7 strategies for surviving a recession and coming out even stronger
There is a lot of talk about an impending recession at the moment (September 2022).
A recession is generally defined as: "a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters." (Source)
Recessions are usually accompanied by:
a decrease in demand (for goods and services)
a shortage of credit
Recessions are a normal and inevitable part of the business cycle. We've had many before - see this chart of recessions around the world since 1960. And whether we are headed for one at the moment or not, you can be sure there will be another somewhere in the future.
But it doesn't have to be all bad news. If you want to grow and strengthen your business during a recession, you'll need to build a strategy that takes into account both the opportunities and challenges presented by this economic environment.
In this blog, I will identify 7 strategies to help you to achieve this.
Get your mindset right
Adapt to changes in demand
Cut costs strategically
Avoid cutting prices
Invest for the future
Keep your team motivated
Get the timing right
1. Get your mindset right
It's easy to fall into the trap of thinking that periods of economic growth are good and recessions are bad.
Whilst that may be true for the economy as a whole, it does not need to be true for you and your business.
Recessions are generally bad for short-term profitability. But if you focus on longer-term goals and longer-term profitability, then recession can be a good thing.
Recessions are a form of disruption - they disrupt the pattern of economic growth leading up to them. Disruptions are a form of change. Change creates opportunities and challenges. Winners and losers. The only question is: which one will you be?
So the first step in dealing with a recession is to see it not as a problem, but as an opportunity.
One starting point is to reflect on the number of well-known businesses that were established during recessions. The chart below shows 18 of them.
Each was started - and thrived - because they met what was, at that time, an emerging and unmet need.
Of course. It is not all about new companies. The data for existing companies is cautionary. According to a 2010 Harvard Business Review study, as many as 85% of pre-recession growth leaders are toppled during recessions. (Source) But that still leaves 15% who thrive. Your challenge is to ensure your business is one of them.
One thing we can be reasonably sure of is that all recessions end. At least, they have done in the past. But not all firms, industries, products and services do.
Our challenge is two-fold. We need to survive the recession itself, and we need to emerge on the other side poised to enjoy the renewed growth that will follow.
One way to think about recessions is to compare the business cycle to the seasons. It is easy to say that we prefer summer over winter. But the truth is that all four seasons are different. And how we experience and respond to them is different too.
Summer, or economic growth, may be the most productive and prosperous phase.
Autumn or Fall is an opportunity to lay in supplies and prepare for Winter.
During Winter, or recession, we're drawing down on stores, conserving energy and keeping warm. But there are also opportunities for other activities (like a ski holiday!)
Spring presents an opportunity for the proverbial Spring clean - opening everything up again, and getting ready for the productive period.
Just like in the seasons, some winters are colder and darker than others, some recessions are deeper and longer than others.
Our continued success lies in our ability to adapt to the seasons and to do the things that each season requires. So surviving and thriving during and after a recession is simply a case of knowing what that season requires.
One thing that this metaphor highlights is that recessions are generally much shorter than periods of growth. According to Wikipedia, the average length of recessions in the UK has been getting shorter. The last 4 lasted between 6 and 15 months each. In the US, the average post-war (after 1945) recession lasted only 10 months. This also represented a shortening since pre-war recessions. (Source)
On the other hand, the average period of growth between recessions is more like 71 months.
So, we spend a lot more time developing strategies for periods of growth than we do for recessions. And we get good at what we practice most. So we're better at doing strategy in times of growth, and we're not nearly as good at doing strategy in times of recession.
Once we appreciate that recession presents opportunities, but that it requires different strategies to what we're most familiar with to exploit them, then we're ready to start working.
2. Adapt to changes in demand
Demand for products and services generally decreases during a recession as people cut back. This is almost part of the definition of a recession.
But the decreases in demand won't be evenly spread.
There are exceptions where demand actually increases. These are generally known as counter-cyclical products and services. Discount retailers, non-premium alcohol brands, pawn shops and "last resort" businesses such as payday lenders and debt collection and repossession agencies are generally considered good examples of counter-cyclical businesses. That is, demand for these tends to increase during a recession.
