Лидеры отрасли, тем более мирового масштаба, болеют редко, но основательно. Вывести компанию из пике можно только комплексной терапией: объединением с конкурентом, географической экспансией и продажей непрофильных активов.

1. Третьим буду. Спасти General Motors, потерявшую лидерство
в области автомобилестроения и терпящую убытки, может
сотрудничество с Renault-Nissan. Американский миллиардер Кирк
Керкорян, владеющий 9,9% акций GM, направил письма президенту
Renault-Nissan Карлосу Гону и гендиректору GM Рику Вагонеру с
предложением объединиться, чтобы сократить расходы на производство.
На слухах о возможном слиянии акции GM подорожали на 8,6% и теперь
стоят $29,38 против $18,5 в начале 2006 года. Только первый квартал
2006-го принес GM, проигрывающей конкуренцию азиатским Nissan и
Toyota и несущей большие операционные расходы, убытки в $10,6 млрд.
В ноябре 2005 компания уволила 35 тыс. работников, сэкономив $1
млрд на зарплате и медицинских страховках. В марте 2006 концерн
продал 51% акций финансового подразделения GMAC за $14,5 млрд и
сократил долю в Suzuki Motors с 20% до 3%.

2. Восточная мудрость. Samsung преодолел азиатский
финансовый кризис 1997 года благодаря решительным действиям
президента компании Юн Джонг Йонга. На тот момент долги компании
достигли $18 млрд. Первым делом Йонг сократил штат с 89 тыс. до 54
тыс., ликвидировал пожизненное трудоустройство, что позволило
компании экономить $430 млн в год. А избавившись от более десяти
непрофильных направлений, компания в 2000 году стала лидером на
рынках телекоммуникации и компьютерной техники. Сейчас 40% дохода
компании приносит производство чипов памяти, по 30% приходится на
продажу мобильных телефонов и мониторов.

3. Химиотерапия. В августе 2001 года компания Bayer
потеряла $1 млрд после того, как ей пришлось отозвать препарат
Lipobay, вызвавший смерть более ста человек. Чтобы исправить
ситуацию, в 2002 году Bayer приобрел агрохимическое подразделение у
Aventis и Schering за $7,25 млрд. К 2004 году чистая прибыль
концерна уже составила 29,8 млрд евро, за два года увеличившись в
четыре раза. Препараты Bayer нашли покупателей в Китае, странах
Латинской Америки, Африки и Ближнего Востока, где спрос на продукты
химпрома растет быстрыми темпами.

4. Спасительное вложение. Со шведским производителем
телефонов Ericsson случилось сразу две серьезных неприятности.
Сначала пожар на заводе по производству чипов в 2000 году принес
$2,3 млрд убытков, а после объединения производства трубок с
японской Sony их рыночная доля снизилась с 12% до 6%. Карл-Хенрик
Сванберг, возглавивший компанию в 2002 году, оставил лишь 20
научных лабораторий из 80, упростил систему финотчетности и даже
вложил в компанию собственные $11 млн. Неизвестно, помогли ли
Ericsson именно эти деньги, но 2004 год компания закончила с чистой
прибылью $2,6 млрд.

5. Прочь из Германии. Metro Group занимает третье место в
мире по величине активов в секторе розничной торговли. Эту позицию
в 2005 году сильно пошатнул скандал в сети гипермаркетов Real,
«дочке» Metro. Продавцы подделывали сроки годности на продуктах,
из-за потери репутации объем продаж на немецком рынке упал на 2,2%.
Ситуацию усугубил экономический кризис в Германии. В качестве
противоядия Metro выбрала экспансию: компания собирается расширить
присутствие в Швеции, Пакистане и России. Более 40% ее годового
оборота уже приходится на зарубежные филиалы.

90000 Ten tips for leading companies out of crisis 90001

90002 90003 «I’ve seen my share of boiled frogs,» 90004 says Doug Yakola, comparing companies in crisis with the metaphorical frog that does not notice the water it’s in is warming up until it’s too late. As the chief restructuring officer or CFO of more than a dozen turnaround situations over nearly two decades, Yakola has witnessed firsthand how managers back right into a crisis without recognizing that their situation is worsening.»They’re not bad managers, but they’re often working under a set of paradigms that no longer apply and letting the power of inertia carry them along.» And if they do not realize they’re facing a crisis, they will not know that they need to undertake a turnaround, either. 90005

90002 Video 90005
Memoirs of a turnaround artist
90002
McKinsey’s Doug Yakola reflects on nearly two decades of leading companies through crisis.90005

