Road To Recovery Khushboo Gulati and Shailja Vashisht

Times are tough, no matter what size a business is. Start-ups and corporate giants alike are struggling to stay afloat long enough for business to pick back up. If the recession has proven anything, it's that even corporate giants have to think outside the box to stay afloat. Only a tiny percentage of large companies reliably grow the bottom line year after year. Those that do share certain characteristics. On the one hand, theyre built for innovation. They enter new markets before competitors do; theyre good at experimentation; they hold everyone accountable for new ideas; and they can move on a dime. On the other hand, theyre extremely stable. Chief executives have come up through the company; strategy and organizational structure stay consistent for long stretches; client retention is unusually high; and the corporate culture is strong and unchanging. Those characteristics may seem contradictory, but stability appears to be what makes innovationand steady growth possible. Rapid Adapters The growth outliers do a tremendous amount of experimentation and innovation. They develop and deploy new technologies, move into new markets, explore new business models, and even open up new industries. They take on acquisitions and aggressively seek input from people and organizations quite unlike their own. They rapidly adjust and readjust resources and are comfortable moving executives and other employees from one role to another. They make small bets early and diversify their portfolios. These companies take what we call an options-oriented approach to new markets. They tend to move earlier than competitors into spaces that appear attractive, making small initial investments and following up with more-substantial onesor getting outas the opportunity warrants. HDFCs history of entering new growth markets is illustrative. In 1998 HDFC joined the Cirrus interbank network so that Mastercard holders worldwide could use its ATMs. In 2001 it became the first bank in India to launch an international debit card, in association with Visa. It introduced various credit card innovations, including a card specifically for farmers, and then reached an agreement with Tata Pipes to offer the farmers credit.

Unlike their competitors, outliers appear to make fewer big, high-risk betswhich is also consistent with an options orientation. When we compare Indra with its rival BAE, for instance, we found that both had made acquisitions and divestitures during the study period, but most of Indras acquisitions were under $100 million, whereas most of BAEs were much higher, including its $4.5 billion acquisition of Armor Holdings, in 2007. Finally, the winners of recession have diverse but related portfolios, with enough variety to enable investment in their core businesses even as they explored new alternatives. Even the single-product outliers, Tsingtao Brewery and Yahoo Japan, honored this principle: Tsingtao diversified geographically, and Yahoo Japan diversified by selling into new segments and offering new services. Theyre active acquirers. These companies appreciate the value of acquisitions for building new capabilities and getting into new markets quickly. And they have a better-than-average record of making those acquisitions work. For example, FactSet was actually criticized for some of its activity: It spent $92 million on acquisitions in 2005, when the companys net income was only $72 million. Nonetheless, it continues to acquire companies to broaden the offerings it can provide to its customers. They manage major resource allocations centrally. At many companies, resources are held hostage at the divisional or business-unit level. When one division is under threat, or an opportunity falls between units, the company cant respond effectively because incumbent executives resist. But at outliers, decision making with respect to major strategic challenges appears to be centrally coordinated. They have processes that support speed and flexibility. Outliers favor adaptability over pure efficiency, even though it occasionally leads to less-than-perfect outcomes. Their strategy adjustments and resource allocation shifts are more likely to occur quarterly than annually, as are their promotions and personnel evaluations. This allows them to be more responsive to changes in the environment than companies with rigid annual processes. They build innovation into everyday operations. At many traditional companies, the most powerful people run the large, well-established lines of business, and growth-oriented innovation is managed by a separate, less powerful group. Innovation at the outliers tends to be better integrated. Every year at Infosys, for example, the senior executive team asks each

