Playing it safe: tactics to ride out the storm
Build defenses, protect core assets and adopt lean operations.
Playing it safe involves using a core set of tactics that help you protect and optimize your business during hard times. Some tried and tested methods of preparing for crises are as relevant now as they ever were.
Particularly in challenging times, businesses must not compromise on fundamentals that keep their companies safe and secure. For example, crime often increases in recessions. In 2008, the number of online fraud cases increased 33% in the United States.6 Companies cannot afford to compromise their defenses.
Companies also need to maintain strong governance standards and mitigate against behavioral risks. “Situations where executives stray from company values or ethical behavior can be problematic even in good times,” notes John King, EY Americas Vice Chair — Assurance, “but can be doubly challenging in turbulent conditions, as regulators may be even more vigilant.”
Similarly, it is important for firms to take measures to both protect their brands and look for opportunities to build further loyalty by staying true to their purpose in tough times. A survey undertaken by EY reveals that 73% of respondents believe that a well-integrated purpose helps organizations navigate challenging times by building trust and strengthening relationships with stakeholders. In environments where trust erodes, maintaining your status as a trusted brand can pay great dividends. Protecting your core value, the value you deliver to all your stakeholders, means protecting your core values, or what you stand for.
In addition to adopting these protective measures, companies also need to optimize their operations as the global economy cools.
Companies that outperformed their peers in the last two recessions had taken steps to both protect and optimize their businesses before recession hit. By doing so, they positioned themselves to take advantage of new opportunities that economic downturns always create.
By cleaning up the balance sheet, they were able to take advantage of weaker, stricken players and acquire them, as soon as a downturn hit.
By being clear on the businesses they were in, they were able to divest out of non-core activities, freeing up both cash and mind space to fuel growth.
By moving fixed costs to variable costs, they were not burdened by costly overcapacity and were able to flex as growth opportunities arose.
Honeywell: reducing labor costs without cutting heads
After employing broad-based layoffs during the 2000 dot-com recession and struggling to recover afterward, Honeywell followed a different strategy in 2008. Understanding the corrosive impact that layoffs can have on morale and realizing that cost savings (which can take up to six months to materialize) may be temporary, as companies may need to begin re-hiring during recovery, Honeywell instead chose to furlough employees for one to five weeks with no or reduced pay. This saved an estimated 20,000 jobs and positioned the firm well for when demand picked back up.7
By diversifying their product range, they avoided the fate awaiting companies whose narrow focus proved fatal (e.g., Toys”R”Us, Blockbuster, Borders).
The natural tendency of companies facing difficult times is to focus only on defensive measures. Research, however, shows that this is not an effective strategy. Companies need to pair defensive tactics with offensive moves.8 In other words, winners from the last recessions didn’t just play it safe and passively wait for the storms to pass. The real differentiator was that they used the freed-up resources to double down on growth.
Doubling down means having a view of the future, prioritizing investments necessary to protect, optimize and grow the business. This perspective guides the strategic bets companies make to accelerate growth in times of economic uncertainty.
Double down: strategies for growth
Be opportunistic, experiment fast and take bold steps.
Uncertain economic times can bring enormous opportunities as tectonic changes recreate market landscapes. Typically, new entrants grasp these opportunities more effectively, as they are able to move quickly without the baggage that weighs down older incumbents.
A 2009 survey examined responses to the economic downturn of 3,000 country winners and finalists from the EY Entrepreneur Of The YearTM competition compared to C-suite executives in large multinational corporations. While 74% of the multinationals focused on ”securing the present,” only 30% of the entrepreneur group prioritized the present. By contrast, just 19% of the large company group focused on ”pursuing new market opportunities” compared to 67% of entrepreneurs. One winning entrepreneur sums up the attitude: “There’s no point in doing anything other than to look for the opportunity in the crisis.”9
Entrepreneurial companies are focused on building tomorrow’s market opportunity, while market leaders, for very obvious reasons, may tend to protect and optimize their current business. In this analysis, we show that pursuing both is the only way to meet the three imperatives of every company leader: protect, optimize and grow.
Not all the previous recession’s winners were startups. Some big companies made the brave steps it takes to emerge stronger out of crisis. They doubled down on long-term growth strategies, which positioned them to emerge as leaders into the next business cycle.
They invested in new technologies in support of goals such as improving operational efficiencies, creating more intimate customer connections, gaining a better understanding of their business and customer through data analytics, or moving into the cloud for more agile computing.