90002 He’s also heard the regrets: sometimes managers underestimated how critical their situation was-or they were looking at the wrong data. Others took advantage of easy access to cheap capital to stay the course in spite of poor performance, believing they could push through it. Still others got so caught up in the pressure for short-term returns that they neglected to ensure their company’s long-term health-or even willfully sacrificed it. 90005
90002 Rare among them is the executive who stepped back to review his or her own plans objectively, asking «Is this what I thought would happen when I first started going down this road?» That’s a problem, Yakola says, because acknowledging that your plan is not working is a necessary first step.90005
90002 Yakola joined McKinsey’s RTS as a senior partner in 2011. Here, he offers ten ways ailing companies can get started on the turnaround work they need. 90005
90016 1. Throw away your perceptions of a company in distress 90017
90002 It’s next to impossible to come up with one working definition of a company in distress-and dangerous to think that you have one for your own company. Depending on the situation, there are probably 25 different signs of potential distress (exhibit). The problem is seldom made up of just one or two of these things, however.Rather, it is the result of a greater number of them interacting together and with other external factors. 90005

90002 Exhibit 90005
90022 There are numerous signs of distress-and a distressed company is typically dealing with multiple signs. 90023

We strive to provide individuals with disabilities equal access to our website.If you would like information about this content we will be happy to work with you. Please email us at: [email protected]