unit to name two big things it is going to do that will dramatically move the business forward in real timeand to go public with those intentions. Yahoo Japan has identified four major growth strategies; its managers are regularly asked to identify the next set of promising opportunities in those areas, and resources are liberally allocated to the best ideas that emerge from their discussions. Champions of Stability As noted, the outliers are unusually stable as well as highly flexible. Their changes are evolutionary, and their adaptations are rapid. We saw little evidence among them of the kinds of wrenching change that many companies experience. They focus management attention on culture and shared values.These companies pay close attention to values, culture, and alignment. Infosys, for example, is famous for its Global Education Center, the largest dedicated corporate-education facility in the world, with the capacity to train 14,000 students at any one time. Even HDFC Bank scored high on organizational effectiveness, employee engagement, and a supportive environment. They avoid dramatic divestitures. These companies tend to reallocate resources gradually rather than to dramatically divest or restructure. They use industry evolution as an opportunity to leave old businesses and enter new, higher-growth segments. Cognizant, for instance, made nine strategic acquisitions but no divestitures during the period of our study. The company, a 1994 spin-off of Dun & Bradstreet, began by offering straightforward technology services. Over the years, it moved into professional consulting services and differentiated itself with a strong industry focus and colocation of its teams with clients. It shifted technology and people from low-growth businesses such as plain-vanilla business process outsourcing to people-intensive, high-touch businesses such as complete, complex software solutions. This shift occurred without the wholesale downsizing that Satyam Computer Services and other competitors experienced. They hold on to their talent. One of the implications of executing transformations without wrenching change is that talented employees are less likely to have their careers cut short unnecessarily. Like Cognizant, the others are slow to downsize, and their habit of gradually moving resources into new businesses means that emerging leaders have new places to go. The recognition that talent needs a place to go is complemented by a commitment to

employee training. The combination probably explains why senior managers nearly always come from inside the company. They dont change high-level strategies quickly.Past decade was a tumultuous time It included the burst of the dot-com bubble, the tragedy of 9/11, the global housing and credit bubbles, the introduction of the euro, wars in Iraq and Afghanistan, the explosion of the internet as a vehicle for commerce, and the Great Recession of 2008. Even so, the companies strategies remained remarkably stable. At Tsingtao Brewery, after the sudden death of its hard-driving president PengZuoyi in 2001, subsequent leaders committed to following through on his international expansion strategy. When ACS was founded, in 1983, its CEO expressed his commitment to making it Spains most profitable public construction company; that strategy is still in place. Atmos Energy is now executing the strategy crafted in 1997 by a former CEO, leveraging efficiency in its regulated business and driving growth in its unregulated businesses. They have a reliable customer base. Outliers relationships with their clients are remarkably stable as wellprobably because their gradual strategic shifts allow them to change as their customers change. FactSets client retention rate reached 92% in 2011. Even both Infosys and Cognizant have strong client retention. Cognizant reported a 90% client satisfaction rate in a recent survey, and Infosys reported a 95% retention rate in a recent interview with us. Our conclusion is that this seeming paradox is a feature, not a bug: Stability is what enables these companies to innovate and to maintain steady growth. Coupled with transparent values, it allows employees to feel confident about taking the risks that experimentation requires. Strong values help maintain ethical standards. Continual small changes keep an organization from becoming stale. Management continuity permits the building of informal internal networks, which are known to be a factor in successful innovation. The result is a highperforming organization that delivers consistent results over a reasonably long period in the face of environmental volatility. Great leaders know that how they fight a war often decides whether they will win the peace. Yet as CEOs continue to combat the myriad challenges thrown up by the Great Recession of 2007, they are increasingly unsure about what strategic approaches to deploy. Almost all

