What Companies Can Learn from the Great Depression

What Companies Can Learn from the Great Depression

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Green Shoots, False Positives, and What Companies Can Learn from the Great Depression

Management in a Two-Speed Economy, Strategy
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  • “Gentlemen, you have come 60 days too late. The depression is over.”

    With those optimistic words, President Herbert Hoover welcomed his guests—a delegation of banking officials and religious leaders concerned about rising joblessness—in June 1930. The U.S. economy was indeed showing signs of stabilization, and the Harvard Economic Society had even predicted an upswing for the second half of 1930. But as we all know now, the worst of the Great Depression was yet to come.

    Readers of our Collateral Damage series of papers will know that we have taken a consistently cautious view of the prospects for the global economy. We still expect an upturn in early 2010. For us, it is not about the precise timing of the upturn, but more the nature of the recovery: we expect this upturn to be sluggish—as with all upturns after a recession that is synchronized around the globe and preceded by systemic financial stress. And in a sluggish economy, trading conditions will be tougher, competitive advantage more important, and
     broken business models exposed.

    In recent conversations at companies the world over, we have detected a change in the mindset of many executives. Many seem to be adopting a more optimistic economic outlook. They tell us that they see “green shoots.” But although government intervention means that we are unlikely to see the bank failures that contributed to the paralysis of the 1930s, we should nonetheless learn from Hoover’s hubris—and take it as a warning to be cautious about any premature celebrations of the upturn.

    In this paper, we have taken a closer look at the green shoots phenomenon. Are the signs of stabilization and recovery reliable? Do they allow us to predict the timing and strength of the next upswing? As we explain in Part 1 of this paper, green shoots are notoriously difficult to call—except in hindsight.

    We have also consistently argued that good companies simultaneously prepare for tough times and create a platform for growth beyond the downturn. We examined all the major recessions from the Great Depression onward—and it was the Great Depression that provided some of the clearest messages for today’s management teams. So while we do not expect a repeat of the Great Depression, there is much we can learn from the companies that prepared well and used the crisis to fundamentally improve their competitive position. In Part 2 of this paper, we tell some of those inspiring stories and distill some of the lessons. (See the sidebar “In Summary” for an overview of our findings on green shoots and lessons from the Great Depression.)

    See Collateral Damage, Part 5: Confronting the New Realities of a World in Crisis, BCG White Paper, March 2009.

    In Summary

    The economy and the question of green shoots

    • The downturn will be long and deep

    • Some economic indicators are declining at a slower rate or even turning positive—but others remain quite depressed

    • Many individual indicators can signal false positives and are therefore unreliable

    • Even positive economic trends can prove volatile or reverse themselves

    • It is dangerous to look at individual economic indicators in isolation—they sometimes tell only part of the story

    • When growth returns next year, it will remain sluggish for some time

    Lessons from the Great Depression

    • There were companies that outperformed

    • The lessons from the winners remain relevant

    • Controlling costs is a prerequisite for surviving and thriving

    • Be decisive in cutting costs, but preserve the core—focus on efficiency and capacity and don’t put all your energy into dabbling with low-impact discretionary spending

    • Variabilize costs and reduce breakeven levels

    • Protect cash

    • Protect revenues and recognize that new opportunities can emerge as consumers and corporate customers reprioritize their purchasing

    • Reposition your product portfolio in line with these changing customer behaviors

    • Remember that slashing the marketing budget is often not the answer; some winners actually increase their marketing expenditures

    • Anticipate and capitalize on government

    • Invest in the future: stay committed to R&D and take advantage of the stronger value environment for M&A

    • Retain your talent; tough times offer opportunities to improve the quality of your workforce

    • Strong and decisive leadership really does make a difference in tough times

    • Pick your battles: take action where you can get the highest payback without diluting your resources

    Of course, history is written by the victors, as Winston Churchill famously observed. And his observation is just as true about economic history. Any research identifying what distinguishes companies that outperformed during the Great Depression inevitably suffers from survivor bias. So in drawing lessons from what the winners appear to have done well, we should recognize that there may be other companies that pursued the same path—and failed. But we were also drawn to another Churchill observation that seems to characterize the winners from the 1930s: “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”
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