CEO Insights | August 2020
Growing through an economic downturn may seem counterintuitive to structure into a line of thinking and executive action. But in reality, smart companies grow at multiples during this time.
THE OPPORTUNITY
An economic downturn causes tectonic shifts in the industry. During this time, many companies see margins erode, lose market share, become vulnerable to the competition, and some deplete their financial resources. Fortunately, that doesn’t have to be the case. Some companies capitalize on the downturn and exit winners.
Case Examples
Prime examples include TMSC, Ford, AB InBev, Home Depot, and Verizon to name a few. These companies emerged as winners in their industry in the aftermath of the 2008 recession.
These strategic moves are not the sole province of large companies. The common thread among these firms is an approach based on timing a sequence of actions.
THE COMMON THREAD
Companies that capitalize on an economic downturn and exit winners follow a simple formula: build a position of strength in anticipation of a downturn and use it to launch growth initiatives as the economy swings into recovery. Even though the approach sounds easy, few companies get it right (Exhibit 1).
Step 1. The first step is to protect the financial position of the company, i.e., stabilize the business in line with slowing revenue growth, reduce costs, strengthen the balance sheet, defend against downside risk, and ensure adequate cash flow and access to capital.
Step 2. With these measures in place, the firm can turn to the second step of identifying ways to capitalize on the downturn to overcome weakened competitors. This strategy plays out in two forms: (1) expanding market share and (2) taking advantage of opportunistic acquisitions.
Exhibit 1. Approaching an Economic Downturn
Timing is critical. A firm that executes these steps late or out of sequence makes a devastating error: it undergoes a drastic drop in performance during the crisis, then starts cutting costs during economic recovery instead of expanding market share. The consequences of missing the mark have an overwhelming impact on cyclical businesses, including metals, mining, chemicals, automotive parts, aerospace, heavy equipment, building products, construction, machinery, materials, and logistics.
EXPANDING MARKET SHARE
As the economy begins to recover, it makes sense for the company to plan to expand market share. This strategy requires exploiting a substantial competitive advantage in a growth market. Such exploitation can involve new technology, new products, cost leadership against competitors, a lock on the delivery system, control of the value chain, and many other forms of advantage.
Expanding market share functions on investments above the level of what regular market growth requires, with the aim of strengthening market position. Investments fund activities such as new market entry, channel expansion, regional or global expansion, penetration of new customer segments, gain in share of customer spend, product development (next generation, complements, support services), expanding steps in the value chain, and increased marketing and sales.
These are the actions and responsibilities for head offices, divisions, and business unit management teams. Their concern is to improve performance, deliver annual growth, maintain market positions, and defend profitability against competitors.
M&A
Economic recovery offers the best opportunity to activate M&A as a major lever of growth. The reason is that valuations are low and competitors are weak. So, during this time, a well-positioned company can take advantage of M&A to grow along different axes of expansion, including the following:
These are long-term strategies and responsibilities that pertain to the CEO and the board. They comprise significant moves in the industry and answer the complex question of where to look for growth in the long-term. An economic recovery makes these M&A strategies more attractive and much easier to execute than normal times.
CONCLUSION
The issues at stake during a downturn are paramount and cannot go unresolved. The worse course of action is to do nothing which will land the company in a ditch.
The right approach is to reduce cost and improve competitiveness first, followed by investing in growth during the economic recovery. The downside of acting too early is low: at worst, the company will have advanced its focus on cost and the balance sheet 9 to 12 months ahead of time. Conversely, the downside of acting late is devastating to the firm as it will decline even more.
During a downturn, the context is the same for all companies; although some sectors are worse off than others. The essential point is to prepare and perform better than your competitors. The merit of a comprehensive approach is not only to survive the downturn, but maximize your performance, and seize an advantage for long-term growth.
What is your approach to the economic downturn?
What is your growth strategy?
_______________
Want to strengthen your financial position?
For more information, contact us directly.
Great Prairie Group is a management consulting firm that specializes in strategy and corporate finance. The firm assists US and EU groups in their growth strategies, and private equity funds in maximizing the value of their investments.
This website uses cookies so that we can provide you with the best user experience possible. Cookie information is stored in your browser and performs functions such as recognising you when you return to our website and helping our team to understand which sections of the website you find most interesting and useful.
Strictly Necessary Cookie should be enabled at all times so that we can save your preferences for cookie settings.
If you disable this cookie, we will not be able to save your preferences. This means that every time you visit this website you will need to enable or disable cookies again.