Starbucks: strengthening connections with its customers through digital and social channels
After Howard Schultz returned to lead Starbucks in early 2008, the company took steps to shore up its operations while also investing to reinvigorate customer connections. Starbucks closed almost a thousand underperforming stores in 2008-09 and focused on its core commitment to the customer experience. Schultz made his objective very clear: “reigniting the emotional attachment with customers.” The company used social media to allow customers to share ideas and, importantly, listened to the suggestions and implemented over 100 of these ideas. Starbucks was also early to embrace mobile apps to facilitate personalization. One feature, MyStarbucksSignature, allowed customers to design their own signature drinks.10
They continued to invest in R&D to bring innovation to market in time for the upsurge after the recession.
Microsoft: doubling down on R&D
During the 2008–09 recession, Microsoft significantly increased its R&D budget, growing spend around 15% in 2008 and 10% in 2009. One key target of the research program targeted cloud computing. Development of the firm’s Azure platform was announced in fall 2008 and was launched in early 2010. By the end of FY10, approximately 70% of Microsoft’s engineers were working on cloud-related products and services. A decade later (April 2019), Microsoft’s cloud revenues hit a run rate of $38.46b.11
They took advantage of weaker competitors to gain market share, to acquire key talent and to undertake strategic acquisitions.
InBev: a competitive strike
In the depth of the financial crash in 2008, just as Lehman Brothers filed for bankruptcy, European beer-maker InBev swooped to acquire the 100-year-old, family-controlled Anheuser-Busch, whose brands included the all-American Budweiser. Anheuser shareholders had seen profits flatline and despite opposition from the controlling Busch family, the US firm was sold for about $52b.12
They invested heavily in their delivery system while also adopting open and transparent communication styles with their customers, gaining trust, even when it involved owning up to harsh truths.
Domino’s: doubling down on brand trust
Domino’s Pizza was in trouble in the past recession, with its stock reaching an all-time low in 2008 and its pizza tied for last in a national taste test in 2009. The new CEO instituted several changes to turn things around. One area of strength that he set to improve was the company’s delivery system, primarily by bolstering online, mobile and social media channels. More fundamentally, the company completely overhauled the recipe and ingredients used for its pizzas. While rolling out the new recipe, Domino’s undertook a major advertising campaign, noted for its “legendary boldness.” The company chose to address former shortcomings of its product head on. According to then-CEO Patrick Doyle, “the old days of trying to spin things simply doesn’t work anymore ... great brands going forward are going to have a level of honesty and transparency that hasn’t been seen before.” Domino’s “radical authenticity” and the reinvention of its core product helped it reinvigorate its brand and boost sales.13
This Transformative Age is already creating enormous growth potential for companies able to adopt a new mindset. “Executives need to be value navigators,” says Hank Prybylski, EY Americas Vice Chair — Consulting Services. “We need to understand the real value of being connected, of managing our networks to chart uncertain territories.”
Mastering the complexity of our age involves more than understanding the capabilities of new technologies: it means developing an acute skill at continuously re-imagining the business we are in.
Amazon: from bookseller to tech platform and hardware developer
When Amazon launched its Kindle electronic book reader, many thought it was a crazy cannibalization of its business: customers would abandon physical books in favor of cheaper, electronic versions. The company had already acquired Audible.com in 2008, entering the audiobook market. By Q3 2009, Amazon Founder and CEO Jeff Bezos was able to announce, “Kindle has become the No. 1 best-selling item by both unit sales and dollars — not just in our electronic store, but across all product categories on Amazon.com.” Besides offering customers a cheaper option for purchasing books at a time when many were tightening their belts, the Kindle served a longer-term strategy by introducing a platform that would be expanded to offer customers additional digital products and services, not least paving the way for the Kindle Fire and Amazon’s entry into the tablet market. Amazon was farsighted enough to recognize that it was in the business of selling books in multiple formats.14
These are object lessons from successful cases that combine tactics to play it safe and strategies to double down. But, as we think about how to apply these to the next business cycle, what’s really different in this Transformative Age? How does the complexity crisis change the game?
Play it safe, double down or change it up?
The Transformative Age requires transformative skills.
“Business shouldn’t be slowing down because of uncertainty,” says Carmine Di Sibio, EY Global Chairman and CEO. “It should be speeding up because of transformation.”
At its simplest state, a business must set out to do three things every day: it must protect itself, optimize everything it can and ultimately grow. These are business imperatives that remain constant in face of societal, technological and geopolitical change. However, what is really different now is the pace of change.
