Many executives are already anticipating a recession in the next few years and quietly gearing up for it. The question for these executives isn’t whether to prepare, it’s how.
What does it mean to be a resilient company in a recession?
During the last downturn, resilient companies weren’t protected from the market because they had better products or services. In fact, most lost nearly as much revenue as industry peers during the recession; the outliers were from a few sectors that didn’t experience the downturn as strongly.
But by the time the recession had reached its lowest point in 2009, the “resilients” had increased their earnings before interest, tax, depreciation and amortization by 10%, on average, while industry peers had lost nearly 15%. The resilients seem to have accomplished this by reducing operating costs earlier in the recession cycle, and more deeply.
Their willingness to move early made them more likely to successfully weather economic shock. As the effects of the downturn became more and more apparent, resilient companies focused on building more flexibility into their investment-planning and operations in addition to pursuing continued earnings expansion.
The upshot is that resilients were entering the trough of the recession in much better shape than industry peers, with far more cash. Resilient companies also focused on maintaining loyalty among high-value customers that were central to the company’s growth post-recession.
Future recessions, however, will look different. For a start, today’s CEOs are more constrained in their ability to cut costs. Activist investors, pressure from Wall Street and other factors have already driven companies to become as lean as possible. Given the current debate on income inequality, combined with the increase in employee activism, cost cuts can create second-order consequences — hits to the brand, for instance, or political backlash, or reduced company morale. Slashing costs may end up being an inadequate tool for earnings growth.
As our research suggests, getting ahead relative to peers (even slightly) during a recession gives companies an advantage that is tough to reverse when the economy improves.
(Kevin Laczkowski is a senior partner in McKinsey’s Chicago office. Mihir Mysore is a partner in the Houston office.)