90016 2. Force yourself to criticize your own plan 90017
90002 The biggest thing you can do to avoid distress is periodically review your business plans. When you’re creating them, whether at the beginning of the year or the start of a three-year cycle, build in some trigger points. A simple explicit reminder can be enough: «If we do not have this type of performance by this date or we have not gotten the following 12 things done by this date, we’ll step back and decide if we’re going down the right path, given what’s happened since our last review.»90005
90002 Such trigger points should be oriented both to operational and market performance as well as to basic financial metrics and cash flow. Look at where you are as a company using basic financial and cash milestones, and then look at where you are with respect to your industry and competitors. If you’re not moving with the rest of the industry (or not outpacing it, if the industry is struggling), then your plan may be obsolete. And do not forget to look back at your performance over past cycles to identify any trends.If you keep missing performance targets, ask why. 90005
90016 3. Expect more from your board 90017
90002 The beauty of a board is that it has enough distance from the company to see the forest for the trees. Managers often treat their board as a necessary evil to placate so they can get on with their business, but that undermines the board’s role as an early-warning system when a company is heading for distress. 90005
90002 It’s also the board’s responsibility to look the CEO, the CFO, and the chief operating officer (COO) in the eye and say, «OK, we like your plan.Now let’s talk about what it would take to cut costs not just by 3 percent but by 20. Let’s talk about all the things that can go wrong-the risks to the business. » Sometimes significant events happen that no one could have foreseen, of course. But in a typical distress situation, a company has usually just had 18 to 24 months of poor performance, and the board has not been aware or has not asked the right questions. Independent board members-truly independent ones-can have a big impact here. 90005
90002 The senior team at one company maintains a list of risks to the business, employees, and the plan.They review those risks with the board on a quarterly basis to ensure that they’re staying top of mind. It’s an excellent way to have conversations that you would not normally otherwise have in a business operation. 90005
90016 4. Focus on cash 90017
90002 A successful turnaround really comes down to one thing, which is a focus on cash and cash returns. That means bringing a business back to its basic element of success. Is it generating cash or burning it? And, even more specifically, which investments in the business are generating or burning cash? 90005
90002 I like to think about this in the same way one would if running a local hardware store.By that, I mean asking fundamental questions, such as whether there is enough cash in the register to pay the utility bill, for example, or to pay for the pallet of house paint that will arrive next week, or how much more cash I can make by investing in a new delivery truck. When you bring a business back to those basic elements, the actions you need to take to get back on track become pretty clear. In many of the cases I have seen, the management team and board are focused on complex metrics related to earnings before interest and taxes (EBIT) and return on investment that exclude major uses of cash.For example, variations on EBIT commonly exclude depreciation and amortization but also exclude things like rents or fuel. These are all fine metrics, but nasty surprises await when no one is focused on cash. 90005
90002 Keeping track of cash is not just about watching your bank balance. To avoid surprises, companies also need a good forecast that keeps a midterm and longer view. For example, failing to pay attention to the cash component of capital investments routinely gets companies in trouble.Project net present values ​​can look the same whether the return begins gradually at year two or jumps up dramatically at year five. But if you’re not focusing on the cash that goes out the door while you’re waiting for that year-five infusion, you can suddenly find yourself with very little cash left to run the business, sending you into a spiral you may not recover from. 90005
90016 5. Create a great change story 90017
90002 Companies in distress do not focus enough on creating a change story that everyone understands-and that creates some sense of urgency.Here’s an example. I recently did a turnaround as chief restructuring officer of a mining company. It was profitable, returned a decent margin, and was cash positive. But the commodity price was dropping, and the board was worried about generating enough free cash flow to drive the capital needs of the business. The change story we created said, «Yes, we are profitable. But the whole point of profitability is to generate enough cash to expand, grow, and maintain operations. If we can not do that, then we’re headed for a long, slow decline where equipment breaks down and lower production becomes the new reality.»90005
90002 If you can tell that story in a paragraph or less, in a way that means something to the average guy on the front line, then people will get on board. In this case, employees wanted to have their children and their grandchildren work for this company in the same remote mining location, and the change story spurred them to action. The key was a simple message, not fancy metrics. 90005
90016 6. Treat every turnaround like a crisis 90017
90002 Without a crisis mind-set, you get a stable company’s response to change: risk is to be avoided, and incrementalism takes over.Your workers are asked to do a little more (or the same) with less. More aggressive ideas will be analyzed ad nauseam, and the implementation will be slow and methodical. 90005
90002 In contrast, a crisis demands significant action, now, which is what a distressed company needs. Managers need to use words like crisis and urgency from the first moment they recognize the need for a turnaround. A company that’s in true crisis will be willing to try some things that it normally would not consider, and it’s those bold actions that change the trajectory of the company.Crisis drives people to action and opens managers up to consider a full range of options. 90005
90016 7. Build traction for change with quick wins 90017
90002 The tendency of most managers is to put all of their focus and resources into three or four big bets to turn a company around. That can be a high-risk approach. Even if big bets are sometimes necessary, they take a lot of time and effort-and they do not always pay off. For example, say you decide to change suppliers of raw materials so you can source from a low-cost country, expecting 30 percent lower direct costs.If you realize six months later that the material specifications do not meet your needs, you’ll have spent time you do not have, perhaps interrupted your whole production schedule, and probably burned a bunch of cash on something that did not pay off. 90005
90002 In addition to going after big bets, managers should focus on getting a series of quick wins to gain traction within the organization. Such quick wins can be cost focused, cutting off demand for some external service they do not need. Or it could be policy focused, such as introducing a more stringent policy on travel expense.90005
90002 Not only do such moves improve the bottom line, they also generate support among employees. In any given company, you’re likely to find that a fifth of employees across the organization are almost always supportive. They work hard. And they will change what they’re doing if you just ask them. These are the people you’ll want to spend most of your time with, and they’re the ones you’ll promote-but you’ll probably spend too much time with the bottom fifth of employees. These are the underachieving ones who actively resist change, look for ways to avoid it, or are simply high maintenance.90005
90002 What often gets ignored is the remaining 60 percent of the organization. These are the fence-sitters, and they are tuned into action, not just talk. They see the changes going on, and if you proactively work with them, then 80 percent of the organization will be behind you. But if you do not give them a reason to stand up and be positive about the company, they’ll go negative. That’s the importance of quick wins. When you quickly take real action, and when those actions affect the management team as well, you send a powerful message.90005
90016 8. Throw out your old incentive plans 90017
90002 Management incentives are often the most overlooked tool in a turnaround. In stable companies, short-term incentive plans can be a complex assortment of goals related to safety, financial and operational performance, and personal development. Many are so complex that when you ask managers what they need to do to earn their bonus, many just shrug their shoulders and say, «Someone will tell me at the end of the year.» 90005
90002 In a turnaround, take a lesson from the private-equity industry and throw out your old plans.Instead, offer managers incentives tied specifically to what you want them to do. Do you need $ 10 million of improvement from pricing? Then make it a big part of your sales staff’s incentive plan. Need $ 150 million from procurement? Give your chief purchasing officer a meet-or-beat target. Be willing to forgo bonus payments for those that do not achieve 100 percent of their target-and to pay out handsomely for those whose results are beyond expectations. 90005
90016 9. Replace a top-team member-or two 90017
90002 Experience tells me that most successful turnarounds involve changing out one or two top-team members.This is not about «bad» managers. In my 20 years of doing this, I’ve only seen a small handful of managers I thought were truly incompetent. But it’s a practical reality that there are managers who must own the decline. And more often than not, they are incapable of the shift in mind-set needed to make fundamental changes to the operating philosophy they’ve believed in for years. Whether they realize it or not, they block that change because they’re bent on defending what they believe to be true.Although it’s difficult, removing those people sends another signal to your stakeholders that there will be changes and you’re not afraid to make tough moves. 90005
90016 10. Find and retain talented people 90017
90002 Beyond the leadership team, there are two types of people I look for immediately. First are those that have the institutional knowledge. They may not be your top performers, but they know all the ins and outs of the company-and are vital to understanding the impact of potential changes on the business.Many times they are the disgruntled ones, unhappy with the company’s performance. But you need people who are willing to point out the uncomfortable truths. 90005
90002 A turnaround is also a real opportunity to find the next level of talent in an organization. I’ve been through multiple crises where the people who added the most value and impact were not the ones sitting around the table at the beginning. I have often found great leaders two and three levels down who are just waiting for an opportunity-and the fact that they can be part of something bigger than themselves, saving a company, is often enough to attract and retain them.90005
90002 For both groups, it’s important to realize that retention is not always about money and bonuses. It’s also about figuring out the individual’s needs. Good turnaround managers actively look for those people and find a way to get them involved. 90005