business leaders reluctantly admit that the current crisis also marks an inflection point: The world after it is unlikely to resemble the one before it. Their priority, when they get a moments respite, must be to remake their organizations to cope with the new normal. But CEOs, like generals in the heat of battle, are so busy tackling short-term priorities that the future is obscured by the fog of war. What strategies can companies use to survive a recession so that theyll thrive when it ends?many studies suggest that enterprises that cut costs by focusing on operating efficiency even as they spend more than rivals on marketing, R&D, and assets are likely to be postrecession winners. Similarly, companies that only cut costs heavily during a downturn dont flourish after it ends. Neither do the few businesses that only invest more than rivals during a recession. CEOs must be disciplined about costs and learn to spot investment opportunities that offer reliable returns in reasonable payback periods. If they get the mix right, it helps them tackle short-run problems and create a successful medium-term strategy. Analyzing Strategy Shifts Only a small number of companiesflourished after a slowdown, doing better on key financial parameters than they had before it and outperforming rivals in their These postrecession winners arent the usual suspects. Firms that cut costs faster and deeper than rivals dont necessarily flourish. Businesses that boldly invest more than their rivals during a recession dont always fare well either. Just who are the postrecession winners? What strategies do they deploy? Can other corporations emulate them? Companies that master the delicate balance between cutting costs to survive today and investing to grow tomorrow do well after a recession. These companies reduce costs selectively by focusing more on operational efficiency than their rivals do, even as they invest relatively comprehensively in the future by spending on marketing, R&D, and new assets. Strategies of surviving recession Companies, not surprisingly, dont all follow the same strategies during a recession. That could be because of differences in executives cognitive orientation during a crisis. There are

two basic modes of self-regulation. We can classify companies and their approaches to managing during a recession into four types: Prevention-focused companies, which make primarily defensive moves and are more concerned than their rivals with avoiding losses and minimizing downside risks. Promotion-focused companies, which invest more in offensive moves that provide upside benefits than their peers do. Pragmatic companies, which combine defensive and offensive moves. Progressive companies, which deploy the optimal combination of defense and offense. Lets now analyze these groups. Defensive Strategy Confronted by a recession, many CEOs swing into crisis mode, believing that their sole responsibility is to prevent the company from getting badly hurt or going under. They quickly implement policies that will reduce operating costs, shrink discretionary expenditures, eliminate frills, rationalize business portfolios, lower head count, and preserve cash. They also postpone making fresh investments in R&D, developing new businesses, or buying assets such as plants and machinery. As a rule, prevention-focused leaders cut back on almost every item of cost and investment and reduce expenditures significantly more than their competitors on at least one dimension. Sony, which announced a cost-reduction target of $2.6 billion in December 2008, epitomizes the prevention-focused approach. It plans to close several factories and eliminate 16,000 jobs, and will delay investmentssuch as building a much-needed LCD television factory in Slovakiain its core electronics business. This strategy resembles the approach Sony took during the 2000 downturn, when over a two-year period the Japanese giant cut its workforce by 11%, its R&D expenditures by 12%, and its capital expenditures by 23%. The cuts helped Sony increase its profit margin from 8% in 1999 to 12% in 2002, but growth in its sales tumbled from an average of 11% in the three years before the recession to 1% thereafter. In fact, Sony has struggled since then to regain momentum. It has invested in developing new products such as electronic book readers, gaming consoles, and organic light-emitting diode

TV sets, but finds itself bested in those product categories by Amazon, Microsoft and Nintendo, and Samsung, respectively. A focus solely on cost cutting causes several problems. Executives and employees start approaching every decision through a lossminimizing lens. A siege mentality leads the organization to aim low and keep both innovation and cost cutting incremental. Instead of learning to operate more efficiently, the organization tries to do more of the same with less. That often results in lower quality and therefore a drop in customer satisfaction. Cost-cutting decisions become centralized: The finance department makes across-theboard cuts, paying little attention to initiatives that may be the nuclei of postrecession growth. Pessimism permeates the organization. Centralization, strict controls, and the constant threat of more cuts build a feeling of disempowerment. The focus becomes survival both personal and organizational. Few prevention-focused corporations do well after a recession. In the three years after the 2000 recession, sales for the 200 largest companies grew by an average of $12 billion over prerecession levels, the prevention-focused enterprises among them saw sales grow by an average of just $5 billion. Moreover, cost cutting didnt lead to above-average growth in earnings. Aggressive Strategy Some business leaders pursue opportunity even in the face of adversity. They use a recession as a pretext to push change through, get closer to customers who may be ignored by competitors, make strategic investments that have long-term payoffs, and act

