Accelerating Out of the Great Recession

Accelerating Out of the Great Recession

Article image

How to Win in a Slow-Growth Economy

Accelerating Out of the Great Recession

Strategy, Management in a Two-Speed Economy
  • Add To Interests

  • In This Article
    • In this excerpt from the book, which won a 2010 getAbstract International Book Award, BCG provides a clear-eyed look at the slow-growth business environment that is likely to last for years to come.
    • Drawing on lessons from previous recessions, BCG offers insights about, and practical suggestions for, opportunities in the aftermath of the Great Recession.

    As we will see, history teaches us that past periods of slow economic growth have been brought to an end by waves of innovation. Thus, in the same way that economies of the past were resuscitated by technological advances—such as the commercialization of electricity or the invention of the internal combustion engine—today’s damaged economy could well get a boost from advancements and breakthroughs in such fields as biotechnology, nanotechnology, material science, renewable energy, defense, and health care.

    Even if this happens, however, we do not expect to see a return anytime soon of the kind of profit levels witnessed from 2005 through 2007. As research conducted by The Boston Consulting Group (BCG) shows, most industries earned record-high profits in those years. The rising share and profitability of the financial sector contributed to these profit levels, as did high global growth rates, easy access to pools of cheap labor around the world, deregulation of markets and industries, and lower tax rates.

    All these factors, which had such a positive influence on profits in the past, are now likely to go into reverse.

    In early 2009, Frank-Walter Steinmeier, then Germany’s vice chancellor and foreign minister, told the Financial Times that “the turbo-capitalism of the past few years is dead.”  He laid much of the responsibility on shareholders obsessed with short-term profit making. And among the political elite in Europe, his is not a lone voice. Accordingly, we might see changes in capital-gains tax rates as well as the introduction of incentives that favor longer-term investments and discourage shorter-term gains.

    Therefore, if this is the environment in which companies must compete, what of the companies themselves?

    Recessions separate winners from losers. While overall profit levels fall within an industry, there can be great variation in profit performance from company to company. Markets consolidate as outperformers strengthen their positions, and default rates spike upward as underperformers drop out. In general, larger companies outperform the others, but some small players can leapfrog their weakened competitors and claim a top-three spot in their particular industry.

    Most important, companies that outperform in a recession tend to enjoy a sustained advantage. They tend to retain their performance leadership in subsequent years—in terms of both revenue and share price. Indeed, an index of stock prices, baselined to 1932 (the trough year of the Great Depression), shows that the average stock price appreciation of the top performers over the subsequent five years was 34 percent greater than the average performance of other companies.

    The real question, therefore, is what drives a winning performance in a downturn and the following upswing?

    To find some answers to this question, we have dug deeply into the history of past recessions, particularly the Great Depression and Japan’s Lost Decade, to learn from the companies that fundamentally improved their competitive positions even during those turbulent times. As you will see, we cite these stories throughout this book and devote Chapter 3 to an analysis of the U.S. auto industry in the 1930s. (For a description of our research and how we chose the companies that we cite, see Appendix A at the end of the book.)

    In addition to this research, we conducted two surveys of senior managers in large corporations. The first survey, completed in March 2009, focused on the priorities companies had set for themselves to deal with the rapidly deteriorating economic environment. The second survey, completed in September 2009, focused on companies’ expectations for the future development of the world economy. Throughout this book we will refer to these surveys (primarily the September 2009 survey) to demonstrate how our ideas about possible economic developments are supported by many of these leaders. (For more information about the surveys, see Appendix B.)

    What our research shows is that the factors that drive the success of the best performers in a downturn are actually similar to the factors that make for success in more benign times. In particular, high performers have strong leaders who take decisive action, act early and with resolve, display courage and a commitment to take the fight to their competitors, show a willingness to rethink the entire business model (they spurn sacred cows), and demonstrate the ability to bring their organizations along with them.

    Having said this, today’s executives probably have more on their plates than their predecessors did. Certainly the strategic and business challenges are more complex today than they were yesterday—as we explain in Chapter 6.

    We believe that the agenda of today’s CEO needs to include:

    1.Reassessing the challenges and opportunities presented by globalization.

    2.Rethinking how businesses are managed for shareholder value.

    3.Reorganizing compensation systems to align with the new ethics of business.

    4.Redesigning corporate governance to avoid uncontrolled risk taking.

    5.Regaining public trust in business.

    6.Developing new models for business leadership.

    7.Helping the management team to think ambitiously about growth by looking beyond today’s tough economic environment.

    There is much to worry about. But there are solutions to the problems.

    History is written by the victors, as Winston Churchill famously observed. So any research that identifies typical characteristics of the outperformers from long-past recessions is prone to survivor bias. Other companies may well have displayed the same characteristic, followed the same strategies—and failed.

    So we do not suggest that slavish application of lessons from the past will guarantee success today. But, as we describe primarily in Chapters 4 and 5—but also through Chapter 3’s story of the auto companies during the Great Depression—the lessons resonate powerfully over the years. They show clearly that well-managed companies can prosper in tough times and that when the upswing comes, these companies can accelerate faster than the competition and increase their lead.

    This line of thought reminds us of another observation from Churchill: “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”

    In this book, our goal is to help you to understand the magnitude and enduring nature of the changes that have taken place and to offer insights and practical suggestions for seizing the opportunities that will present themselves in the aftermath of the Great Recession.

    You can purchase Accelerating Out of the Great Recession at Amazon or at Barnes & Noble.

    Bertrand Benoit, Quentin Peel, and Chris Bryant, “Steinmeier Takes Hard Line on Regulation,” Financial Times, February 22, 2009.
    To Contact the Authors
    • Alumnus
    • Berlin
    This is an excerpt from  Accelerating Out of the Great Recession: How to Win in a Slow-Growth Economy  by David Rhodes and Daniel Stelter. Copyright © 2010, The Boston Consulting Group, Inc. Reprinted by permission of McGraw-Hill. All rights reserved.
  • Add To Interests