By Jane C. Linder and Brian McCarthy
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PDF Help Although the past decade's record-setting economic growth
temporarily obscured the reality and, indeed, the importance of recessions,
recessions are a fact of business life. The current business environment is a
reminder that managing during times of economic turmoil is a critical business
capability.
So what did those companies that came out of the financial
gate most strongly after the recession of the early 1990s do?
  To
find out, Accenture Institute for High Performance Business researchers
interviewed senior executives who experienced the global recession of
1990-1991. We then coupled those quantitative findings with analysis of the
financial performance of 850 of the largest companies in the United States
based on return on invested capital.¹
Setting the Stage
Our
interviews made clear that the vast majority of executives at the time of the
last recession thought of a recession as an opportunity to improve business
performance. Yet despite this resounding consensus, their companies' performances varied dramatically, indicating that many were unable to turn the
downturn into an advantage.
We found that taking advantage of a recession was as much
about what companies did in the good times as the bad. The most successful
post-recession companies built financial strength during the good times. They
amassed liquid assets, limited debt and focused on cash flow in order to remain
flexible and unencumbered. The Accenture research shows that 83 percent of
those executives whose companies came out of the last recession the strongest
described their approaches to financial management as conservative. In
contrast, only 45 percent of the poorly performing companies took this stance.
Successful companies also prepared themselves strategically
during the good times. They forged resilient strategies designed to work in
good times and bad. They tended to narrow, rather than to broaden, their
business portfolios, focusing on areas in which they could establish a clear
lead. They also favored profitable internal growth over acquisitions, except
when they were in a position to consolidate operations expertly.
But the research also indicates there was something else in
addition to conservative financial management that separated the last
recession's winners and losers.
Execute Distinctively
Both
the winners and losers of the last recession shopped for bargain assets,
reduced costs and delayed or eliminated some spending. But while these are
important and prudent tactics during a recession, these actions did not spell
the difference between good and poor performance.
What does appear to be a driver is openness to innovative
perspectives on existing knowledge, tools and relationships. Our research and
analysis shows that winning companies took some actions not taken by others.
These decisive actions strengthened a company’s strategic position. These high
performing organizations:
- Set priorities based on detailed knowledge of how
the company creates value. Companies did not just cut costs—they cut
the right costs. They diverted resources to activities that actually created
value. How did these companies make the right calls?
Unlike most
executives, the leaders and everyone else in their companies knew explicitly
how their companies made money.² They knew how their
products and services stacked up against those of the competition, why
customers preferred doing business with them and exactly what they had to do to
turn a profit. This kind of knowledge at all levels meant that recommendations
and decisions about budgets were made with a clear understanding about the
potential impact.
- Leveraged unique information systems.
The high performing companies invested in information systems, such as
computer-based modeling, designed to give them the ability to manage and gain
insight about their key value drivers. More importantly, they used the output.
The poorly performing companies did not have the same responsive
systems.
- Collaborated with customers to improve value propositions. The winners of the last recession reached out to
customers to better understand their challenges. Gathering this information
allowed the companies to create new products and services that were uniquely
suited to the pressures customers were facing during the downturn.
- Priced for profitability. Winners worked
themselves into an advantaged cost position during good times, and then used
their pricing flexibility to pick up market share in a
downturn.
However, in the downturn, winning companies walked away from
bad business and losers did not. The companies that performed poorly accepted
unprofitable sales in an attempt to hold onto market share.
The Accenture research shows that savvy executives changed
their companies' competitive position and created value by managing the last
recession effectively. Their actions gained market share, forged new customer
relations, strengthened product and service positions, and helped build a
platform for profitable growth into the expansion that followed.
In fact, we found that companies with the highest return on
invested capital for the three-year period following the recession tended to
maintain their lead despite other factors in the market. This correlation shows
that companies that pull away from the competition during a downturn have
lasting advantages, not just a fragile edge (see Figure
1).
Companies that are not well positioned in the current
uncertain economy can still turn the downturn to their advantage by receiving
unvarnished answers to vital questions. Executives have a chance to learn what
is important to customers, what is essential for delivering value and what
actually distinguishes their company from the competition.
Companies can, of course, ask these questions at any time,
but the pressure of a difficult economic environment puts a much finer point on
the responses. Organizations that seek and apply these answers may well be in a
better position to take advantage of the next inflection point.
This Outlook Point of View is based on
"When Good Management Shows:
Creating Value in an Uncertain Economy," an Accenture Institute for High
Performance Business Institute Studies Abstract.
Jane C.
Linder, senior research fellow-Accenture Institute for High Performance
Business, was a Harvard Business School professor in the information
management area.
Brian McCarthy, senior
manager-Accenture Finance &
Performance Management, has extensive experience in value management and
financial reengineering.
For more information, please
contact us.
¹Researchers analyzed the
financial results of 850 of the largest companies in the United States
following the 1990 to 1991 recession using statistics from Value Line and Stern
Stewart & Co. To gauge performance, each of the companies’ return on
invested capital before, during and after the recession was compared to the
average in its industry. Researchers then conducted in-depth interviews with 40
senior executives from 35 companies with a range of performance characteristics
to understand the actions they took during the recession.
Return on invested capital is defined as annual earnings
from total operations divided by the company's invested capital at the end of
the year. Return on invested capital is the sum of long-term debt and
shareholders' equity.
²Jane Linder and Susan
Cantrell, "Working Models," Accenture Institute for High Performance Business
Institute Studies Abstract, January 2000.
The views and opinions expressed in
this article are meant to stimulate thought and discussion. As each business
has unique requirements and objectives, these ideas should not be viewed as
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