The fate for many of these companies was sad.
- Seventeen percent of the companies failed to survive the economic challenges of a recession went out of business.
- Forty percent of the companies were still struggling financially three years after the recession ended.
- Eight five percent of the market leaders within their category lost that leadership position to someone else.
Only nine percent of the companies in the study came out of a recession in better shape than before.
For the answers to today’s questions, the research contains many valuable lessons from the past. The researchers studied the business activities of these companies in response to the economic conditions of the three recessions.
Based on the activities each company pursued, the companies were grouped into four categories:
- The Prevention Focused Companies, those that were primarily focused on cost cutting as a means of survival. The Prevention Focused companies primarily made defensive moves. They were more concerned than their rivals with avoiding losses and minimize downside risks
- The Promotion Focused Companies, those that felt confident enough in their market position to be aggressive in nature during the recession. They felt comfortable enough to invest more in offensive moves that their rivals to provide upside benefits.
- The Pragmatic Companies, those companies that took a balanced approach to both cost cutting and investment in search of operational efficiencies.
- The Progressive Companies, those nine percent that came through the recession better than before.
The Prevention Focused Companies went into crisis mode when the recession began. Their activities were defensive in nature. They reduced operating costs, shrank discretionary expenditures, eliminated frills and lowered the head count all to preserve cash flow. These companies cut back on almost every item of cost and investment and reduce expenditures more than their competitors.
All of their decisions were based on loss-minimizing. This singular focused created a siege mentality among the management team. They pushed their employees to try and do more with less. This increased pressure resulted in lower quality and a drop in customer satisfaction. Pessimism spread throughout as employees feared more cuts were imminent and they themselves might be next. The focus becomes survival, both personal and the organization’s.
The strategy of across the board cuts eliminated investment in post recession growth opportunities. Consequently as a group, the post recession sales of the Prevention-Focused Companies grew only at 41% of the average.
The Promotion-Focused Companies used the recession as an opportunity to pursue opportunity in the face of adversity. They felt as if they had the momentum and resources to see their way through the tough times and take advantage of their weaker competitors.
There is no doubt that a recession presents opportunities. When times are good, a certain structure is imposed from the top down because those at the top like it just fine. The Promotion-Focused companies used the recession to push changes through. They made strategic investments in hopes of acquiring talent, assets or new business.
In the study, eighty five percent of the market leaders lost their leadership position during a recession.
Unfortunately for those companies that were classified as Promotion-Focused, their culture of optimism led to a culture of denial when the going got tough. This overly positive outlook for the future created the opportunity to ignore warning signs. The companies were saddled with a bloated cost structure. When the eventually had to face the realities, it was too late. The change of direction appeared to be a 180 degree turn to the staff which led to blame and finger pointing.
The post recession profits of the Promotion-Focused companies grew only at 22.7% of the average in the study.
The Pragmatic Companies were just that, they were pragmatic. They took the long view of things. After all, we should be pretty good at dealing with recessionary times.
The Great Recession is the eleventh recession since World War II. Most recessions only last a year or two. So when you look at the long view, our country is in recession for a year or two then we get back to economic expansion for seven to nine years. Then its recession again and then back to growth. The number of years of growth far outnumbers the number of years of recession.
And it’s not like the whole world comes to an end during a recession. During the Great Recession, Gross Domestic Production only declined three percent.
The Pragmatic Companies recognized that cost cutting was an essential tactic in their strategy to survive the recession. But at the same time, they understood that strategic investment must be a part of their plans. The Pragmatic Companies endeavored to strike a balance between cost cutting and strategic investments.
This is not an easy task. The most basic defensive moves involve reducing the number of employees, improving operational efficiencies or a combination of both. The most basic offensive moves include developing new markets, investing in new assets or a combination of both.
There could be countless other opportunities, both defensive and offensive to consider. Some work better than others.
The Progressive Companies found the magic balance between defensive and offensive tactics that worked just right for their circumstances. The Progressive Companies were the nine percent of the companies studied that came out of the recession better off than when they went in.
The Progressive Companies were able to cut costs with selective defensive moves that focused on improving operational efficiencies. They made strategic cuts in some areas and reinvested some of the savings in others. They recognized that to have a future when the recession ended they must continue to invest in research and development and in marketing.
The difference between the Pragmatic Companies and the Progressive Companies was the Progressive Company’s ability to be willing to re-evaluate everything. They were able to check their egos at the boardroom door.
Albert Einstein once said; “You can’t solve today’s problems at the same level of thinking that created them.”
The Progressive Companies knew this instinctively. They knew they had to be open to new ideas. They must have had one of those signs hanging in their office that said “Insanity is doing the same thing over and over but expecting a new result”.
Unfortunately for many local business owners, checking their ego at the door is the most difficult thing for them to do. After all, in many cases, their name is the name of the business, Bill Smith Plumbing for example. They have literally poured everything they have into their business, their time, their money, their hopes and dreams. Their family members may very well be working there too.
Re-evaluating a previous decision is very difficult to do.
Psychologists tell us that people very rarely change their minds. But they make new decisions every single day! And that is the secret to being a Progressive Local Company.
If you are a small business owner looking for a way to position your company for the future, take a lesson from the basic elements of this research.
Cost cutting along won’t get you where you need to be. You’ll end up cutting the muscle of your company right off of the bone and you won’t have any strength to grow when the recession is over.
Most local business owners don’t have the resources to buy their way through the recession but if you think you do, those Promotion Focused Company profits only grew at twenty two percent of the average. They were focused on spending money on the wrong things. They thought they had all of the right ideas.
Be open-minded. Check your ego at the door. Don’t get all hung up in “that’s the way we’ve always done it.” Recognize that it is the small business owner who can put everything on the table for discussion is the business owner that creates the most new opportunity.
Some of your favorite business activities may be just the very thing you need to keep on doing. But just be open-minded that they may be the very things that are holding you back from the future success that all of your hard work deserves.
If you would to learn more about how to be a Progressive Company, please send me an email to Spike@SpikeSantee.Com.
Talk to you soon.