90086
About the author (s)
90087
90002 90003 Doug Yakola 90004 is a senior partner in McKinsey’s RTS, which focuses on turnarounds and financially distressed companies.90005 90002
The editors would like to thank Ryan Davies and Bill Huyett for their contributions to this article. 90005

.90000 Create ways and means to get out of a crisis 90001

90002
90003

90004
90003

90004
90003

90004
90009

90010
90003

90004
90003
Menu
90004

90009

90016
90003

90004
90003
Menu
90004
90003

90004
90009

90016
90003
Analysis
90004
90009

90010
90003

90004

90003
Tech
90004

90009

90002

90003
Gold / Forex
90004

90003

90004

90003
Subscribe
90004

90041

Logout

90004

90003

90004
90009

90046
Go
90047

90048 Trending 90049

UAE holidays 2020

Coronavirus

Special Reports

15% off on CV services

Travel

90002
90003
UAE

90002
90003
Crime
90004
90003
Education

90002
90003
Young Editors
90004
90009

90004
90003
Environment
90004
90003
Government
90004
90003
Health

90002
90003
Better Health
90004
90003
Why Worry
90004
90009

90004
90003
Transport
90004
90003
Science
90004
90003
Weather
90004
90003
Reader Complaint
90004
90003
Ask the Law
90004
90003
Special Reports
90004
90009

90004
90003
Living In UAE

90002
90003
Visa + Immigration
90004
90003
Housing
90004
90003
Phone + Internet
90004
90003
Banking
90004
90003
Transport
90004
90003
Health
90004 90009 90004 90009.90000 Page Not Found 404 | Deloitte 90001

Page Not Found 404 | Deloitte | Global services, reports, and industry insights

90002
Please enable JavaScript to view the site.90003

90002 The page you have selected may have moved or is no longer available. 90003

90002 Alternatively, please try: 90003

90002 If you received this error when you clicked on a URL from our website, please contact us.90003

90010
Back to home page

90011

.90000 Roaring Out of Recession 90001

90002 The Idea in Brief 90003

90004 90005 What strategies can companies use to survive a recession so that they’ll thrive when it ends? 90006 A yearlong study suggests that enterprises that cut costs by focusing on operating efficiency even as they spend more than rivals on marketing, R & D, and assets are likely to be postrecession winners. 90007
90004 90005 Companies that only cut costs heavily during a downturn do not flourish after it ends.90006 Neither do the few businesses that only invest more than rivals during a recession. Even companies that were doing well beforehand do not retain their momentum-85% of market leaders get dislodged during a recession. 90007
90004 90005 Cutting costs while making investments is not easy. 90006 CEOs must be disciplined about costs and learn to spot investment opportunities that offer reliable returns in reasonable payback periods. If they get the mix right, it helps them tackle short-run problems and create a successful medium-term strategy.90007

