How to win in a recession

There's good news in bad: A recession can actually be a great opportunity for well-managed companies to advance, according to a new study.

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During the 2001 recession, just over half the 400 companies studied improved their gross profit margins during the year, according to Diamond Management & Technology Consultants, of Chicago. The winners’ secret: Targeted rather than blanket cost-cuts, combined with a willingness to invest strategically.

By the end of the recession, those companies had grown margins by 20 percent, measuring improvement from 1998 through 2000 combined, compared with 2002 through 2004 combined. They also created more than $350 billion in market value over the same time period, while the rest of the firms destroyed more than $200 billion. The study looked at companies with more than $100 million in annual revenue.

Volatility creates opportunity, says John Sviokla, Diamond’s vice chairman. “It’s at the time of a crisis you have the most chance to really change an organization,” he says. “You really don’t want to waste that crisis.”

Sviokla says executives tend to panic and order across-the-board cuts.

“Your first job as a leader is to recognize that and make sure you’re not just making knee-jerk reactions,” he adds.

In the study, all companies on average cut costs. But ones who emerged victorious made targeted rather than blanket cuts. They also didn’t stop spending entirely –instead, they made strategic investments in key areas to gain an edge over rivals.

Success didn’t depend on the size of the firm, but rather how targeted its approach to cutting and investing was. In some industries — such as auto — the bigger companies did worse than smaller rivals; in others, such as pharmaceuticals, many of the big companies did better.

The top-half companies in the study performed well not just with market value and margins, but also across a basket of five measures Diamond used to gauge success: earnings before interest, taxes, depreciation and amortization as a percentage of revenue; price to book value; return on equity; return on assets; and return on invested capital. In an index of these measures, the top-half firms’ scores increased 45 percent during the study period.

In the current downturn, Sviokla see several specific ways for companies to advance while cutting costs:

Use new technology not just to cut costs in the short-term but to create efficiencies in the future. Sviokla pointed to one of the firm’s clients, a transportation and trucking firm, which is making cutbacks but also implementing RFID tracking technology now.

Change your marketing mix. Rather than just slash all advertising, create web initiatives targeted at key groups, such as inviting customers to participate in product design. Managers should ask, “how do I go across these different media so I get more bang for my buck?” says Sviokla.

Figure out who your best customers are — or will be — and focus on them. “No matter how bad the market is, there are always good customers” somewhere, he says.

Author: Erin White, wsj.com