The business community, like everybody else, is trying to make sense of the mixed signals coming from the economy. The U.S. unemployment rate, for example, dropped to 9.7 percent in January, down from 10 percent in December, the Bureau of Labor Statistics reports, but at the same time the economy shed another 20,000 net jobs.
Meanwhile, U.S. economic growth in the fourth quarter of 2009 shot up to a reported 5.7 percent. But this preliminary number probably won’t hold when the first correction comes out—and even if it does, no one expects 2010 to sustain a level of growth anywhere near that, with most educated predictions falling within the 2.8 to 3 percent range.
And Europe has its own fears, with the value of the euro falling and Greece, Spain, and Portugal rumored to be near default.
By now, most executives have done what’s necessary to keep their businesses viable, wringing out cost savings, cutting production, closing facilities, and so forth. This isn’t the time to let up, and there are abundant opportunities for most businesses to manage even tighter. Among other levers, many companies can push still harder to drive down the cost of goods sold, find creative approaches to variabilizing costs, manage prices and revenues more effectively, leverage shared services across lines of business, utilize assets more inventively, and fundamentally reorganize and delayer. In fact, most companies are planning to take a big, second bite at the apple in 2010, striving for more efficiency and more fundamental innovation in their underlying business models.
But cost reduction and other measures intended to shore up a company’s short-term performance should have a second objective: to provide the capacity and confidence needed to finance growth. Indeed, improving short-term performance should be about more than surviving. It can be the tool that provides CEOs with the financial leverage as well as the permission from stakeholders to pursue a growth agenda.
Even during the Great Depression, many of the companies that achieved the greatest success were those that boldly went on the offensive while others were still hunkering down.
One such company was DuPont, which increased its R&D expenditures by 93 percent from 1930 to 1939, an investment that yielded many innovations. Neoprene, for example, the first synthetic rubber, was introduced in 1931. By 1939, virtually every automobile and airplane manufactured in the United States contained neoprene parts. Nylon, the first synthetic fiber, was developed in 1934, introduced in 1938, and found a blockbuster application in 1940: women’s stockings. Also in 1938, the company created the molecule known as Teflon.
Similarly, IBM launched three times as many new products during the Great Depression as it had during the 1920s—and twice as many as it would during World War II. In 1929, CEO Thomas Watson observed that only about 5 percent of business accounting functions were mechanized. He recognized this as an opportunity, encouraging companies to streamline and cut costs, and helping them do so by discounting products and offering to rent machines.
More recent recessions have yielded similar examples. Arrow Electronics, for example, saw the slump in the electronic-components business of the late 1980s as a chance to leapfrog the competition. At the time, Arrow was the second-largest company of its kind but only half the size of the industry leader. So in 1988, it began buying and integrating smaller competitors. By the time the industry rebounded following the recession of the early 1990s, Arrow had become number one, with sales increasing at a rate of 64.5 percent per year from 1991 to 1994.
Another company that grew during that period was U-Haul, the familiar truck-rental company. Consumers had become extremely cost conscious during the recession, driving business to rental companies with the lowest prices. U-Haul met the challenge by reinventing itself: not only competing aggressively on price, but becoming a one-stop shopping center for do-it-yourself movers with a new line of highly profitable products, such as boxes, tape, twine, and packing materials.
During tough and uncertain times, companies must figure out how to improve performance not only as a defensive measure, but to finance growth. Cost reduction and growth are not incompatible. Both are necessary and must take place simultaneously. We call this the “art of and.”
Pursuing the art of and requires courage and a willingness to pursue transformative changes despite the volatility and uncertainty of the business environment. Executives today often like to talk about transformation, but all too often this is merely a catch phrase for any corporate-change effort, especially cost reduction and downsizing. That’s not what we’re talking about here.
Truly transformational leaders find ways to grow while managing tight. It happened during the Great Depression, it happened during previous recessions, and it can happen today. While cost cutting, downsizing, and asset productivity may be part of the process, successful companies don’t just shrink or drive greater efficiency, they grow something new or move in a different direction—both of which create jobs.
This is what will separate the winners from the rest as we emerge from the Great Recession.