Down and Up and Running Again

While some are happy barely to survive, only the courageous would look beyond and invest for a full-blown post-doomsday revival 

What could we possibly do when confronted with a crisis? Like it or not, our options are really limited. Either we cry over the unforeseen calamity and eventually succumb, or we try to come to grips with the situation, struggle and ultimately cope with the disaster to survive.

Survive or thrive?

But what happens after we survive? There can be another fork in the road post-crisis. Those of us who barely scrape through, try to gather our shattered lives in the hope of rebuilding the same nest which we lost. Chances are, we might not carry on long with fractured bearings, lost hopes and broken dreams – and finally give up the race and perish. Mere survival is not really a promise for a turnaround.

In contrast, some – very few in fact – choose to take the other arm of the forked road after a crisis. They try to understand the nature of the crisis, take necessary steps to soften the blow – perhaps sacrificing a part to save the other – lie low and identify areas that need to be reworked to create a different future. A future based on the learnings from the present crisis, so that the next crisis might be averted or cushioned. That is a road less travelled, but one that allows us to evolve and get on with life.

The business world is rife with examples where companies have responded to crisis in ways that did more harm than good. Cost reductions and job cuts are steps that come to mind the first thing when we think of a downturn. It takes real courage to admit that these are merely knee-jerk reactions that can well be avoided. Companies that injudiciously slash marketing spending often find that they later must spend far more than they saved in order to recover.

Show of pluck: Cisco & Apple

During the 2008-09 financial collapse, John Chambers, the CEO of Cisco, made it very clear that they would not be looking at retrenchment as a solution. Cisco was then under going fast expansions in the server and data centre businesses. They required extra personnel and projected acquisitions to fulfil their growth vision and had just around US$27 billion in available funds. Yet, they stood by their employees during the crisis and did not consider job cuts as an option. Rather, the company invested in several businesses which were nearly recession-proof and was expected to continue to do well. Its core router operation was critical to building out broadband and systems for popular products like VoIP. The stimulus package gave that business a bump up. Cisco had also invested in sectors like video conferencing which showed real growth potential in case business travels were curtailed. That was judicious thinking indeed. Now we all know how communication platforms like Zoom, Teams, or Slack created new opportunities during the pandemic.

Similar was the story with Apple during the same financial meltdown. Because Apple’s success depended on new innovations, refining existing products and aggressive promotion, it needed all the people who worked at the company and more. Hence, they had no reason to consider job cuts during the downturn. And they kept on adding quarter-on-quarter to the US$24 billion they had in cash and securities despite the economic crisis. In fact, Apple was one of the few US companies that were prepared to drive product introductions and spend to pick up market share as the recession deepened. We all know where it stands today, as the world’s most valuable organization.

Planning by scenarios

Whenever an unforeseen crisis looms, rush to your planning-boards to sketch out at least three possible scenarios: (i) a modest and short-term disruption, (ii) a more severe decline with mid-range implications, and (iii) an all-out disaster situation both in terms of duration and overall severity impact. Keep assessing any evolving situation to determine which scenario is most likely to unfold in your industry and your business, based on available data and analysis in the current context.

Next, identify all the possible ways in which each of the three scenarios might affect your business. How would consumers’ limited capacity to buy reduce demand for your products? Will job insecurity and deflating asset prices make even the creditworthy increasingly reluctant to take on more debt? Will reduced demand affect your ability to secure short-term financing, or will weak stock markets make it difficult to raise equity? Even if you have the capability to tap the debt and equity markets, will higher borrowing costs and return requirements raise your cost of capital?

Run simulations for each of these scenarios that generate financial outcomes based on major variables, including sales volume, prices, and variable costs. Ensure to confront head-on what you foresee as the worst case. For example, what effect would a 20% decline in sales volume and a 5% decline in prices have on your overall financial performance? You may be surprised to find out that, even in the case of a still-healthy company with operating margins (before interest and taxes) of around 10%, such a decline in volume and prices could turn current profits into huge losses and send cash flow deep into the red. Conduct a similar analysis for each of your business units.

Thinking of tomorrow, today

Investments made today in areas such as product development and information or production technology will, in many cases, bear fruit only after the recession is past. Waiting to move forward with such investments may compromise your ability to capitalize on opportunities when the economy rebounds. And the cost of these investments will be lower now, as competition for resources slackens.

Given current financial constraints, you won’t be able to do everything, of course, or even most things. But that shouldn’t keep you from making some big bets. Prioritize the different options, protecting investments likely to have a major impact on the long-term health of the company, delaying ones with less-certain positive outcomes, and ditching those projects that would be nice to have but aren’t crucial to future success.

Sanofi-Synthélabo, the French pharmaceutical company, entered the economic recession that began in 2001 with a solid product portfolio. Throughout the downturn, the company maintained, and in some cases increased, its R&D spending in order to keep its product pipeline robust. Sanofi increased its absolute R&D expenditure from €950 million in 2000 to €1.3 billion in 2003. Because of its strong business and financial performance, the company gained market share and outperformed peers in the stock market. The company was thus well positioned to acquire Aventis, a much larger Franco-German pharmaceutical company, after a takeover battle, in the economic upswing of 2004.

Economic downturns can be a time of wrenching transformation for companies and industries. The economics of the business may change because of increased competition, changing input costs, government intervention, or new trade policies. New competitors and business models may emerge as companies seek to increase revenue through expansion into adjacent product categories or horizontal integration.

If you dream of thriving after scraping through a crisis, make all decisions today with tomorrow in mind.