It’s been 12 years since the last recession, when the World Bank estimates that global GDP fell by 1.7%. But some companies were better prepared than others: their revenues didn’t fall as far and, as the recession ended, they recovered more quickly than their peers. Looking at what these organizations did differently, and learning lessons from their experiences can help leaders prepare for the unexpected—whatever the source of turbulence.
According to a recent study of more than 1,000 large, publicly-traded companies, three factors made the biggest difference before, during, and after the downturn:
- Increasing productivity levels—and, crucially, making the improvements stick
- Improving balance sheets through a combination of decreasing debt and cutting operating costs
- Being smart with M&A activity—both in divesting underperforming businesses and in buying promising ones from other companies
The combination allowed some businesses not only to boost earnings an average of 10 percent in the darkest year of 2009, but also to build on that advantage over the coming decade. This is what we mean by “resilience”: a company’s ability to generate an economic profit through cyclical and structural changes in supply and demand, balanced on twin pillars of flexibility and productivity. After ten years, total return to shareholders for this resilient group had outperformed their nonresilient competitors by about 150 percent.
Given the volatility of the current economic environment, achieving resilience will require a new, flexible approach to operations. This approach applies next-generation levers such as digital, analytics, and automation, and integrates them to cut across silos and sustain the impact. The result helps businesses respond not only to the fast pace of change of digital and other innovations, but also to an aging workforce, increasingly regionalized value chains, and rising consumer demand for fast delivery and mass customization. Together, these forces make adaptability and responsiveness more valuable than ever before.
During previous downturns, resilient companies drove higher productivity to help protect margins. In our new digital age, digital and analytics tools allow organizations to dial production levels up or down to match demand, building a new and important factor of flexibility. It requires a focus on the success measures that really matter—defining what it means to win the day at the individual, team, business unit, and company levels. It also requires a management system that works across all levels of the organization, empowering the employees closest to the work to inform the development of digital processes—and aligning incentives accordingly.
Given the different experiences of resilient and non-resilient companies, defining, measuring, and having a clear plan to build resilience could help companies prepare for future turbulence. Accordingly, a new Operations Resilience Index looks at 40+ factors across a company’s cost structure, productivity levels, and rate of productivity improvement. It measures the degrees of freedom a company has to modify costs and remain flexible and responsive.
Companies can increase their readiness for the unexpected by making structural, strategic, and operating decisions that improve performance. Even in good economic times these are helpful actions to take, as they ensure an organization is ready, whatever storms may come their way.
The auto industry’s performance is a good demonstration of the effect of different levels of preparedness for a downtown. During the 2007 recession globally, vehicle production dropped by nearly 16% in 2008 and 2009, and in North America vehicle production dropped by over 43%. It was not just auto manufacturers who suffered in terms of profitability, but the whole value chain was impacted—several major auto OEMs and up to half of all North American auto suppliers were in severe financial distress. Bankruptcies spiked, and government support was critical to helping the industry recover.
In recent times automakers around the world have been significantly reducing their operating costs and increasing flexibility. Organizations that take actions such as these will be better positioned to cope with economically challenging times in the future.
Companies should act now, when the economy is stronger, so that they can adjust quickly to a changing environment. Automation, digitization, and analytics are changing industries faster than ever before, and the pace of change is only accelerating. And with political flux and trade disputes on the rise, economic disruption becomes more a question of “when” than “if.”
What was “good enough” five or ten years ago will no longer do. To pivot in time, businesses need to be lighter on their feet and quicker in their reflexes. By understanding where your operations are rigid or slow today, you can take practical steps to become more resilient tomorrow—and perform much better over time.
