Rumour has it that we're entering a recession.
Last month, the American Bureau of Economic Analysis reported that the Gross Domestic Product (GDP) had dropped 1.6% in Q1 and 0.9% in Q2, a common sign of economic recession. At the same time, many sectors of the economy have been thriving, with companies like Amazon, Walmart and Shell reporting their greatest profits in years. The U.S. labor market has also remained strong, creating 2.7 million jobs in six months and lowering the unemployment rate to 3.5% — a level rarely seen during a recession.
As experts wrestle with conflicting data, whether the U.S. is currently in a recession has become more of a semantic debate. Ultimately, people are struggling as prices continue to soar, the cost of borrowing rises and layoffs increase across the country. Consumer sentiment has reached a new low, forecasting a wave of cautious spending. As a result, organizations sit in limbo, depending on a ‘wait and see’ mentality…
Learning from History
If the past has taught us anything, it's that economic moments of uncertainty provoke resiliency and companies that adapt quickly create new competitive advantages. A 2010 Harvard Business Review study revealed that during the recessions of 1980, 1990 and 2000, a fraction of companies actually flourished, beating competitors by at least 10% in sales and profit growth.
While many leaders want to come roaring out of the recession, they’re unsure of which strategic approach to deploy. Organizations that react in panic and cut costs faster than rivals don't necessarily thrive; they actually have the lowest probability of pulling ahead of the competition. Companies that overreact and blindly invest don’t necessarily succeed; they fall prone to fluctuating trends.
Nearly three decades of working with The Fortune 100 has taught us that those who master the fine line between cutting costs and investing based on customer needs do best in a recession. This blog will discuss what it means to have a prevention, promotion and progressive-focused approach to periods of economic recession. We’ll also explore how past ‘recession-winners’ have used innovation to stand out from the crowd and how your organization can do the same.
Prevention and Promotion-Focused Approaches
During a crisis, many CEOs solely concern themselves with preventing their company from being negatively affected. They delay much-needed investments, hoping that saved costs compensate for any potential loss in the future. In reality, only 21% of prevention-focused companies are likely to outperform rivals by 10%.
At the height of the 2000 recession, Sony postponed investing in its manufacturing process and slashed its workforce to help reach a reduction target of $2.6 billion. Between 1999 and 2002, Sony did increase its profit margin but growth in sales steadily declined. The company has had a difficult time regaining momentum ever since.
In the eyes of promotion-focused leaders, market disruptions are seen as opportunities to forge ahead. These leaders make bold investments that have long-term payoffs by leveraging talent, assets, or entire businesses that become available during a downturn. Often, these companies take on more than they can handle, neglecting the need to focus on customer needs and calculated risk-taking. On average, only 26% of promotion-focused companies go on to outperform their rivals by 10% or more.
Once the recession is over, promotion-focused organizations struggle to deal with the costs of their changes, leading them to become blindsided by poor financial results. For instance, after aggressively investing in expanding its workforce during the Covid-19 pandemic, Shopify laid off more than 10% of its employees as the e-commerce boom fizzled out– less than a year after the hiring wave began.
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Walking a Fine Line: The Progressive-Focused Approach
A progressive-focused organization is the most likely to be a ‘recession winner’ by employing a balanced strategy. They deploy the perfect combination of defense and offense. Like prevention-focused companies, these firms make defensive moves. However, they focus on operational efficiency rather than cutting employees. Like promotion-focused organizations, progressive firms also make bold offensive moves– but they are carefully thought out. Progressive-focused companies invest significantly in customer research, market intelligence and workplace learning to develop new and existing business opportunities.
These investments may not make a massive difference during the recession but add to sales and profits afterward, enabling progressive-focused companies to respond faster than rivals to a rise in demand. That’s why a staggering 37% of prevention-focused companies are likely to outperform their rivals by 10% or more. Adopting a customer-centric mindset is critical; progressive-focused companies rely on customer needs to guide their investments in times of uncertainty.
How Our Clients Have Become ‘Recession-Winners’
When the pandemic hit, ExperiencePoint was approached by various organizations looking to pursue a progressive-focused approach and future-proof themselves. One of the world’s largest North American banks came to us intending to invest in their people during times of uncertainty. They turned to us to up-skill a key part of their workforce and support a move away from transactional work towards more strategic work as business advisors.
ExperiencePoint helped the bank to understand, based on their experience, what power skills were most critical to advisory success. We then curated a set of our Spark episodes and delivered them via facilitated online workshops to over 1000 people in one day.
These Spark episodes helped the firm focus problem-solving efforts on user needs, enabling divergent thinking that leveraged customers’ pain points and sparked conversations around user empathy. People were better able to step back from existing solutions, get fresh perspectives and advise on how to improve overall offerings, products and services. Workshop learning was reinforced through executive presentations and town halls to ensure new customer-centric mindsets stuck.
For organizations hoping to ensure employees feel a greater sense of purpose at work (a key measurement of employee experience according to IBM), it's beneficial to help workers understand customers and offer insights rather than just process numbers. While some turned to layoffs or subsidiary acquisitions to respond to the pandemic, our client was able to invest in their people and breathe fresh air into their work culture.
Where Does Your Organization Stand?
While the rest of the corporate world is gearing up for economic uncertainty, what is your organization doing to ensure it has an innovative culture that takes advantage of opportunity? Working with market leaders has taught us that investing in people’s innovation capability is essential to building future-proof organizations. With the help of ExperiencePoint's innovation training products and services, you can enable your people to face whatever lies ahead–recession or not.