A recession or downturn in the market is one of the most demanding scenarios for senior leadership to weather because there are so many possible responses to consider. Each decision leadership makes during this critical time can have a significant effect on the company’s ability to come out on the other side at all, let alone seize available opportunities to grow in the process. So, how can you strategically invest in your business during a downturn to increase the likelihood that it will be able to emerge stronger?
It is critical to act swiftly instead of ignoring the warning signs that a downturn is coming, worsening, or may last longer than anticipated. However, that does not mean giving into kneejerk reactions. A Harvard Business Review article summarizes it best by saying,
“Inaction is the riskiest response to the uncertainties of an economic crisis. But rash or scattershot action can be nearly as damaging. Rising anxiety (how much worse are things likely to get? how long is this going to last?) and the growing pressure to do something often produces a variety of uncoordinated moves that target the wrong problem or overshoot the right one.”
Have honest conversations with your leadership team to solicit feedback on how to proceed while leaning on the data. Focus on efforts on strategically managing expenses, acquiring assets to achieve your goals, prioritizing customer relationships, and developing new markets while focusing on your core competencies.
Manage Costs
Harvard Business Review research examined recessionary responses and concluded, “These post-recession winners aren’t the usual suspects. Firms that cut costs faster and deeper than rivals don’t necessarily flourish. They have the lowest probability—21%—of pulling ahead of the competition when times get better, according to our study.”
Do not rush to cut costs or make deep cuts indiscriminately, especially as it relates to headcount. Retain employees to sustain company morale, maintain productivity, and avoid costly re-hire expenses in the future. Instead, reduce costs selectively.
Aim to control costs instead of just eliminating them using techniques such as:
- Transforming fixed costs into variable costs
- Prioritizing operational efficiency
- Improving internal processes
- Reducing waste
- Restructuring the organization
- Analyze your existing supply chains
Focus on bottom-line growth as well as top-line growth because simply trying to recoup lost revenue will not get you through a recession without also controlling expenses. Invest responsibly in R&D, technology, and marketing to promote long-term growth.
Acquire Assets Responsibly
Avoid getting too aggressive with hiring, asset purchases, or business acquisitions to maintain business agility and keep cash free for critical business needs. Consider delaying investments that will have long payback periods to avoid tying up cash that can be used for more imminent paybacks. Strategic consultant, Hamza Mudassir, explains to Entrepreneur magazine,
“Companies, buildings, equipment, and land—all of this become cheaper to acquire during a recession. However, just because an asset is cheap does not mean you should buy it... Such purchases will become a drain on cash and managerial focus when the economy bounces back, creating a drag on your company’s performance.”
Prioritize Customers
Be cautiously optimistic – realistically evaluate the current business climate and listen to customers as their purchase patterns change. Invest in customer relationships, especially among your best clients. Remember, acquiring new customers can cost up to five times as much as retaining existing customers, making it a smart strategic move to focus on those relationships. When you couple that data with the difference in sales success rates between new customers (5-20%) and existing customers (60-70%), it becomes clear that retaining customers needs to be a strategic priority during a downturn.
Focus on Core Competencies
Pursue new business opportunities when they arise but do not lose focus on your core competencies. Resist the temptation to chase short-term revenue opportunities from non-complementary product or service offerings, which could pull the company in too many directions and dilute overall goals.
The strongest business opportunity worth pursuing is developing new markets to create new revenue streams because after the recession is over your company will be better poised to respond to opportunities and grow faster than competitors. Adding items like digital products, membership options, and consulting services can create new revenue streams from your existing offerings.
Find out more about how CEOs and CFOs should respond to the COVID pandemic to promote growth in their organizations.