90004
Artwork:
Felice Varini,
90005 Drill Hall 90006,
90019 2008, Singapore Biennale, Singapore 90020
90007

90004 Great leaders know that how they fight a war often decides whether they will win the peace. Yet as CEOs continue to combat the myriad challenges thrown up by the Great Recession of 2007, they are increasingly unsure about what strategic approaches to deploy. Many worry that the 27-month slowdown is far from over in the United States. Others feel that although a recovery may have begun, it could prove to be short-lived, and they would do well to brace for a double-dip recession.Almost all business leaders reluctantly admit that the current crisis also marks an inflection point: The world after it is unlikely to resemble the one before it. Their priority, when they get a moment’s respite, must be to remake their organizations to cope with the «new normal.» But CEOs, like generals in the heat of battle, are so busy tackling short-term priorities that the future is obscured by the fog of war. 90007
90004 Unfortunately, little research has been done on strategies that can help companies survive a recession, get ahead during a slow-growth recovery, and be ready to win when good times return.Folksy wisdom abounds (how many times have you read that Procter & Gamble, Chevy, and Camel flourished during the Great Depression because they advertised heavily?), But empirical studies are few. That’s why we decided to mount a yearlong project to analyze strategy selection and corporate performance during the past three global recessions: the 1980 crisis (which lasted from 1980 to 1982), the 1990 slowdown (1990 to 1991), and the 2000 bust (2000 to 2002). We studied 4,700 public companies, breaking down the data into three periods: the three years before a recession, the three years after, and the recession years themselves.(See the sidebar «Analyzing Strategy Shifts.») 90007

90004 Our findings are stark and startling. Seventeen percent of the companies in our study did not survive a recession: They went bankrupt, were acquired, or became private. The survivors were painfully slow to recover from the battering. About 80% of them had not yet regained their prerecession growth rates for sales and profits three years after a recession; in fact, 40% of them had not even returned to their absolute prerecession sales and profits levels by the end of that time period.Only a small number of companies-approximately 9% of our sample-flourished after a slowdown, doing better on key financial parameters than they had before it and outperforming rivals in their industry by at least 10% in terms of sales and profits growth. 90007
90004 These postrecession winners are not the usual suspects. Firms that cut costs faster and deeper than rivals do not necessarily flourish. They have the lowest probability-21% -of pulling ahead of the competition when times get better, according to our study.Businesses that boldly invest more than their rivals during a recession do not always fare well either. They enjoy only a 26% chance of becoming leaders after a downturn. And companies that were growth leaders coming into a recession often can not retain their momentum; about 85% are toppled during bad times. 90007
90004 Just who 90019 are 90020 the postrecession winners? What strategies do they deploy? Can other corporations emulate them? According to our research, companies that master the delicate balance between cutting costs to survive today and investing to grow tomorrow do well after a recession.Within this group, a subset that deploys a specific combination of defensive and offensive moves has the highest probability-37% -of breaking away from the pack. These companies reduce costs selectively by focusing more on operational efficiency than their rivals do, even as they invest relatively comprehensively in the future by spending on marketing, R & D, and new assets. Their multipronged strategy, which we will discuss in the following pages, is the best antidote to a recession. 90007
90034 Four Responses to a Slowdown 90035
90004 Companies, not surprisingly, do not all follow the same strategies during a recession.That could be because of differences in executives ‘cognitive orientation during a crisis. According to Tory Higgins, a Columbia University psychologist, human beings are hedonistic-we avoid pain and seek pleasure-but they differ in how they try to achieve those aims. There are two basic modes of self-regulation. Some people are driven most by goals, such as achievement, advancement, and growth. These promotion-focused individuals are motivated by ideals and aspirations that provide pleasure if realized and disappointment if not.Other people are prevention-focused-concerned mainly with safety, security, and responsibility. They strive to avoid bad outcomes, experiencing relief if they succeed and pain if they fail. Situations have a potent influence on cognitive orientation: A recession, for example, can trigger a response that overrides a person’s usual orientation. 90007
90004 By applying this perspective to our empirical research, we were able to classify companies and their approaches to managing during a recession into four types:
90007
90004 90019 Prevention-focused companies, 90020 which make primarily defensive moves and are more concerned than their rivals with avoiding losses and minimizing downside risks.90007
90004 90019 Promotion-focused companies, 90020 which invest more in offensive moves that provide upside benefits than their peers do. 90007
90004 90019 Pragmatic companies, 90020 which combine defensive and offensive moves. 90007

90004 90019 Progressive companies, 90020 which deploy the optimal combination of defense and offense. 90007

