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Who’s Afraid of a Recession?

Not strategy guru Adrian Slywotzky. He says bad times are the best times to make time on the competition.

Recession, slowdown, correction, disaster. Whatever kind of consultant-speak you choose, there’s no getting around the fact that now’s a scary time to be running a business. But does a downturn mean that it’s time to hibernate until the leading indicators once again show signs of life?

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Hardly, says Adrian Slywotzky, a vice president at Mercer Management Consulting and author of several books, including How Digital Is Your Business?: Creating the Company of the Future (Crown Business, 2000). Recessions, he says, sound a lot worse than they are — in part because they’re a great opportunity to move forward on key strategies and to take on competitors.

Bad times are the best times to invest in the most important parts of your business, precisely because other companies aren’t investing. The wrong strategies, says Slywotzky, are the broad layoffs and 15% cost cuts splashed across daily newspapers. But what are the right strategies? In a conversation with fastcompany.com, Slywotzky lays out his contrarian take on how to do business in tough times.

What exactly is going on out there? Are we heading into a dramatic slowdown or recession? If so, should companies change the way that they think about business?

I don’t know whether I’d use the word dramatic, but we are heading into the kind of recession that we have had many, many times in the past. The truth is that all multibusiness, multigeography companies are never more than 24 months away from a major recession somewhere in their system. The only surprising thing about recessions is that people are always taken off guard by them. But only a small percentage of today’s managers has actually managed through a previous recession, so perhaps this economic environment is a new challenge for our leaders.

Recessions are shrouded in more myths than any other phenomenon in business. The first myth is that recessions are rare. The second myth is that they’re all bad news. And the third myth is that businesses should hunker down when they hit.

A recessionary economy is different from a booming economy, but we don’t stop creating value during a recession. Japan’s been in a recession for a decade. And yet companies like DoCoMo Inc. have invented new business designs and created new value for customers in the midst of a stagnant business environment.

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Right now, we’re seeing broad layoffs and conservative decision making. Is that the right strategy for this economic environment?

Not at all. The prevalent reaction is to hunker down, focus internally, and implement across-the-board cuts. Companies typically focus on two simple questions: How deeply do we cut? How quickly do we cut?

Recessions are hell, but they provide unique strategic opportunities. It’s very hard to gain relative position in a boom: Everybody’s paying attention; everybody’s focused; everybody’s adding capacity; everybody’s spending. Smart companies have demonstrated that it’s drastically easier to improve relative position during a downturn. In 1997 in Asia, the economy was terrible, and companies like Cisco Systems and Cemex turned on the heat, magnified investments, and picked up assets for 50 cents on the dollar. They dramatically improved operations. Intel achieved comparable goals in 1991. When things were bad, they accelerated their capital expenditures on plants and began building their brand with “Intel Inside.”

What options are available to managers today? They can make cuts across the board and hope that this recession ends soon. Or they can say, “Yes, we do need to save, but we don’t want to cut 10% off everything. We want to discern carefully which areas of our business are not adding value.” A lot of people make across-the-board cuts because they don’t have adequate data telling them to do otherwise.

The height of a boom is the best time to start developing and analyzing, because in a downturn, companies should spend more time helping their best customers and less time trying to subsidize their worst customers. It’s always bad to make your good customers subsidize your bad ones. It’s terrible to do that in a recession. The same logic is true for suppliers and employees.

You suggest that companies should invest while they cut during a recession. Can you further explain that recommendation?

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It’s counterintuitive for companies to ask, “What is the most important thing for us to accelerate during this downturn?” For some businesses, the most important thing is brand building. For other businesses, it may be product development.

By concentrating on a specific target, companies are forced to think harder and deeper about what’s really not essential and not valued by customers. Companies should cut two inessential ingredients and invest in one truly vital component during a recession. When a rebound happens, the companies that only cut resources are going to lose ground to those that cut and then invested in the most important aspects of their businesses.

Your last book concentrates on building companies’ “digital” strengths. Now some companies are abandoning Web strategies altogether. Is your book still relevant?

Now is the best time to accelerate a company’s transition from a conventional to a digital arena. Downturns afford companies the opportunity to step back and ask, “What are the most important issues we face? What are the best designs around those issues? And why are we not managing 100% of those bits electronically?”

A handful of companies like Cisco, Schwab, Cemex, and Dell started that process in 1996 and essentially completed it by 2000. That four-year process produced phenomenal economic results. In 2001, every penny counts. Companies can’t afford to move things up and down the chain anymore. They should make the transition now.

Secondly, I think that companies need to help their best customers get through this recession in the best way possible. Companies interact with customers and suppliers in extremely expensive, slow, and frustrating ways. Companies like Cisco, Dell, and Schwab have figured out how to digitize many of those interactions. They have learned to reduce costs dramatically while increasing satisfaction as customers get their answers more quickly and accurately.

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But even Cisco and Dell are struggling now. How do we know that they’ve done the right thing?

A great business model does not exempt any company from the laws of an economic slowdown. Great business designs took a financial hit in 1991, but they bounced back quickly, because their relative position was much stronger than their peers’. In 2001, companies that have made the digital transition still generate higher profits and earn higher valuations than their competitors. For example, Dell plans to increase its cost advantage this year. Digital sales already make up about 50% of Dell’s total sales, but the company is driving very hard to increase that ratio.

In past downturns, companies have cut people and training first. Is it going to be different this time? And even if companies manage to keep their best people, how do they avoid what Gordon Eubanks, president and CEO of Oblix Inc., calls the “molasses of indifference”?

About two years ago, I spoke to a group about formulating a talent strategy. I said, “Let’s be clear about why we’re doing this. We shouldn’t be doing this because good people are in short supply. We should be doing this because it’s the right thing to do. And we should continue doing this even after the shortage has abated.” In 2001, we’ll see which companies behave that way. Intel is bending over backward to keep its people, and that’s smart.

Companies must intensify internal marketing and communications — recession or no recession. You always need a message to galvanize your people around. In a recession, you have the undivided attention of every person in your organization. That’s why it may be the easiest time to change habits.

Contact Adrian Slywotzky via email (adrian.slywotzky@mercermc.com).

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