergence of a recession. Fingers are being pointed at credit oversupply, energy prices, over reliance on the ‘decoupling theory’ (the idea that new markets would be resilient to a downturn in the more mature economies), whilst others point more worryingly to a structural failure in the capital market architecture that has been constructed over the last decade – see Financial Times 25 January 2008 – Ins and Outs of the Ups and Downs.

Last week provided us with the chilling message from the IMF that no country would be immune to a global slowdown.

So if there are real structural drivers behind a downturn – not just talk producing a self-fulfilling economic prophecy – what should businesses do?

This was a question that had stuck in my mind for a few days after seeing newspaper headlines stating that businesses were already planning to take the financial knife to their advertising budgets. The question must be ‘how can we stop recession at the firm level becoming a self-fulfilling prophecy?‘

To answer this question, I had to go back a long way in time – further back than the threatened 2001 recession – to delve into experiences from the early 1990s and 1980s.

A clear message started to appear – firms can survive and even grow in a recession.

The general messages are:

• Customers: Recession is a time for innovation, not retrenchment in terms of customer strategies. Organisations that survive broaden rather than narrow the customer segments that they serve. A key question to answer is how can my organisation’s value proposition be made more important to my customers. This demands possibly more research into what customers value in these economically demanding times. A reactive position would be to do the opposite and fall back on price reductions to defend revenue levels.
• Offerings: A similar message appears here too. Recession is a period to maintain R&D and to broaden the range of offerings – products and services – that are provided.
• Expenses: Remember that downsizing carries significant risks. Experiences from the 1980s and 1990s point to mixed financial results and the danger of mistrust, declining motivation and appearance of the ’survivor syndrome’ the symptoms of which are declining creativity and risk aversion. Learning from the past, the objectives must be (a) to know your minimum critical size and (b) create an expense base that is more flexible – better matched to changing revenue volumes.
• Management. This is a time to get closer to impending problems. In terms of performance management systems, this must be the point to take a careful look at your leading indicators – indicators of potential future problems.

Interestingly, McKinsey has recently published a research study into firm behaviour in recessionary times – which came to the clear conclusion that it is possible for firms to grow. The more successful focus on organic growth, product and geographic diversification, maintenance of R&D and capital investment on top of a quest for productivity leadership and a more flexible cost structure.

So, have we forgotten the lessons from the 1980s and the 1990s and are we about to take our firms into a self-fulfilling prophecy?

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