Recession : The complexities of risks & opportunities

Taking the IPOD and the first PC from IBM as an example, both of which were issued in hard times, the first was issued weeks after the 9/11 and the latter was issued throughout the 1981 US recession. Both have done splendid in the markets, so the question here is recession/hard times a period companies should embark on cost cuts or should they be aggressive!

Touching the point of cost cuts as a sole strategy in recession as some companies previously did…

The appeal of cost cuts

The appeal of the defensive strategies, and mainly cost cuts can be well understood, the empirical study of Kwapil (2010) for companies in Austria supported the argument; showing that 85% regarded the cost cutting as a relevant or very relevant strategy to adopt throughout the crisis. Out of the many cost cuts categories, the tendency was to cut labor costs.

The study went further to show that organizations that were hit hard by the recession were the ones to move to the labor costs cut, while the ones that were affected mildly preferred to cut non-labor costs. A behavior that might be explained by the fast gains organizations can harness by cutting the labor charges, while the other ones, might accept the longer time frame till the benefits are realized.

However, organizations in fact compete on either cost leadership. That is; “we give you the best price” or they opt for differentiation strategies, that is, “After all that you’ve seen, I am sure you are not expecting us to come in cheap” or a focused strategy as the name implies, it focuses on a narrow market or a segment. Those are the three generic marketing strategies.

In general organizations will follow a focus strategy, however, it is one that will be able to differentiate itself on a cost leadership basis (David, 2003) the rest in essence have to set a different course in competition, which means some organizations might have lost sight of their differentiating factor in favor of cost only.

Of course there is the turnaround theory and its details will make this post quite lengthy, hence, it is left for the time being.

Learn from history !

The empirical study of a 4,700 public companies performance during the past three recessions; 1980 crisis, 1990 crisis & the 2000 bust performed by Gulati, Nohria & Wohlegezogen (2010) reported the lowest probability for the organizations that adopted fast cost cuts to be among the ones to flourish upon the end of the recession, a percentage as low as 21% compared to 26% to the organizations that invested boldly. The highest probability of success after the recession was reported to be 37% and it was for the organizations that mastered the balance between defensive and offensive strategies. The empirical study started by categorizing the organizational behavior into four categories; “prevention – focused companies, promotion – focused companies, pragmatic companies, & progressive companies”. The prevention focused companies are the ones focused on cost cuts, in addition to the fact that those organizations will trail the other groups in making post-recession growth, other risks rightfully argued by the authors are the degrading quality of the products rising from the cost cuts in R&D and the loss of focus on efficiency, in addition to that, pessimism will be the prevailing culture in those organizations and survival whether it be on the personal level or the organizational level is the core focus. Moreover, those organizations will not pay focus on what could create a healthy growth after the recession, in other words, they will be ill prepared for the post-recession period. The other side of the coin isn’t much better either as reported by the empirical study; the high optimism –despite its appeal – could make the organization overlook the realities making it difficult for them to compete after the recession is over.

Organization should seek the tricky balance between offensive and defensive strategies which is not a straightforward solution, nonetheless, pragmatic and progressive organizations did indeed report much healthier position after the recession. However, if an organization is to assume three possible defensive strategies and three possible offensive strategies, this will yield a nine possible combinations, one of which will give better results than the other combinations.

References

Kwapil C. (2010), ‘Firms’ reactions to the crisis and their consequences for the labour market : results of a company survey conducted in Austria’, European Central bank : working papers series, No 1274 Dec.  

David F. R. (2003), Strategic management concepts (9th Edition), Prentice Hall (ISBN 0-13-120235-9)

Gulati R., Nohria N. & Wohlgezogen F. (2010), Roaring out of recession, Harvard Business Review, March, p.63-69.

Photo by rattigon. Published on 30 October 2012 Stock photo - Image ID: 100109147

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