There is dialogue in the press these days that suggests we have hit the top of our ability to drive economic growth – and a recession may be around the corner. What this means to many people, is that we should begin to be conservative with our firm’s investments and pull back to essentials only.
History tells a bit of a different story.
Research shows that firms that make the right moves in a downturn take an enduring advantage when things stabilize (links here and here). Examples include retail players like Costco (who simplified and doubled down), FedEx (who invested in automation) and John Deere (who built new capitalization structures).
“These findings show that recessions are not so much “slowdowns” as they are intense crucibles of opportunity.” – Harvard Business Review
Yes, we need to care for our core value propositions by making them as lean and efficient as possible. However, every economic downturn is followed by an upcycle, and those who make shrewd investments through the tension of the down cycle emerge ready for the strong growth to come.
What we are really looking for is a powerful, adaptive strategy that is able to find and take advantage of new opportunities, while taking care to build our core as lean as possible.
For an analogy, consider a Carrier Strike Group. These are amazing groupings of naval-based power that are built for both offensive and defensive conflicts in any theater of the world. The core of this group is the carrier and the air support, with the flanking vessels there for both offensive and defensive support.
Setting a “Plan of Attack”
The members of a strike group are always equipped with a very specific intent and clear orders before they enter a theater of action. This allows them to move an incredible array of capabilities with speed and focus.
You and your team need to exercise that same discipline in planning and execution. Here’s how:
#1: Optimize the Core in Three Dimensions
- Financially – Engage your CFO strategically to look at your firm through the lens of competitive economics. Is your capital structure optimized for cost and tax efficiency? Can we use our real estate more efficiently by centralizing, focusing or combining plants or offices? Are our gross margins and EBITDA improving? Optimizing here means every turn of your business flywheel spins of cash (which provides options).
- Time – Are we prepared to win on the basis of cycle time? Key processes include order to cash, insight to product, and end-to-end inventory turns. If your benchmarking shows you short in any of these areas, it is like running a track race with heavy shoes. By being nimble, you’ll be able to quickly find and correct any missteps.
- Distribution – The digitization of the distribution channel has turned entire industries inside out. You need to carefully step back and look at your customer’s costs and ease of doing business with you, which will lead to some hard questions. Are your value-added partners still of value? What are your costs of customer acquisition and are they focused on transferring value to the end client?
#2: Take Control by Laser-Focused Acceleration
Firms that win coming out of these downturns find a trend that was active going into the downturn and seek a way to put their foot to the floor and accelerate it into existence. Examples of this include retail changes, such as Costco and Aldi simplifying their offerings, and investing selectively in R&D, like Verizon’s relentless approach to network speed and reliability.
The key to success here is to do the work to seek validated insights that will respond to investment. Clarity in a distracted age is like oxygen. Having the best transport layer in an increasingly digital world is like having the best navy during the 1800s (which gave Britain outsized influence).
#3: Practice Directed Opportunism
Asset values shift dramatically during downturns. Valuations shift to a firm’s current ability to generate free cash, which can put smaller, more conservative firms in the position to acquire significant assets.
For instance, the long-term suitor Stanley was able to acquire Black and Decker in a move where the acquirer was the smaller of the two entities. Having a shopping list with value triggers already worked out can allow firms to move quickly in the rapidly shifting context of a downturn.
A unique situation in this cycle is that more financing has been de-coupled from balance sheets and is in play through private equity. This means that one of the key constraints, i.e. cash on the balance sheet, will give way to return on equity. This is especially true for M&A deals, where the combined value of the parent firm and its target are confidently modeled.
Yes, it’s good advice for any set of business conditions
Firms that are prepared to persist and add value to the strongest segments of the market will power out of the downturn and be hard to catch.
Building a powerful capacity to execute growth is a timeless activity. The work begins with leadership setting the intent and releasing teams to execute an accelerated pace with clear sponsorship.
If you’d like help with building your adaptive strategy, please reach out to me at 847-651-1014 or use this link to set up a 20-minute call.
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