A Tiny Number Of Companies Managed To Outsmart Economic Downturns...Here's How They Did It

McKinsey
Bain
Harvard Business
& Gallup
all agree:

There is a proven path to actually thriving through disruption.

To capture more customers, more market share, and more profits during an economic downturn....but historically, only 9% of companies actually manage to do it.

To find out how, researchers embarked on more than a year of study, analyzing over 5,700 companies, across the last three 3 recessions, to answer two simple questions:

“What do we know about how leaders decide what to do when demand suddenly falls? And how do these choices affect a company’s competitiveness after the downturn ends?”

And what they found shocked them:

A tiny 9% of the companies studied not only ‘survived’ the economic downturn...they actually thrived because of it; outpacing their competitors during recession periods...and then downright leaving them in the dust after things returned to normal.

So, let’s dig into exactly how these companies used disruption and the resulting downturns...to their advantage

The first thing we need to understand is why companies who manage to thrive during disruption are so rare…

So, why do so few actually figure it out?

Turns out the first hurdle...is our brain.

Years ago the great race car driver Mario Andretti was asked for his best tip on becoming a racing champion. His answer was surprisingly simple:

“Don’t look at the wall.”

To further elaborate, he explained that what you focus on will determine your direction, so if you’re staring wide-eyed at the wall...you exponentially increase your chances of hitting it.

Same concept is true during an economic disruption.

At BOTH the micro & macro level, people are freaking out; literally.

We’re ALL looking at the ‘wall’ right now as we stare down this pandemic unfolding hour by hour.

This mental loop of ‘uh oh...this is bad...this is really bad” by its very nature, stimulates our ‘fight or flight’ response; which means a constant drip of Cortisol into our brains.

Translation: Our brains go full ‘reptile mode’ and focuses ONLY on survival.

Which then shifts resources from high level creativity & synthesis work (like “how can we unlock new growth opportunities right now?”) to the ‘urgent’ need of survival (like “we need to cut all expenses asap”)

Harvard Business puts it this way:

“like generals in the heat of battle, leaders are so busy tackling short-term priorities that the future is obscured by the fog of war.”

But this natural instinct to be defensive is exactly what not to do.

And HBR expounds in further detail WHY a purely defensive position isn’t the answer:

“A focus solely on cost cutting causes several problems.

One: Executives and employees start approaching every decision through a loss-minimizing lens. A siege mentality leads the organization to aim low and keep innovation incremental.

Two: Instead of learning to operate more efficiently, the organization tries to do more of the same with less. That often results in lower quality, and therefore a drop in customer satisfaction.”

Which means even less demand, which means even more cuts, which turns into a brutal downward spiral.

But as McKinsey cautions, that’s *not* the way out of economic disruption and downturn:

“While most companies tightened their belts, successful leaders [...] refocused rather than cut spending. When other companies simply battened down the hatches, seeing only risk during the recession, the more successful competitors found opportunity and pressed their advantages”

Now that we understand what not to do (only play defense and overcorrect by counter-productive cuts), let’s dive into the two core things these ‘outlier’ companies did do to find a path to prosperity despite severe economic downturns...

As Harvard Business notes: “These companies’ defensive moves are selective. They reduce expenses by improving operational efficiency rather than by slashing [costs]”

So instead of blindly cutting spending across the board, their teams looked for ways to get more efficient for the long term; exploring and implementing creative ways they could boost output, share resources, or negotiate better vendor relationships...but again, in a way that was sustainable and served them for the long term.

But as they did that, they also did the really counterintuitive part; they actually invested more into things like research and development and marketing...all in service of developing new assets and unlocking new markets.

And here’s the punchline, from the researchers at Harvard Business:

“This multipronged [innovation & development] strategy is the best antidote to a recession”

I’ll write that again so it really sinks in:

These companies, by investing in new initiatives, unlocking new markets and developing new business assets, found the true antidote to recession.

At this point, we’ve been digesting a lot of research, which is all well and good...but let’s look at how effective this approach can be in real world conditions from a company you’ll probably recognize: Target.

During the 2000 recession, Target not only increased its marketing and sales expenditures by 20%...but its capital expenditures by 50% over pre-recession levels.

It also increased the number of stores it operated from 947 to 1,107 and added 88 SuperTarget stores to the 30 it had already set up.

I repeat; during the recession...they expanded.

But even more importantly, the company made several smart ‘future focused’ choices along the way:

They launched several new product segments, ramped up investment in new customer programs, expanded their digital business, inked new distribution deals, and developed new design partnerships.

And the result?

These moves helped the company grow sales by 40% and profits by 50%...

...during a recession.

Now, you may not be Target, but the good news is that how Target got there, is, at its core, the same way the others did as well.