opportunistically to acquire talent, assets, or businesses that become available during the downturn. These strategies are designed to garner upside benefits. At the height of the 2000 recession, for example, Hewlett-Packard drew up an ambitious change agenda even though sales and profits were falling HP embarked on a massive restructuring program, made the largest acquisition in its history by buying Compaq for $25

billion, and increased R&D expenditures by 9%. It also spent $200 million on a corporate branding campaign and $1 billion on expanding the availability of information technology in developing countries. These initiatives strained the organization and spread top managements attention too thin. When the recession ended, the company found it tough to match the profitability levels of IBM and Dell. By 2004 HPs earnings, at 8.4%, had slipped below IBMs 16.8% and Dells 9.3%. Such organizations ignore early warning signs, such as customers budget cuts, and are steadfast in the belief that as long as they innovate, their sales and profits will continue to rise. Even as customers clamour for lower prices and greater value for money, these companies add bells and whistles to their products. They simply dont notice that because the pie is shrinking, they must capture an even larger share from rivals to keep growing. Thats why promotion-focused organizations are often blindsided by poor financial results.Worse, when these companies are forced to tackle bloated cost structures, the changes they make often prove to be too little, too late. Despite a focus on growth, promotion-focused companies post-recession sales and earnings rise by only 8% and 6% respectively, whereas those of progressive companies shoot up by 13% and 12%. Among the 200 largest companies that tackled the 2000 recession, promotionfocused enterprises grew sales by $15 billion and profits by $1.5 billion, on averagefar lower than progressive companies average increases of $28 billion in sales and $6.6 billion in profits. The Elusive Balance The companies most likely to outperform their competitors after a recession are pragmatic. The CEOs of pragmatic companies recognize that cost cutting is necessary to survive a recession, that investment is equally essential to spur growth, and that they must manage both at the same time if their companies are to emerge as post recession leaders.Companies typically combine three defensive approachesreducing the number of employees, improving operational efficiency, or bothwith three offensive ones: developing new markets, investing in new assets, or both. This yields nine possible combinations, some of which are more effective than others. Best Combination of Moves

One combination has the greatest likelihood of producing post recession winners: the one pursued by progressive enterprises. These companies defensive moves are selective. They cut costs mainly by improving operational efficiency rather than by slashing the number of employees relative to peers. However, their offensive moves are comprehensive. They develop new business opportunities by making significantly greater investments than their rivals do in R&D and marketing, and they invest in assets such as plants and machinery. Their post recession growth in sales and earnings is the best among the groups in our study. Its important to understand why the companies that use this combination do so well after a recession.
Operational efficiency

Most enterprises implement aggressive cost-reduction plans to survive a recession. But companies that attend to improving operational efficiency fare better than those that focus on reducing the number of employees. Progressive companies also lay off employees, but they rely on that approach much less than their peers do. Only 23% of progressive enterprises cut staffwhereas 56% of prevention-focused companies doand they lay off far fewer people. Companies that rely solely on cutting the workforce have only an 11% probability of achieving breakaway performance after a downturn. There may be several reasons for this. In our experience, morale is usually better at companies that stress operational efficiency. Employees at these companies appreciate top managements commitment to them, and they are more creative in reducing costs as a result. In contrast, companies that respond to a slowdown by reexamining every aspect of their business modelsfrom how they have configured supply chains to how they are organized and structuredreduce their operating costs on a permanent basis. When demand returns, costs will stay low, allowing their profits to grow faster than those of competitors. Investment in both existing and new businesses. During recessions, progressive companies develop new markets and invest to enlarge their asset bases. They take advantage of depressed prices to buy property, plants, and equipment. This helps them both during the recession and afterward, when they can respond faster than