90004 Let’s now analyze these groups. 90007
90034 Do not Be Too Defensive 90035
90004 Confronted by a recession, many CEOs swing into crisis mode, believing that their sole responsibility is to prevent the company from getting badly hurt or going under.They quickly implement policies that will reduce operating costs, shrink discretionary expenditures, eliminate frills, rationalize business portfolios, lower head count, and preserve cash. They also postpone making fresh investments in R & D, developing new businesses, or buying assets such as plants and machinery. As a rule, prevention-focused leaders cut back on almost every item of cost and investment and reduce expenditures significantly more than their competitors on at least one dimension.90007
90004 Sony, which announced a cost-reduction target of $ 2.6 billion in December 2008, epitomizes the prevention-focused approach. It plans to close several factories and eliminate 16,000 jobs, and will delay investments-such as building a much-needed LCD television factory in Slovakia-in its core electronics business. This strategy resembles the approach Sony took during the 2000 downturn, when over a two-year period the Japanese giant cut its workforce by 11%, its R & D expenditures by 12%, and its capital expenditures by 23%.The cuts helped Sony increase its profit margin from 8% in тисяча дев’ятсот дев’яносто дев’ять to 12% in 2002 but growth in its sales tumbled from an average of 11% in the three years before the recession to 1% thereafter. In fact, Sony has struggled since then to regain momentum. It has invested in developing new products such as electronic book readers, gaming consoles, and organic light-emitting diode TV sets, but finds itself bested in those product categories by Amazon, Microsoft and Nintendo, and Samsung, respectively.90007
90004 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 both innovation and cost cutting 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. Three, cost-cutting decisions become centralized: The finance department makes across-the-board cuts, paying little attention to initiatives that may be the nuclei of postrecession growth.Four, pessimism permeates the organization. Centralization, strict controls, and the constant threat of more cuts build a feeling of disempowerment. The focus becomes survival-both personal and organizational.
90007
90004 Few prevention-focused corporations do well after a recession, according to our study. They trail the other groups, with growth, on average, of 6% in sales and 4% in profits, compared with 13% and 12% for progressive companies. Whereas in the three years after the 2000 recession, sales for the 200 largest companies grew by an average of $ 12 billion over prerecession levels, the prevention-focused enterprises among them saw sales grow by an average of just $ 5 billion.Moreover, cost cutting did not lead to above-average growth in earnings. Postrecession profits for prevention-focused enterprises typically rose by only $ 600 million, whereas for progressive companies they increased by an average of $ 6.6 billion. 90007
90034 Do not Be Too Aggressive 90035
90004 Some business leaders pursue opportunity even in the face of adversity. They use a recession as a pretext to push change through, get closer to customers who may be ignored by competitors, make strategic investments that have long-term payoffs, and act opportunistically to acquire talent, assets, or businesses that become available during the downturn .These strategies are designed to garner upside benefits. 90007
90004 At the height of the 2000 recession, for example, Hewlett-Packard drew up an ambitious change agenda even though sales and profits were falling. Carly Fiorina, then the CEO, asserted, «In blackjack, you double down when you have an increasing probability of winning. We’re going to double down. » HP embarked on a massive restructuring program, made the largest acquisition in its history by buying Compaq for $ 25 billion, and increased R & D expenditures by 9%.It also spent $ 200 million on a corporate branding campaign and $ 1 billion on expanding the availability of information technology in developing countries. These initiatives strained the organization and spread top management’s attention too thin. When the recession ended, the company found it tough to match the profitability levels of IBM and Dell. By 2004 HP’s earnings, at 8.4%, had slipped below IBM’s 16.8% and Dell’s 9.3%. (Throughout this article, «profits» and «earnings» refer to earnings before interest, taxes, depreciation, and amortization [EBITDA] as a percentage of sales.) 90007
90004 Organizations that focus purely on promotion develop a culture of optimism that leads them to deny the gravity of a crisis for a long time. They ignore early warning signs, such as customers ‘budget cuts, and are steadfast in the belief that as long as they innovate, their sales and profits will continue to rise. Even as customers clamor for lower prices and greater value for money, these companies add bells and whistles to their products. They simply do not notice that because the pie is shrinking, they must capture an even larger share from rivals to keep growing.Optimistic leaders attract employees who thrive in a forward-looking, growth-oriented environment. When positive groupthink permeates an organization, naysayers are marginalized and realities are overlooked. That’s why promotion-focused organizations are often blindsided by poor financial results. 90007

90004 When positive groupthink permeates an organization, naysayers are marginalized and realities are overlooked. 90007

90004 Worse, when these companies are forced to tackle bloated cost structures, the changes they make often prove to be too little, too late.Because each function and business firmly believes that it contributes to corporate success, finger-pointing increases. Trade-offs are difficult to make and decision making becomes sclerotic. 90007
90004 Whereas prevention-oriented companies lower their cost-to-sales ratio by about three percentage points relative to peers over the course of a recession, promotion-focused enterprises are unable to reduce that ratio. Promotion-focused CEOs sometimes increase expenditures rather than cutting back, believing that this will push them ahead.If investments take longer than expected to generate paybacks, or innovations do not resonate with customers, these companies run headlong into trouble. 90007