The current business environment demands that a company employ a new skill set to help it continually see the world differently and to move with agility as opportunities for growth emerge. Key transformative skills are the ability to harness and embed new technologies to effect transformative change at speed, an adaptive mindset (that will allow you to respond to unforeseen changes to thrive, not just survive) and a new level of decision mastery to drive an ever-more- complex connected ecosystem.
Winners will be those who can master the “what” of digital capabilities and the “how” of leading that change. To protect, optimize and grow, businesses have to embed digital into every aspect of their strategy and operations; they have to develop an adaptive mindset and they have to master decision-making in spite of uncertainty.
“Be prepared and begin to act,” advises Michael Inserra, EY Americas Senior Vice Chair and Deputy Managing Partner, Ernst & Young LLP. “It’s the companies who are going to be out on their front foot, willing to make mistakes and iterate on strategy that will emerge as clear winners.”
With contribution from Liz Bolshaw, EY alum – former EY Global Growth Markets Lead Analyst.
Show article references#Hide article references
- “Optimism Sinks to a 3-year Low; Recession Expected Before 2020 Election,” Duke CFO Global Business Outlook, accessed 20 October 2019.
- “Business Roundtable CEO Economic Outlook Index Decreases in Q3,” Business Roundtable website, accessed 20 October 2019.
- Richard Fry, “Millennials projected to overtake Baby Boomers as America’s largest generation,” Pew Research Center website, accessed 1 September 2019.
- “World’s biggest companies face $1 trillion in climate change risks,” CDP website, accessed 20 September 2019.
- Graeme Wood, Social Principal #9, Geek Media, accessed 31 October 2019.
- “The IC3 Internet Fraud Statistics Report,” Identify Theft Scenarios website, accessed 15 September 2019.
- David Cote, “Honeywell’s CEO on How He Avoided Layoffs,” Harvard Business Review, June 2013. Walter Frick, “How to Survive a Recession and Thrive Afterward,” Harvard Business Review, May–June 2019.
- Ranjay Gulati, Nitin Nohria and Franz Wohlgezogen, “Roaring out of Recession,” Harvard Business Review, March 2010.
- Seizing opportunities: a once in a lifetime chance, EYGM Limited, 2009.
- Shezray Husain, Feroz Khan and Waqas Mirza, ”Brewing innovation,” Business Today, 28 September 2014. Alexis Fournier, “My Starbucks Idea: an Open Innovation Case-Study,” Braineet website, accessed 15 September 2019. Maureen Morrison, “Starbucks Forges ‘Moments of Connection‘ by Offering Experience,” AdAge, 7 November 2011.
- Steven A. Balmer, “Shareholder Letter,” Annual Report 2010: Microsoft Corporation, 3 September 2010. Steven A. Balmer, “Shareholder Letter,” Annual Report 2009: Microsoft Corporation, 1 September 2009. Shanhong Liu, “Microsoft’s expenditure on research and development 2002–2019,” Statistia, 9 August 2019.
- Michael J. de la Merced, “Anheuser-Busch Agrees to Be Sold to InBev,” New York Times, 14 July 2008.
- Bill Taylor, “How Domino’s Pizza Reinvented Itself,” Harvard Business Review, 28 November 2016. Jim Edwards, "Dominos Admits Pizza Was ‘the Worst’; Bets the Company on Ads Vowing Change,” CBS News, 14 January 2010. Abbey Klaassen, “Domino’s Talks Radical Authenticity,” AdAge, 28 October 2010. Sam Oches, “The Many Acts of Domino’s Pizza,” QSR Magazine, August 2010.
- Bobbie Johnson, “Amazon busts through recession with profit surge,” The Guardian, 22 October 2009. Zoë Henry, “Amazon Has Acquired or Invested in More Companies Than You Think — at Least 128 of Them,” Inc. Adam Clark Estes, “Amazon’s Recession-Friendly Tablet Strategy: Cheap Now, Pay Later,” The Atlantic, 28 September 2011.
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We’re in a time of great uncertainty. The pressures of a potential economic downcycle and an emerging complexity crisis (geopolitics, socio-cultural change and digitization) demand a deep understanding of how to protect, optimize and grow your business. The Transformative Age can create enormous opportunities for growth. Companies will need to employ a new mindset to help it continually see the world differently and to move with agility as opportunities for growth emerge. The question now is, given this shifting landscape, should you play it safe and ride out the storm or double down on growth opportunities?