rivals to a rise in demand. Because their asset costs are lower than their non investing competitors, their earnings can be relatively higher. These companies also judiciously increase spending on R&D and marketing, which may produce only modest benefits during the recession, but adds substantially to sales and profits afterward. The resources freed up by improving operational efficiency finance much of this expenditure. In turbulent times, its tough for companies to know where to place their bets for both the immediate term and the long run. Progressive companies stay closely connected to customer needsa powerful filter through which to make investment decisions. Getting It Right Pursuing a Janus-faced strategy isnt easy. Cutting budgets in one area while expanding them in another means explaining to those who are being asked to bear the burden of the former why the company is spending where no immediate benefits are apparent During the 2000 recession, Target increased its marketing and sales expenditures by 20% and its capital expenditures by 50% over prerecession levels. It increased the number of stores it operated from 947 to 1,107 and added 88 Super Target stores to the 30 it had already set up. It expanded into several new merchandise segments, ramped up investment in credit-card programs, and grew its internet business. The company made several smart choices along the way. Instead of trying to go it alone online, Target partnered with Amazon to sell its products. It also teamed up with well-known designers such as Michael Graves, Philippe Starck, and Todd Oldham to cement its reputation for cheap chic, thereby differentiating its products. Meanwhile, Target relentlessly tried to reduce costs, improve productivity, and enhance the efficiency of its supply chain operations. For instance, in 2000 it was one of the 12 retailers that founded the WorldWide Retail Exchange, a global business-to-business electronic marketplace, to facilitate trading between retailers and vendors. In January 2001 Target consolidated its Daytons and Hudsons stores under Marshall Fields to take advantage of the well-known brand name. These moves helped the company grow sales by 40% and profits by 50% over the course of the recession. Its profit margin increased from 9% in the three years before the recession to 10% after it.These strategies contrast sharply with those of other retailers, which focus primarily on growing store networks.

Many CEOs find investing in bargain-basement assets a tempting offensive move in a downturn. But the revenues and profits from opportunistic investments can take a long time to materialize, leaving a company saddled with an asset base that doesnt significantly boost returns. Target hasnt faced this problem. During the current recession, the retailer initially saw a decline in same-store sales, in part because Wal-Marts message of everyday low prices went down well with customers. Realizing that spending on wants was decreasing sharply, Target strengthened its position in a key needs segment: food. It launched a new store format that doubles the amount of floor space devoted to food; extended the range of its food brands, Market Pantry and Archer Farms; and overhauled its operations to support the emphasis on food. The retailer also increased media spending and reaffirmed its positioning with the slogan Expect more, pay lesswith an emphasis on the second half. These are early days, but the results appear promising: By 2008 Market Pantrys sales had increased by 30% and Archer Farms by 13%. And food has become a $1.8 billion business for Target.

Conclusion
All businesses need to adjust to reality of recession, but the clever and courageous ones are also spotting new gaps in their opponents defences and making a break for it.The companies we looked at all increased growth and profitability during the recessions or the following recovery periods because of the choices they made when times were toughest. Businesses should think cautiously in the short term but be ambitious and plan for the long term. There is no doubt that times are increasingly tough, but to survive, businesses have to look to the future.

Stability is what enables these companies to innovate and to maintain steady growth. Coupled with transparent values, it allows employees to feel confident about taking the risks that experimentation requires. Management continuity permits the building of informal internal networks, which are known to be a factor in successful innovation. The result is a high performing organization that delivers consistent results over a reasonably long period in the face of environmental volatility.

References Gulati, Nohria, and Wohlgezogen, (March 2010),Roaring Out of Recession, Harvard Business Review McGrath, (Jan 2012), How the Growth Outliers Do It, Harvard Business Review Andrew Winston, ( August 2009), Survival, Relevance, and Advantage: Why Environmental Thinking is the Key to Growth in Tough Times and Beyond, , Harvard Business Review New Zealand Trade and Enterprises, (March 2009),Changing the Game: Recession Survival Strategies