Survive or Thrive? If a recession is really on the way, it could spell opportunity for companies that manage effectively to the economic times The headlines are grim. The housing market seems to get worse each day. Higher food and gas prices are eating into consumer confidence. And the credit crunch continues to take its toll on Wall Street and Main Street alike. Many economists say a recession is upon us. Some think we’re in one already. But whatever the precise terminology may be, it’s safe to say the good times may be history – at least for now. The going is getting tougher.  So, it’s time to hunker down. Throttle back. Tighten your belt. Cut costs.
Or is it? While those may seem like sensible ways to manage your business in a downturn, it’s no longer good enough to just settle for survival. The strongest companies aren’t those that do the most effective job riding the waves of the economy, but those that break the cycle altogether and thrive in a downturn. Fat, dumb and happy
When the economy is strong, most companies tend to gather revenues while the gathering is good. They chase growth without fine-tuning their operations. Human resources, product line diversification, inventory and other areas are geared up to make the most of the situation. But when the economy slows, investments that seemed to make sense during the boom years can quickly go bust. The number of customers and products often proliferate. Structural costs can balloon. Imperfectly integrated acquisitions and far-flung ventures into emerging markets could start to look questionable. In a downturn, inefficiencies become unmasked. Or, as Warren Buffett likes to say, “When the tide rolls out, you can see who’s been swimming naked.” Thriving in a downturn
It’s easy to blame the economy for disappointing results. Don’t fall into this trap. External factors such as energy costs and the consumer’s health may be beyond the CFO’s control. But long-term planning and short-term budgeting decisions are not. Get those right, and your business can have the tools and indicators to actually improve financial results in a downturn. Just imagine yourself emerging from the slump with improved profitability, more pricing leverage over competitors, increased market share and surpassed investor expectations. Sound too good to be true? It’s not easy, but it doesn’t have to be a fantasy. There are plenty of examples of companies that have done these things – despite tough economic conditions. We took a closer look at a few manufacturing companies that outperformed the Dow Jones Industrial Average despite a slack economy during the last downturn, 2000–2002: Terex Corp., 3M, United Technologies and Danaher. In each case, the downturn created an opportunity for these companies to strengthen their businesses1: - United Technologies streamlined supply chain management and made cost-consciousness a companywide initiative.
- 3M used global sourcing to smooth out raw material cost changes.
- Terex focused on product lines that were less exposed to price competition and used outsourcing to reduce fixed costs by 20 to 25 percent.
- Danaher invested in smart product development and used Web-based tools to improve material procurement
While our research focused on the manufacturing sector, these important lessons apply across industry lines. We identified six key strategies that could help companies outperform their competition in a downturn. Grow smart
Smart growth begins with hedging against recession by investing in counter-cyclical areas. It should also mean focusing on products and services with more consistent demand and less price elasticity. Finally, offering a high-quality customer experience can shore up price realization and give clients new reasons to be loyal at a time when these relationships are tested the most. Simplify your business model
In tight times, it pays to recalibrate the overall cost burden. In some cases, our research found up to 30 percent of a company’s customers or products are actually not profitable. Companies that have recently been through mergers may find more potential adjustments. Specifically, if an unfinished integration process has left redundancies in place or economies of scale unrealized, this can be a good time to find those performance leaks and seal them. Get lean
Is your organizational structure and supply chain aligned with the brisk business you’ve been doing, or with the economic reality that lies ahead? Aggressive hiring, internal promotions or acquisitions in the good times may have created a tangle of organizational layers. A flatter structure may function more efficiently. Don’t forget that vendors are in the same boat. There may be savings available through revisiting these relationships, choosing new allies or tightening the screws on compliance by existing vendors. Turn fixed costs into variable costs
Most businesses have a number of costs that don’t decline as volume falls. But shared support functions such as finance, information technology and HR don’t have to be viewed as fixed-cost monoliths. Employee compensation packages can be reframed to include more performance-driven variable pay relative to base pay. Shifting the mix toward a higher proportion of contract workers for noncore/support functions can be another path to flexibility in the cost structure. Manage talent proactively
If you’re going to thrive in tough times, you need your high-performing people by your side. This also is a good opportunity to transition underperforming employees. Initiate a process now to identify the employees you can’t afford to lose. Bolster your planning discipline
Use the downturn as an opportunity to learn more about the macro factors that drive your business. Create a dashboard to map out the scenarios you might face, which indicators will serve as warnings and how you’ll react when those bells are sounded. Contrary to conventional wisdom, we believe a downturn can be a great opportunity to gain competitive advantage, not a threat. By being proactive, companies can gain market share, sustain profitability during the slowdown and surpass investor expectations. And the finance function should be in the lead position to drive the effort. So don’t let those gloomy headlines get you down. Embrace the challenge. 1 deCamara, Don. “To Survive or Thrive?” Chief Executive Online, March 6, 2008. This publication contains general information only and Deloitte Consulting LLP is not, by means of this publication, rendering business, financial, investment, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte Consulting LLP, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this publication. | 