And Harvard Business tell us exactly *how* these organizations managed these disruptions so effectively:

“They encouraged and empowered their people to discover what works and combine those findings in a portfolio of initiatives that improve efficiency along with market and asset development.”

And that...is the second key to managing disruption; empowering ALL their people to define the problem, identify the constraints and figure out a viable path forward.

It’s an organization shift from ‘planning & managing work’ to ‘empowering & equipping people’ to ideate, collaborate and execute the path forward.

Encouragingly, these findings and approach are confirmed by the world’s leading data source on effective management: Gallup.

In fact, in research done specifically about economic disruption, Gallup found five ‘key factors’ that organizations must focus on to navigate the downturn successfully and implement the strategic initiatives that were so critical to companies that thrived during downturns:

Although we don’t have time to cover all of them in great detail here, we’ll cover the two that relate most specifically to leading & managing teams through disruption...so we can get to the good part: How you can start implementing these concepts in your organization, NOW .

KEY FACTOR 1: Developing People

So many organizations espouse the old axiom “people are our most valuable asset”. But as witnessed by the abysmal rate (30%) of employee engagement, so few companies actually invest the time and resources to make good on that statement. Indeed actions speak louder than words.

And the ironic part, not only does Gallup have compelling data on how important development is to the employees (87% of millennials rate "professional development" as very important to them)...

...but they also show that developing people is a critical component to innovation - yet vastly under invested in; especially during challenging times:

“Development is usually pushed to the wayside during times of change -- but that's exactly when it's needed the most. Continuous coaching and feedback create an opening for new ideas, initiatives and programs.”

This is such a key point.

These ‘outlier’ organizations, who not only thrived through downturns, but emerged the dominant player in their industry...actually increased investment into developing their people during recessionary periods. 

Which not only resulted in greater innovation, but gave people the ownership and accountability to see the initiatives through to completion.

Again. Counterintuitive.

But Proven Over and Over Again.

KEY FACTOR 2: Engaging Employees

Gallup gives us arguably the most important point of all, that’s been proven critical to an organization’s success, no matter what the current business climate is.

It’s the central tenant of their decades of research and is the single biggest factor they attribute to organizational success across the board.

Employee Engagement. (Engagement is defined as the emotional commitment the employee has to their manager and the organization, as evidenced by discretionary effort.)

As if we haven’t already quoted enough brilliant thinkers thus far, less than a couple years ago, $30B consulting firm KPMG released a report on employee engagement that eerily predicted how important engagement will be to “thriving in a new environment”:

"If people have the right tools and are empowered, they will make the right decisions for the organization. Leaders [& Organizations] that get this will thrive in the new environment.”

We've just covered a lot of ground, so let’s recap what’s been proven necessary to navigate economic and market disruption successfully:

1. In times of uncertainty our brains naturally ‘look at the wall’ and default to purely ‘defensive’ strategies...which is exactly what not to do. Companies need to look to, and invest in, the future.
2. The tiny 9% of companies that thrived through disruption and economic downturns did two core things their competitors didn't:
   • Instead of fear-based cuts, they found ways to operate more efficiently, long term
   • They embraced distributed innovation; empowering their people to develop new market opportunities and assets
3. They thrived through the disruption by investing in their managers & team leaders, while working hard to increase engagement so their employees felt empowered to solve the challenges ahead.

Gallup summarizes the entire mindset & approach this way:

“Excessive attention on cost reduction misses the point -- saving money is good, but making money is better. The way to do that is through workers that are more productive and more profitable...because they’re more engaged.”

So...how will you address the current crisis?

Will your people move fast and adopt and develop new opportunities?

Can you find advantages in adversity for your company and clients?

Hopefully we’ve made a compelling case for this approach through the incredible research done by Harvard Business, Gallup, McKinsey & others.

But truth be told, this data only confirms our 10+ years of real world experience integrating these skills and approaches with thousands of employees, in every conceivable industry, including apparel, retail, logistics, healthcare and manufacturing.

At the end of the day, empowering your people is the only proven way organizations can expand their thinking and get creative on how to navigate this storm...together.

Because, as a reminder; nothing gets better if we just stand still...or even worse, start walking backwards. 

Thriving through a downturn is possible. But as the research clearly shows, it takes making some counterintuitive choices to invest in your people, and the future they can help create, together.

And whether companies decide TO invest in them...or NOT invest in them, Gallup is clear that either message will be heard.

“A targeted investment in an employee tells them, "There IS a future...and you are part of that future."

And of course, no investment in people speaks loudly and clearly too.

Ultimately, the choice is yours…but hopefully this has made the path more certain in this unprecedented period of change and disruption to business as we know it.