The Upside Of Down: How To Use A Downturn To Your Advantage

Stop panicking--the fiscal cliff is approaching, but you can turn it around. Follow Warren Buffett and John D. Rockefeller's advice to grow your company in the midst of economic crisis.

On Election Day, Tuesday, November 6, 2012, the U.S. unemployment rate stood at 7.9%. The nation’s debt topped $16 trillion and the country stumbled yet another rung down the ladder of global competitiveness for the third year in a row (#2 in 2009 to #5 in 2012).

The day after the election, the phrase fiscal cliff went viral. Fiscal cliff is a term used to describe the calamity that may ensue when the terms of the Budget Control Act of 2011 are scheduled to go in effect. Notably, on midnight December 31, 2012, tax breaks for businesses will end -- including the tax cuts from 2001‐2003. When combined with taxes related to the administration’s health care law and spending cuts from the 2011 debt ceiling deal, the term fiscal cliff, while it may be hyperbolic (political pundits are good at hyperbole), is perhaps the most apropos phrase to describe what could occur.

There are two conclusions you could draw from this impending situation:

1) We will likely go into a recession while our government continues to kick our fiscal problems down the road or;

2) Downturns are unique opportunities to get ahead, leapfrog your competition, and position your business for growth.

I choose the latter. If not for myself, than for my kids.

I’m not an economist, nor a politician. I am a businessman and an educator. My areas of interest and expertise are business innovation, so I can’t tell you whether or not we will go over a fiscal cliff. That said, according to the International Monetary Fund’s (IMF) 2012 World Economic Outlook, we are facing an “alarmingly high” threat of recession in 2013 with a one-in-six chance of global growth dropping below 2%. According to the IMF, our fate is largely dependent upon how European and U.S. policymakers deal with short-term economic challenges. Whether or not our policymakers figure it out, what I can tell you with certainty is this: If history is any guide, times like these are when great leaders emerge and great companies leapfrog their competition. They do it by getting creative in solving some of the most complex business problems using innovative approaches. But, they also do it by following strategies that -- you too ‐- can learn and apply in your business in order to get ahead. These strategies I explore in detail in my new book THE UPSIDE OF DOWN: How to Use a Downturn to Your Advantage. Consider it a fiscal cliff Christmas gift.

Down times are great times for those willing to take risks, get creative, and invest in the future. Don’t miss your opportunity to widen the gap between you and your competitors. Wealth is not created during periods of economic turbulence; rather, wealth simply changes hands. You don’t have to take my word for it, consider the words of one of the wealthiest humans on the planet, Warren Buffett.

To quote the oracle of Omaha: “Look at market fluctuations as your friend rather than your enemy. Profit from folly rather than participate in it.” Good words indeed, but Warren Buffett’s actions speak louder than his words. Consider the financial choreography he orchestrated during the depths of the last recession.

On September 23, 2008, amid the swirling financial crisis, Berkshire Hathaway agreed to invest (aka, grant an emergency loan) to the tune of $5 billion in a weakened Goldman Sachs through a purchase of preferred stock. To help sweeten the deal, Goldman also granted Berkshire warrants that gave Buffett the option to purchase up to $5 billion of common shares at the handsome strike price of $115/share (less than half of Goldman’s peak share price of $248). Within three years, Buffett earned $3.7 billion on the deal. And Buffett didn’t stop with Goldman Sachs. One week after the Goldman Sachs announcement, Berkshire invested an additional $3 billion in General Electric on terms that would make the Godfather blush with envy.

While Warren Buffett may be alone in his wealth, he is not alone in his wisdom. Great leaders translate moments of uncertainty into moments of opportunity. As John D. Rockefeller advised: “The way to make money is to buy when blood is running in the streets.” Not only do downturns provide the opportunity to streamline operations, they provide the right conditions for innovation to succeed. Creativity loves constraints.

One strategy that separates industry leaders from laggards is that leaders don’t stop innovating when times get tough. In fact, they do quite the opposite. They increase efforts to grab market share, introduce disruptive new products, and expand their reach. From Amazon to Apple and McDonald’s to Procter & Gamble, industry leaders use downturns to their advantage. They invest when others cut back.

In a study of 1,000 companies over an 18-year period (1982-1999), McKinsey & Company found that those companies that retained or gained market leadership during the recession of 1990‐1991 invested cash reserves on strategic acquisitions and opted to pursue new opportunities that fit its overall corporate strategy rather than focusing on reducing operating expenses. They innovated their way out, over, and around the downturn. It sounds logical, but it requires discipline. Think about it. Why would you increase marketing spending during a boom and not a recession? The market is louder during boom times. Your messages will invariably get lost. On the other hand, during downturns, the market is much quieter precisely because your competitors will likely pull back on marketing in an attempt to reduce costs. However, this is precisely the wrong thing to do. And so, why not take advantage of their folly? You should be increasing your marketing spending now. The same holds for spending on SG&A and investments in R&D. Now is the time to invest. In fact, McKinsey also found that industry leaders doubled down on both SG&A and R&D. They increased spending significantly during downturns while industry laggards (those who trailed during the subsequent boom time) cut back.

And so, while others proclaim doom and gloom, choose not to participate in their pessimism. Choose to get ahead. Use the downturn to your advantage. What you’ll soon discover is that the process of innovation is actually easier to manage during downturns (and much more cost‐effective). It’s easier to focus, to make decisions, and to uncover what your customers really value when times get tough. More importantly, the products of innovation are more valuable during tough times. Your customers are more discriminating and as a result, they -- like you -- are looking for creative solutions to their problems. Before you drop your price (bad idea) or cut costs (unsustainable), consider getting creative. Challenge your team to innovate your way out.

Whether or not our collective economic bus careens off the proverbial fiscal cliff or not, don’t forget the unique nature of economic downturns in helping you get ahead. The question is not whether to cut costs or to invest. The question is how best to do both in order to position your company for growth when the economy bounces back. Think of it this way: If you’re going through the process of tightening your belt, you might as well consider investing in a new pair of pants.

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Andrew Razeghi is a Lecturer at the Kellogg School of Management at Northwestern University. This article was excerpted from his new book THE UPSIDE OF DOWN: How to Use a Downturn to Your Advantage (SlimBooks 2012), available at SlimBooks.com and at the Kindle Store on Amazon. Follow Andrew on Twitter @andrewrazeghi.

[Image: Flickr user Miuenski Miuenski]

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