The corporate playbook during downturns is typically grim. In this time of inflation, rising interest rates and looming recession, many companies are reacting with layoffs, rescinded job offers and closing down whole business units. But not all companies react in this way. Some are able to make the most out of a slowdown by investing in people, technology, and even other companies at cut-rate prices, turning lemons into lemonade. 

“The best companies are not just resilient, they are systematically resilient,” says Martin Reeves, chairman of the BCG Henderson Institute, which studied more than 5,000 US companies across the last five downturns. Although downturns are part of the regular business cycle, they are rare enough that companies are often ill-equipped when they occur. “We haven’t historically spent enough time in crises to be worthwhile developing a handbook and protocols for resilience,” he said. 

In other words, companies get used to good times and don’t plan enough for bad times. That’s why, when faced with a crisis, companies tend to act reactively and prioritize short-term gains — like the savings gleaned from layoffs — over long-term investments that can grow a business. 

The stakes are high during a downturn. A study by academics at Harvard Business School and Northwestern University’s Kellogg School of Management of 4,700 public companies over three recessions from 1980 through 2000 found 80% of companies that survive a downturn don’t return to pre-recession growth rates or sales three years after a recession. Only 9% of companies flourish after a downturn, doing better on key financial metrics and outperforming rivals. What distinguished the post-recession winners: the ability to find the balance between cutting costs to survive during a downturn with investing in future growth.  

Investing in innovation 

Like the ants and the grasshopper in Aesop’s tale, companies that plan ahead  – and create a financial stockpile – are in a better position to weather uncertain times like what we’re seeing today. 

Large companies are in a better position in no small part because of their deep pockets. This played out during the mother of all downturns, the Great Depression. Studying decades of patent data, Tania Babina, assistant professor of business at the Columbia Business School, along with her coauthors, found that the economic disruption of the Great Depression accelerated the shift of innovation from small, independent inventors to large enterprise firms. 

Though the number of new patents dropped during the Depression, some companies continued to invest. In 1930, a DuPont research scientist discovered neoprene. Though DuPont sales fell by 15% that year, the company boosted R&D spending to develop the material for commercial use, taking advantage of market conditions to hire research scientists and the low price of raw materials. Neoprene was announced in 1931 and made available commercially in 1937, becoming one of the most significant inventions of the 20th century. 

While some cost cuts may be necessary, company leaders also need to keep an eye on future growth engines and protect the budgets of businesses or locations that have attractive growth opportunities. “Companies with cash and resources had the means to buy talent and technology,” says Babina. It’s a pattern that’s repeated itself through many downturns. “If we were to relate what’s happening now versus Great Depression, this is an opportunity for big incumbent firms to go and find the best talent,” she says.  

Looking for long-term initiatives  

One of the many myths about what drives resilience is that crisis management is about what companies do during the acute part of a crisis, says Reeves. But managing crisis in fact has  much longer timescale. Companies that thrive before, during and after a downturn have spent time in anticipation and preparation for adversity. And when market conditions improve, companies don’t just go back to “normal.” Instead, they reimagine their business based on a new reality. 

“When everybody else is breathing a sigh of relief because things have turned back to normal, they’re the ones that actually do the post review and build a playbook for resilience,” he says.  

One example from the 2007-08 global financial crisis was American Express, which was threatened by rising default rates and declining consumer demand. After cutting costs and divesting noncore businesses to stay viable during the downturn, the company turned its focus on long-term growth strategy by pursuing partnerships with banks and others as well as investing digital innovation such as data analytics and payments. In the decade following the downturn the company’s stock price rose by more than 1000%. 

When the dot-com bust came in 1999-2000, competitors Staples and Office Depot took very different approaches. Faced with falling revenue, Office Depot cut about 6% of its workforce. Staples, on the other hand, grew their workforce strategically and found other ways to cut operational expenses. The company invested in a promising new line of business by hiring skilled people who could help the company sell high-margin products such as laptops. The move paid off. Staples’ sales doubled between 1997 to 2003, while Office Depot sales grew at half that place over the same period. 

The decisions made during the downturn had repercussions years into the future. “That critical period created a winner…and they were winning because they made different types of decisions about how they manage their workforce,” says Ian Williamson, Dean at the UCI Paul Merage School of Business. 

Being bold

Companies not only need to get through crises, but learn to thrive. “We’ve shown that crisis performance actually has a disproportionate impact on long term value generation,” he said. Companies can jump up in rankings much more easily during a crisis than during steady times, he adds. 

Take General Motors and Ford during the Great Depression. The two were neck in neck before the crisis, but GM came out a clear winner. GM was quick to adapt to changing conditions in the 1930s, scaling back middle-market and high-end brands and finding efficiencies. It used the same engine and parts across various brands. Meanwhile, Ford had high fixed production costs and actually raised prices on cars during the Depression. Also unlike GM, which had purchased foreign auto manufacturers so it could produce cars in the country of sale, Ford manufactured parts in the U.S. to be shipped overseas for assembly, making it subject to high tariffs. Ford also failed to invest in innovation. When Chrysler came out with a new V6 engine, Ford reacted by rushing out a new model, but it was more expensive and less reliable. While GM posted profits every year during the Depression, Ford saw declining sales and a 12% loss in market share and opened the door for Chrysler, then a small startup, to become a top three automaker. 

In order to come out of a downturn stronger than before, companies need to continue investing in the future. According to the study from Harvard Business School and Northwestern University’s Kellogg School of Management, enterprises that cut costs by focusing on efficiency while outspending rivals on marketing, R&D and assets are most likely to be post-recession winners. By contrast, those that focus on cutting costs aggressively do not. Finding that balance between cost cuts and growth is difficult, but key. 

Learning to deal with crises now is particularly important for companies because, like it or not, they’re coming more frequently. “We’re no longer talking about a cyclical downturn every four years,” says Reeves. “What we’re talking about is a permanent state of uncertainty with multiple unfolding crises.”