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Details on Industry Insight.
By Mark Gottfredson and Steve Schaubert of Bain & Co.
However you define today's business environment, CEOs are in the hot seat. Their challenge is to anticipate where slowing momentum will hurt the business most--and then take actions to blunt those effects and position the business for a quick turnaround.
While many companies batten down the hatches and try to survive, our experience is that, for prepared companies, economic slowdowns can provide significant opportunities to improve their positions and accelerate into the next up cycle.
Where should managers focus their attention? In a downturn, you don't have to wait for a lot of data to decide. Most companies encounter four critical pressure points.
The most obvious and most important is costs. In good times, companies often focus on increasing sales and opening up new markets rather than on managing their costs down the time-honored experience curve - that practice may come back to bite them in a downturn.
As sales slow, cost leaders find that they have even more built-in advantages than usual; cost laggards find that they are even farther behind than they thought. Toyota, for example, has just unveiled the first car produced under its latest cost-cutting program. The company expects the program to generate $2.8 billion in savings. A downturn is a great time to create the "burning platform" necessary to accomplish cost savings and get back onto the experience curve.
At the same time, managers must be very thoughtful about where to cut and where to invest. Investing in the areas customers care the most about while everyone else is cutting back - though counterintuitive - can help a company leapfrog the competition.
A second pressure point is market position. In ordinary times, well-managed market leaders generally outperform followers - leaders' profits and revenues grow faster, their returns on equity are higher and their customers are more loyal, to mention just a few measures.
In a downturn, the competition for position grows more intense, and existing positions may be vulnerable. Leaders may use their deeper pockets to dial up the pressure on followers, or to snap them up at bargain prices. Followers can sometimes turn the pressure exerted by a downturn to their advantage and leapfrog into the No. 1 position.
Customers never sit still, of course. But in a downturn, both businesses and consumers are likely to shift their buying patterns faster than ever. They seek out bargains. They do without some things altogether. These changes in behavior can significantly rearrange the pools of profits that companies compete for.
The "mass luxury" market is already feeling the pain. McDonald's recently announced it would begin serving souped-up coffee beverages at lower prices than the competition, a move widely interpreted as a direct challenge to Starbucks. In ordinary times, the move would be as risky as any attack on an entrenched market leader. In a downturn - who knows? - McDonald's' challenge might pay off.
Companies in good times tend to add features, variations and line extensions, thereby complicating both their production processes and their organization. Even in good times, this can raise costs and interfere with a company's agility.
But the drawbacks of complexity are particularly noticeable in a downturn. Japanese carmakers don't just enjoy a cost advantage over Detroit, they also have a complexity advantage--with fewer models, fewer options and fewer different parts.
Honda requires half a day to build all possible variations on the Accord, while Detroit automakers need more than 90 days to build all possible variations of some American compacts. In a downturn, can Detroit sell enough of all those variations to cover the costs of the complexity?
Our research has shown that changes in economic and strategic position are twice as likely in a downturn as during other economic periods. Firms that paid attention to these pressure points - like the drugstore chain Walgreen - for gained share over their competitors in the last downturn and substantially improved their positions in earnings and sales.
For companies that are prepared, managing in a downturn can open more doors than it closes.