Lessons in Leadership
A leadership guide featuring step-by-step how-tos, Wall Street Journal stories and video interviews with CEOs.
Tips
- Focus on what the company does best and spend to gain share.
- Make bargain acquisitions to build up the company's core, even when it means taking calculated financial risks.
- Approach the economic downturn like a driver heading into a sharp curve -- slow in, fast out.
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The following was adapted from a WSJ column by Darrell Rigby and Steve Ellis of Bain & Co.
Like dangerous curves on a racetrack, economic downturns create more opportunities for companies to move from the middle of the pack into leadership positions than any other time in business.
Unlike straight-aways where leaders can thrive on raw power alone, steep curves require strategic finesse. That often results in dramatic differences in performance as leaders steer out of the curve.
Consider how Southwest Airlines Co. surged ahead during the 2001 recession. With a clean balance sheet, a clear cost advantage and adroitly hedged fuel costs, the discount carrier grew at the expense of rivals. As others eliminated capacity and jobs, Southwest lowered fares to gain market share. It boosted advertising to trumpet its price advantage and built solid relations with labor by avoiding layoffs.
Southwest is not unique. About 24 percent more firms moved from the back of the pack to the front in the 2001 downturn compared with the subsequent period of economic calm, according to an eight-year study by consulting firm Bain & Co. that analyzed the net profit margins and sales growth of more than 2,500 companies. Meanwhile, about one-fifth of all leadership companies—those in the top quartile of financial performance in their industry—fell to the bottom quartile. By comparison only three-quarters as many companies made such dramatic gains or losses after the recession.
Recessions hit some industries harder than others, so staying alert matters. The variations get amplified in a globalizing, interdependent economy. That adds both opportunity and complexity. The opportunity is to shift focus to economically healthier regions. The complexity arises from having to make long-term investments in global operations with less certainty than ever about where you will be exposed when the next downturn hits.
Many industry leaders fall from the top during recessions because they assume that a strong market position is an insurance policy against trouble. That approach breeds overconfidence. Executives postpone taking precautions or reach for the same levers they pulled in the past — like hedging their bets by diversifying. When the downturn hits hard they usually over-react. They slash costs and staff indiscriminately, cut capital expenditures, squeeze suppliers, and avoid strategic acquisitions. Then when conditions improve, they must spend heavily to regain momentum.
The better approach: slow in, fast out—like a good driver heading into a sharp curve. Winners in recessions tend to brake quickly heading into a downturn by managing costs carefully and consistently. It’s like downshifting to a lower gear to slow momentum and increase responsiveness. They focus on what the company does best, reinforcing the core business and spending to gain share. They aggressively monitor the competition to ensure they have the best possible line through the curve. That sets them up to accelerate at the apex of the curve, when the economy starts to improve. The farther you can see and the quicker you can turn, the faster you can safely corner.
Another characteristic of companies adept in a downturn: they make bargain acquisitions to build up their core, even when it means taking calculated financial risks. As markets improve, they are well-positioned to accelerate.