90004 Despite a focus on growth, promotion-focused companies ‘postrecession sales and earnings rise by only 8% and 6% respectively, whereas those of progressive companies’ shoot up by 13% and 12%. Among the 200 largest companies that tackled the 2000 recession, promotion-focused enterprises grew sales by $ 15 billion and profits by $ 1.5 billion, on average-far lower than progressive companies ‘average increases of $ 28 billion in sales and $ 6.6 billion in profits. 90007
90034 The Elusive Balance 90035
90004 The companies most likely to outperform their competitors after a recession are pragmatic as William James defined the term: «The attitude of looking away from first things, principles, ‘categories,’ supposed necessities; and of looking towards last things, fruits, consequences, facts. » The CEOs of pragmatic companies recognize that cost cutting is necessary to survive a recession, that investment is equally essential to spur growth, and that they must manage both at the same time if their companies are to emerge as postrecession leaders.90007
90004 A combination strategy sounds easy to develop: a little offense, a little defense, and voilà, you’re a winner. If only it were that simple. Companies typically combine three defensive approaches-reducing the number of employees, improving operational efficiency, or both-with three offensive ones: developing new markets, investing in new assets, or both. This yields nine possible combinations, some of which are more effective than others. (See the exhibit «What’s the Best Combination of Moves?») 90007

90004 One combination has the greatest likelihood of producing postrecession winners: the one pursued by progressive enterprises.These companies ‘defensive moves are selective. They cut costs mainly by improving operational efficiency rather than by slashing the number of employees relative to peers. However, their offensive moves are comprehensive. They develop new business opportunities by making significantly greater investments than their rivals do in R & D and marketing, and they invest in assets such as plants and machinery. Their postrecession growth in sales and earnings is the best among the groups in our study.It’s important to understand why the companies that use this combination do so well after a recession. 90007

90092 Operational efficiency. 90093
90004 Most enterprises implement aggressive cost-reduction plans to survive a recession. But companies that attend to improving operational efficiency fare better than those that focus on reducing the number of employees. Do not get us wrong: Progressive companies also lay off employees, but they rely on that approach much less than their peers do.Only 23% of progressive enterprises cut staff-whereas 56% of prevention-focused companies do-and they lay off far fewer people. 90007
90004 Companies that rely solely on cutting the workforce have only an 11% probability of achieving breakaway performance after a downturn. There may be several reasons for this. In our experience, morale is usually better at companies that stress operational efficiency. Employees at these companies appreciate top management’s commitment to them, and they are more creative in reducing costs as a result.They do not spend their time worrying about job security-as do people at companies that rely on deep staff cuts. And although layoffs may reduce costs quickly, they make recovery more difficult. Companies run the risk of scaling up too late, especially if hiring is more difficult than they anticipated. People are loath to work for organizations that reduce head count in difficult times. Moreover, as these companies rehire, costs shoot up. 90007
90004 In contrast, companies that respond to a slowdown by reexamining every aspect of their business models-from how they have configured supply chains to how they are organized and structured-reduce their operating costs on a permanent basis.When demand returns, costs will stay low, allowing their profits to grow faster than those of competitors. 90007
90004 During the 2000 recession, Office Depot and Staples took differing approaches to cost management. Office Depot cut 6% of its workforce, but it could not reduce operating costs significantly. Although the company created an incentive plan to boost sales, its sales growth fell from 19% before the recession to 8% after-five percentage points below Staples ‘postrecession sales growth rate.90007
90004 By contrast, Staples closed down some underperforming facilities but increased its workforce by 10% during the recession, mainly to support the high-end product categories and services it introduced. At the same time, the company contained its operating costs and came out of the recession stronger, bigger, and more profitable than it had been in 1999. Its sales doubled, from $ 7.1 billion in 1997 to $ 14.6 billion in 2003 while Office Depot’s rose by about 50%, from $ 8.7 billion to $ 13.4 billion. On average, Staples was about 30% more profitable than its archrival in the three years after that recession. 90007

90004 Staples closed down some underperforming facilities but increased its workforce by 10% during the 2000 recession. 90007

90092 Investment in both existing and new businesses. 90093
90004 During recessions, progressive companies develop new markets and invest to enlarge their asset bases. They take advantage of depressed prices to buy property, plants, and equipment.This helps them both during the recession and afterward, when they can respond faster than rivals to a rise in demand. Because their asset costs are lower than their noninvesting competitors ‘, their earnings can be relatively higher.
90007

