History suggests that the winners from a recession tend to win big
The story is possibly apocryphal, but at the height of the Guinness affair in the mid-1980s, Ernest Saunders, the soon to be disgraced Guinness chairman, is said to have been called to a crisis Sunday morning meeting in London.
Saunders insisted there was no way he could make it as he would be in Church. "I didn't know you were a religious man", the adviser remarked. "I'm not", said Saunders, "but at times like these it pays to hedge your bets".
There are still a few optimists out there, a few prepared to accept forecasts from the UK Treasury and other Western policymakers of a strong, V shaped recovery to come, but most chief executives have long since given up hope of reaching these sun lit-uplands again any time soon.
Hopefully, a Japanese-style lost decade of growth can still be avoided, yet the company boss who is not hedging his bets by thinking about how to match his cloth to such permanently reduced growth prospects would be in dereliction of his duties. Most business leaders expect at best an extended period of anaemic growth for advanced economies, and many are preparing for worse.
We already know for sure that this is no ordinary recession; whatever the official data says about growth over the next several years, it is going to feel bad for a long time. And however decisively China and other surplus nations move to stimulate domestic demand, it's not going to compensate fully for the likely fall-off in US consumption.
In recent years, US consumers have accounted for a whacking great 20pc of global GDP. Private consumption in China would need to rise by more than 30pc to offset a decline of just 5pc in US consumer spending.
Most high growth, developing economies are in any case effectively walled gardens not easily accessed by western companies. They'll keep the goodies for themselves.
If low, or even negative growth is the new reality, the implications are profound, both for the public finances (published plans for fiscal consolidation in Europe and America are heavily dependent on a return to robust growth) and the way companies are managed.
In such circumstances, are companies best advised to put themselves into cold storage, sit on their hands, and do nothing until the debt overhang is removed? That's already a quite common approach to the problem, but the evidence of past Depressions is that it is most unlikely to serve its followers well.
Instead, established business models need to be rethought and companies must adapt to survive. Recessions quickly sort businesses into winners and losers. In good times, all companies tend to float along together on a sea of rising consumption, but when the going gets tough, performance will diverge markedly.
Recessions can therefore produce seismic industrial and corporate change, and somewhat counter-intuitively, really serious ones can catalyse great leaps forward in innovation and productivity. Established market leaders get toppled, and upstarts can come from nowhere to take their place. Recessions can be as much a land of opportunity for the fleet of foot as they are the nemesis of the overblown and complacent.
These are some of the observations of a new study by David Rhodes and Daniel Stelter of The Boston Consulting Group. Their book, "Accelerating Out of the Great Recession – How to Win in a Slow-Growth Economy", convincingly demonstrates that well-managed companies can indeed prosper through tough times and what's more, tend to enjoy sustained advantage for decades afterwards.
The fight to maintain company performance during a downturn is not just about short-term survival – it is also about long-term positioning in the industry hierarchy. For examples of this, the authors have gone back to the American automobile industry during the Great Depression.
Like today, the auto-industry was one of the worst affected by the economic contraction of the 1930s. By 1932, US sales of new automobiles had fallen by an astonishing 75pc and combined annual losses had reached nearly $3bn in today's money. At the start of the Depression, General Motors and Ford enjoyed market share of roughly a third each, with the rest accounted for by smaller players.
Over subsequent years, General Motors improved its market share by a remarkable 15pc, largely at the expense of Ford and smaller players, to take nearly half the total market. But the performance of Chrysler, a comparative upstart was even more impressive. During this period it took an extra 20pc of the market to leave Ford standing.
For General Motors, the secret lay with acting decisively to cut costs and mothball plants, allowing the company rapidly to scale back production of its mid-market and high-end brands. GM slashed prices by up to 70pc to clear unwanted inventories, it crunched its sales forces and component sourcing together across brands, and it created new forms of consumer finance to replace non lending banks.
At Chrysler, the approach was even more brutal. Applying the ancient Roman principle of "decimation", it went through the payroll list sacking every third person indiscriminately. But at the same time, it put in place systems to almost double the hourly output of its assembly lines.
Despite the difficulty of the times, it also continued to invest heavily in marketing, research and development. Realising that the highway expansion programme of the New Deal would create demand for faster more powerful cars, it became the first auto-maker to use wind tunnel testing to improve design and engineering.
These are just two of the many industrial success stories of the Great Depression. Others include genuinely new industries in consumer products and business services, including Hoover and IBM, both of which experienced explosive growth in the 1930s.
It all goes to show that even the most structurally damaged of economies will eventually revive on a wave of innovative, needs-must advancement. For the industries of the future we must look to communications, biotechnology, robotics, nanotechnology, renewable energy and healthcare.
And the management qualities needed to achieve high performance in a downturn? Well, these are not so very different to those that underpin outstanding business achievement at all times – strong leadership, decisive, early action, willingness to rethink the business model and ability to take the organisation with you. It's easy enough to define what makes the difference; making it happen is something else entirely.