We sometimes also see context-specific counter-cyclical businesses. For example, Zoom did particularly well during COVID as people were forced to work from home. If you're one of those, then this article probably won't be as useful for you.
But for almost all other businesses, demand will generally decrease in a recession.
So the first challenge is to try to anticipate how this recession will impact the demand for your goods and services. After all, this recession won't be the same as the last one. It will have different causes, and it will play out in different ways. Your customers will respond accordingly. And your business, its products and services, have changed a lot since the last recession, too.
Start by understanding how your customers' needs might change
The way to do this is to try to understand how your customers will respond to this recession. If you're a B2B business, that may mean you need to try and understand how your customers' customers will respond too.
How will their needs change? How can you better serve them? Are there new ways you could serve them? Are there different ways to deliver the same product and services?
During a recession, many customers will be looking for ways to save money. Can you help them?
Talking to your customers to gain this understanding presents an opportunity. You can use the sense of shared challenge that the recession brings to build stronger relationships. Then, when the recovery comes, your customers will remember how you made them feel and that you were there for them.
Consider changes both during and after the recession
You need to consider how your customers' needs could change both during the recession, as well as afterwards.
After the recession, things may not go back to the way they were before. Changes tend to stick.
Think of the many changes in consumer and working habits precipitated by COVID but which have persisted after the initial crisis period. For a while, during COVID, people hoped that the world would return to normal. Gradually, more and more people have come to accept that what we experience now is the new normal.
Often, a period of change and crisis, like a recession, simply speeds up changes which were already happening.
Again, thinking of COVID, we know that online shopping and remote working were already a trend before COVID struck. Experts estimate that as much as a decade of progress in these areas was accelerated into a period of 2 years.
So it is important to ensure you are on top of all the trends in your industry and to consider how a recession might hasten them.
Double down on focus
Once you've done all of this groundwork, it is important to double down on your clarity of vision, mission and differentiation.
Show your customers why you are uniquely placed to understand and serve their new and changing needs during (and after) the recession.
Increasing revenues during a growth period cover a multitude of inefficiencies. As they say: It's only when the tide goes out that you see who is not wearing a swimsuit. During periods of high growth, it may not have mattered as much if you weren't completely focused. You had enough money to cover any deviations. Your customers were tolerant of things that might not have been quite on point.
During a recession, you're unlikely to have that luxury.
Everything else in this blog post depends on you having a good understanding of how you think demand will change both during and after the recession.
3. Cut expenses strategically
In the face of reduced demand, it's almost inevitable that you may need to cut some costs. But do so strategically.
That means recognising that all costs are not equal. What matters most is which costs you cut.
To use a weight-loss analogy, you need to cut fat, not muscle.
Avoid the mistake that many companies make of demanding "20% cuts across the board". This is a blunt instrument, devoid of strategy.
You may need to cut costs, but don't cut corners. Your customers will probably be even more cost and quality conscious than normal. Don't give them any excuse to abandon you now.
According to a 2010 study by Harvard Business Review, firms that cut costs faster and deeper than rivals don't do better. They have the lowest probably - only 21% - of pulling ahead of the competition when the recession ends. (Source)
Focus on stopping activities
Instead of thinking about cutting costs, think about stopping doing things.
Start by looking for things you should have stopped doing ages ago. Businesses are generally better at starting things than at stopping them. As a result, we often find ourselves continuing to do things out of habit, and inertia. People keep doing things, not because they are right for the business, but because their jobs depend on it. It's easier to just carry on than it is to risk change.
Recessions are a crucible for change, forcing organisations to make the tough calls they'd been avoiding. Whether it's an unprofitable product, an unprofitable customer, or a troublesome employee, use the recession as a catalyst for change. Cut or fix the product. Fire or reform the customer. Redeploy the employee.
Then look for things you don't think you will still need after the recession. You've already formed a view about what your customers will and won't want. So cut products and services you don't think they'll want sooner rather than later. There is little point in carrying the costs all the way through the recession, when you can least afford to, only to cut them once growth returns.
