Corporate Strategy Before During A Recession

Running head: CORPORATE STRATEGY

Corporate Strategy Before During A Recession

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During tough economic times managers execute different plans to help their company survive the downturn and become more profitable in the future. But few managers are able to create a strategy that helps them become the leaders in their industry. Recessions create an opportunity for mangers to take their company to new heights but few are able too. “Research shows that 9% of companies come out of a recession stronger than ever” (Gulati, Nohria, & Wohlgezogen, 2010, p. 63).  By applying certain strategy’s during an economic downturn managers can make their company stronger than ever.

Gulati et al. (2010) classify companies and management strategies into four types the Prevention, Promotion, Pragmatic & Progressive (p. 64). Managers that focus on prevention try to cut costs as much as possible while also trying to reduce risk. The promotion focus is more optimistic they acquire assets at lower prices and try to reach new customers. When a manager tries to use a little of both strategies they are using the pragmatic approach. A company is progressive when it is able to strike that perfect balance between protection and growth.

The prevention focus is the most common seen during a recession managers try to cut the budget on everything within the company and begin growing the amount of cash in their accounts. The reason this approach is so common is because it is a safe way to survive a recession. But the consequences after a recover has begun make them underperform their competitors. “In 2000 Sony cut its workforce by 11% its research and development (R&D) costs by 12% and its capital expenditures by 23%” (Gulati et al., 2010 p. 65). “The company was able to increase its profit margin from 8% to 12% but its sales growth dropped from 11% before the recession to 1% after” (Gulati et al., 2010 p. 65).

Focusing on growth in a recession sounds like a great idea the cost of assets and equipment are usually very low and advertising your product may now cost less. But being too focused on growth can hurt a company after a Recession. The managers that want to remain positive don’t always look at the negative side of the recession where some cost may have to be cut or a change in consumer trends which may not blend well with the plan to grow the company. The consumer may want to save money and the company is selling products at pre-recession prices with increased options. Gulati at el (2010) describes Hewlett-Packard (HP) as a company that remained overly optimistic during the 2000 recession they increased R&D by 9% and acquired Compaq for $25 billion despite these moves after the recession HP had profits of 8.4%  below Dell’s 9.3%  and IBM’s 16.8% (p. 66).

Using a little from both the prevention and promotion strategies works the best for companies to prepare for the post-recession environment. The unfortunate reality is just combining two strategies anyway they feel does not create a strong company. Gulati et al. (2010) observes that companies that focus on operational efficiency as well as market development and asset investment usually show the best results after the recession. (p. 67) Reducing employees is another option that is available to managers when in a recession but reducing the number of people you employee can hurt employee morale and make the company slow to take advantage of the economic recovery it may also increase cost due to rehiring. “Only 23% of progressive enterprises cut staff- whereas 56% of prevention focused companies do- and they lay off far fewer people” (Gulati, et al., 2010 p. 67). ‘‘In 2000 Office Depot… cut 6% of its work force but it couldn’t reduce operating cost significantly’’ (Gulati, et al., 2010 p. 67). “By contrast Staples closed down some underperforming facilities but increased its workforce by 10% during the recession, mainly to support the high-end product categories and services it introduced” (Gulati, et al., 2010 p. 68). “Its sales doubled, from $7.1 billion in 1997 to $14.6 billion in 2003, while Office Depot’s rose by about 50% from $8.7 billion to $13.4 billion” (Gulati, et al., 2010 p. 68). “On average, Staples was about 30% more profitable than its archrival in the three years after that recession” (Gulati, et al., 2010 p. 68).

Looking at historical data from companies that outpreformed there rivials after a recession helps managers develop a strategy that could help their company weather downturns in the economy. Companies can learn from the past that cutting the workforce isn not usually the best option because it can make the company slow to gain ground during the recovery. But reduceing their operating costs by making their process more efficent yelds the best results and the savings continue after the recession has ended. Investing in assets and growing their market share when applied with a level head can help the company improve profits during and after the recession. Being to pessimistic or optimastic is dangerous for managers they need to look at the situation for what it is and develop a plan to save money and plan for the future. Every situation is different a manager can not be focused on one strategy for all situations being flexable is the most important skill for management to have no matter what the economic outlook is.  

Bibliography

Gulati, R., Nohria, N., & Wohlgezogen, F. (2010). Roaring Out of Recession. Retrieved from Harvard Business Review:    <Ahref="http://proxy.ohiolink.edu:9099/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=48219382&site=ehost-live">Roaring Out of Recession.</A>