90004 Progressive companies stay closely connected to customer needs-a powerful filter through which to make investment decisions. 90007

90004 These companies also judiciously increase spending on R & D and marketing, which may produce only modest benefits during the recession, but adds substantially to sales and profits afterward.The resources freed up by improving operational efficiency finance much of this expenditure. In turbulent times, it’s tough for companies to know where to place their bets for both the immediate term and the long run. Progressive companies stay closely connected to customer needs-a powerful filter through which to make investment decisions. 90007
90034 Getting It Right 90035
90004 Pursuing a Janus-faced strategy is not easy. Cutting budgets in one area while expanding them in another means explaining to those who are being asked to bear the burden of the former why the company is spending where no immediate benefits are apparent.It’s easier to exhort everyone to sacrifice and share the pain or to show courage and invest for gain. To pull off a combination of cutbacks and strategic investments, CEOs have to exercise cost discipline and financial prudence and detect opportunities that offer reliable returns in reasonable payback periods. 90007
90004 Let’s look at how one company has managed this difficult balancing act. During the 2000 recession, Target increased its marketing and sales expenditures by 20% and its capital expenditures by 50% over prerecession levels.It 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. It expanded into several new merchandise segments, ramped up investment in credit-card programs, and grew its internet business. The company made several smart choices along the way. Instead of trying to go it alone online, Target partnered with Amazon to sell its products. It also teamed up with well-known designers such as Michael Graves, Philippe Starck, and Todd Oldham to cement its reputation for cheap chic, thereby differentiating its products.90007
90004 Meanwhile, Target relentlessly tried to reduce costs, improve productivity, and enhance the efficiency of its supply chain operations. For instance, in 2000 it was one of the 12 retailers that founded the WorldWide Retail Exchange, a global business-to-business electronic marketplace, to facilitate trading between retailers and vendors. In January 2001 Target consolidated its Dayton’s and Hudson’s stores under Marshall Field’s to take advantage of the well-known brand name. These moves helped the company grow sales by 40% and profits by 50% over the course of the recession.Its profit margin increased from 9% in the three years before the recession to 10% after it. 90007
90004 These strategies contrast sharply with those of other retailers, which focus primarily on growing store networks. For example, the discount retailer TJX Companies, which operates T.J. Maxx and Marshalls, added 300 stores to its network of 1,350 from 2000 to 2002 increasing its retail square footage by almost 25% and nearly doubling its capital expenditures. TJX’s competitors were scaling back growth plans, so real estate options were more plentiful and prices were lower.Although the increase in retail floor space fueled some healthy medium-term sales growth-four percentage points above peers ‘growth in the postrecession period-it did not improve the bottom line. That’s because TJX did little to change its business model; it just scaled up its centralized buying and flexible distribution of merchandise. This more-of-the-same approach put TJX’s bottom-line growth, which had been on a par with rivals ‘before the recession, at 9% lower three years afterward. 90007
90004 Many CEOs find investing in bargain-basement assets a tempting offensive move in a downturn.But the revenues and profits from opportunistic investments can take a long time to materialize, leaving a company saddled with an asset base that does not significantly boost returns. As TJX found, focusing purely on assets also keeps companies from looking for more-imaginative ways to build new businesses that will drive growth when the recession is over. 90007
90004 Target has not faced this problem. During the current recession, the retailer initially saw a decline in same-store sales, in part because Wal-Mart’s message of everyday low prices went down well with customers.Realizing that spending on «wants» was decreasing sharply, Target strengthened its position in a key «needs» segment: food. It launched a new store format that doubles the amount of floor space devoted to food; extended the range of its food brands, Market Pantry and Archer Farms; and overhauled its operations to support the emphasis on food. The retailer also increased media spending and reaffirmed its positioning with the slogan «Expect more, pay less» -with an emphasis on the second half. These are early days, but the results appear promising: By 2008 Market Pantry’s sales had increased by 30% and Archer Farms ‘by 13%.And food has become a $ 1.8 billion business for Target. 90007
90004 Few progressive business leaders have a master plan when they enter a recession. They encourage their organizations to discover what works and combine those findings in a portfolio of initiatives that improve efficiency along with market and asset development. This agility, even as leaders hold the course toward long-term growth and profitability, serves organizations well during a recession. An analysis of the stock market performance of companies that use progressive strategies reveals that they can also ride the momentum after a recession is over.Their approach does not just combat a downturn; it can lay the foundation for continued success once the downturn ends.
90007

A version of this article appeared in the March 2010 issue of 90019 Harvard Business Review 90020.
.