In all cases, do it quickly. The longer you wait, the weaker you will become as the recession saps away your strength and resources. What may seem hard now, will only seem harder later.
Understand your cost structure
All other things being equal, businesses with higher fixed:variable cost ratios struggle more in recessions.
Variable costs tend to take care of themselves. If demand for your products and services decreases, then the costs should naturally decrease too. But you're still stuck with your fixed costs.
High levels of working capital and long manufacturing cycles may delay this effect. So a recession is a perfect opportunity to review your working practices and see if you can make them as lean as possible.
For the same reason, highly leveraged businesses (businesses with lots of debt) also tend to struggle more. This is because interest payments are a fixed cost.
Fixed costs are harder to reduce. And even if you can reduce them, you may find them harder to increase again when the recession is over. So you need to think a little harder about which assets and capabilities you will need to retain for afterwards, and what you can do to cover those expenses until growth returns to the market.
One of many businesses' biggest fixed costs is labour. Especially skilled labour. You can let them go to save costs. But they might not be so easy to rehire when the recession ends.
Don't make the mistake that the then British Chancellor of the Exchequer, Rishi Sunak, made during COVID. In an attempt to preserve jobs, he paid people from the public purse as long as they did nothing productive. If you want to pay and retain staff, make sure they're doing something useful. If there is not enough demand from their normal jobs, devote the extra time to training, maintenance, new product and service development, etc.
You may not be able to change your cost structure ahead of the next recession. But it will impact your options, and therefore your strategy for making it through the recession. So it is important to understand it in great detail.
Unfortunately, many businesses lack this understanding. During periods of growth, this may not be a problem. But a recession will bring it into sharp relief.
Don't cut back on sales and marketing
It can be tempting to cut back on marketing.
But if you do, then you're even less likely to grow / more likely to shrink.
Cutting back on marketing is playing straight into the hands of the recession.
It is possible to get into a vicious cycle of decline. A recession leads to a decrease in demand across the board. You cut your sales and marketing budget to save costs. This results in a further reduction in demand for your products and services (but not necessarily those of your competitors). So you cut sales and marketing budget even more...
Watching how many companies do this during hard times would almost lead you to believe that they don't believe that sales and marketing budgets have an impact on sales volumes. But if that were true, then why wouldn't they have cut those budgets during the growth cycle as well!?
By the same token, don't cut back on strategy!
But do update your sales and marketing messages
However, your sales and marketing messages will need to change.
Two types of changes are required:
Change your sales and marketing messages to reflect the new understanding you've gained about your customers' concerns and needs both during and after the recession, and any changes you've made in response to that understanding.
Make sure your sales and marketing messages reflect the mood of your customers, so as not to appear tone-deaf. For example, if your customers are struggling, cutting back and concerned about the future, don't lead with messages that focus on the indulgent, luxurious and or frivolous.
A British regulator recently proposed an industry-wide campaign to encourage people to save more for their retirements. This was roundly criticised because at the time Britain was facing a cost-of-living crisis. People were more worried about putting food on the table and heating their homes than about long-term savings.
4. Avoid cutting your prices
Avoid cutting your prices if you can.
There are two problems with cutting prices:
It can be hard to increase them again once growth returns.
Price cuts come straight off the top line, reducing profits and increasing pressure to cut costs (see above).
But keep a beady eye on the competition. If they start dropping their prices you may have little choice but to follow suit unless you've been very successful in differentiating your product.
There are many alternatives to cutting prices. You can:
Change payment terms.
Break your product or service into different sized bundles at different price points.
Provide cheaper (less fully featured) versions of your products.
Let your customer do more of the work themselves, such as assembling, operating or repairing your product.
Offer to do more for your customer, like training them, etc.
A recession requires creativity!
5. Invest for the recovery
Investing for growth during a recession may seem counterintuitive.
But there are several good reasons for doing so:
The recession won't last forever. Growth will return and you need to be ready for it.
When growth returns, it will be different to what it was before the recession. Your business needs to change.
