Sometimes progress comes from dire situations. Consider the lodgepole pine: The tree’s hard cones release their seeds only when exposed to the crucible of a fire.
Likewise, economic crises can highlight the natural resilience of members of the entrepreneurial ecosystem. The COVID-19 pandemic has uprooted our lives and the way we work, but agile and resilient businesses that keep focused on the bigger picture can find new opportunities for growth.
Lessons from the Past
A study by Harvard researchers Ranjay Gulati, Nitin Nohria, and Franz Wohlgezogen explores why some companies emerge stronger from a recession. The researchers analyzed the data of 4,700 public companies before, during, and after three recessions (1980-1982, 1990-1991, and 2000-2002). They found that most companies were slow to recover from these economic slowdowns. In fact, about 80% had not returned to pre-recession growth rates within three years after the recession ended.
But a few, 9% of them, flourished. Not only did these companies have better financial performance after the slowdown than before, but they outperformed their competitors by at least 10% on growth of sales and profits. Their secret sauce? While they reduced costs selectively through a focus on operational efficiency (rather than mass layoffs), they also made bold investments in marketing, R&D, and new assets.
The lesson is clear: The time to advance is when everyone else is hunkering down. So where do those growth opportunities lie?
Hire Great Talent
The founders of tech giant Hewlett-Packard attribute much of their success to a willingness to invest in talent, even when it didn’t seem economically feasible to do so. In the late 1940s, the fledgling company picked up some phenomenal talent from U.S. military bases that were closing. Even though the young company was financially strained, the visionary leaders reasoned that they couldn’t afford not to hire such exceptional talent.
One silver lining of an economic crisis is that talent is more widely available — but only for a limited time. If companies in your market have let employees go, now is the time to bring them in for interviews. But make sure you take a disciplined and targeted approach to hiring. For example, focus your recruiting efforts on the “ones that got away” — the people you wish you had been able to hire in the past — and check in with those people. And don’t forget to nurture your existing top talent. Make sure they know that their skills are critical to your company’s success.
Look for Deals on Critical Assets
The small percentage of businesses that emerge stronger from recession make prudent investments in capital assets, taking advantage of depressed prices to buy property, plants, and equipment. This helps them both during the recession and afterward, when they are better prepared to respond to a rise in demand.
The global supply chain has taken a beating from COVID-19, causing many companies to look for suppliers closer to home. As you build up that local or regional supply chain, stay alert for opportunities to secure critical assets at a discount.
Make Smarter Bets
The third leg of the stool that elevates businesses in the aftermath of a recession is an investment in developing new markets. Successful companies increase spending on R&D and marketing, financing those added costs with resources freed up by the operational efficiencies they studiously enforce.
These are the investments that can launch a business to the next level — and a crisis can be an ideal chance to try an idea that seemed too risky during boom times. But these investments can be the hardest to make, because they take time to produce return on investment.
So how do you know whether an investment is a smart bet? By staying focused on your best customers. “In turbulent times, it’s tough for companies to know where to place their bets for both the immediate term and the long run,” write the Harvard researchers. “Progressive companies stay closely connected to customer needs — a powerful filter through which to make investment decisions.”
If you have been incubating an idea to grow your business, now may be the time to launch it. Just make sure you understand and budget for the operating losses your business will incur before that investment turns a profit.
Nurture Your Root System
While we can’t escape inevitable periods of contraction, how we react during these times of adversity can set us apart from our competitors. Remember that, like when a tree has burned to the ground, your root system — the people and systems that support your business — will be the key to your recovery. As you look for opportunities for growth now and in the years to come, your CRI advisors are ready and willing to help you.