You may have spare capacity. For example, skilled staff who are no longer fully engaged in serving growing customer demand. These can be used to prepare for the post-recession future. But that usually requires investment in training, research, process improvement and new product development.
Some cost savings require investment. For example, a recession is a good time to invest in process automation if you haven't already done so.
There may be bargains to be had. Suppliers of raw materials may be struggling too, and willing to cut attractive deals. The same may be true of the supplier of that new equipment you've been eyeing for some time Keep an eye on competitors, too. They may be forced to sell off equipment at a discount. Key staff may be more willing to jump ship.
During growth periods, we're often too busy meeting growing customer demands to be able to take the time to step back, reflect on what's happening, and invest in the changes we'll need for the future. Recessions provides an opportunity for that reflection and investment.
It may seem counter-intuitive to expand during a recession. But if your existing markets for your existing products and services are shrinking, maybe you need to expand into new products and services for your existing customers, or into new markets for your existing products and services (but probably not both - see Ansoff's Matrix).
Expansion during a recession is never easy. But it may leave you in a stronger position once the recession is over.
If the recession is particularly deep in your current country or region, then expanding into other countries or regions may provide some welcome relief.
6. Keep your staff motivated
A recession is not only bad for your business. It can be personally difficult for your staff as well.
This can have a knock-on impact on their performance at work. The more worried they are about their personal circumstances, the less energy they have left to help your business succeed.
At the very time you need your staff the most, their performance could be at its worst!
So it is important to provide as much support as you can.
Employee wellbeing is now a big industry. If you've not kept pace, this may be the perfect time to catch up.
If you show your staff that they do matter to you when times are tough, they will reward you with loyalty when times improve.
Your employees may be less likely to resign during a recession when there may be fewer other opportunities available to them. But when the recession ends and opportunities open up, they will remember how you made them feel. So this is not a time to be complacent.
Of course, probably the most important thing you can do is to show your staff that you have a clear strategy for surviving the recession, and for enjoying the growth that will follow. There is little else you can do that will give them more confidence in the success of the business and the security and future prospects of their own roles.
7. Get the timing right
The last thing to consider is timing.
Timing is always important in strategy. We need to be mindful of the future. We need to act quickly, but keep the long-term big picture in mind. We need to operate across multiple time horizons.
Specifically relating to recessions, we need to remember that it takes at least 2 quarters of data to confirm that we are in a recession. But, if the average recession only lasts 10 months, it could be nearly over by the time we know we're in one!
It could well be too late to do anything about it by then.
So, as with most things in strategy, we need to anticipate recessions. We need to anticipate when they might start, when they might end, how deep they might go, and how they might play out for our customers and suppliers. And we need to prepare based on that anticipation - without any certainty about what will actually happen.
It is said we should repair the roof while the sun is shining, and that we should learn to swim before the boat sinks. So don't wait for the recession to be on us before you start preparing your response.
We also need to pay careful attention to how long it will take to execute our strategies relative to how long we think the recession will last. Some changes simply take longer than others. And some organisations are simply more nimble than others.
You may have a long-term strategy which will take several years to execute. For example, you may be building an ambitious new manufacturing facility which will only come online in 2 or 3 years' time. Should you worry if the economy spends the next 12 months in a recession? Probably not. It may even present you with advantages and opportunities. But as long as your strategy is based on long-term trends which you expect to persist, then you should carry on.
On the other hand, if you're contemplating a significant investment to support the launch of a high-risk luxury product next month, and a recession seems imminent, then you might consider deferring that investment until the signs of recovery start to show.
Equally, if you're planning to buy an 11th machine to expand your production capacity by 10% just as demand falls off, then you might want to defer that (unless the supplier offers a sufficiently attractive discount).
Recession is a less familiar economic condition than growth is. It requires different strategies with which we are probably less experienced.
But if we get our mindset right and take the time to analyse our options, a recession can present many opportunities.
And, of course, StratNavApp.com is there to ensure your strategies remain well evidenced, yet responsive to such changes.
If you need any help with any of the ideas in this post, please reach out to us.