Risk Management

Turbulence: A Time to Fly Higher?

Bain & Co.'s Darrell Rigby says some companies have learned how to thrive during a bumpy economic ride.
Scott LeibsSeptember 22, 2009

One week after Fed chairman Ben Bernanke declared the recession to be over — from a technical standpoint, anyway — Darrell Rigby cautioned that the associated turbulence could last five or six years.

“Cautioned,” however, may not be the right word. Speaking to a crowd of nearly 300 senior finance executives at this week’s CFO Rising West conference in Las Vegas, Rigby, a partner at Bain & Co. and author of the recently published Winning In Turbulence (Harvard Business Press), said that times of turbulence offer a golden opportunity for well-positioned companies to pass their competitors.

As one example, he cited the retail industry. In recessionary periods, 29% of bottom-quartile retailers manage to rise two or more quartiles, while 32% of top-quartile retailers fall two or more quartiles. In periods of stable growth, a mere 11% of bottom-dwellers rise two or more quartiles, and only 18% of top performers fall by two or more quartiles.

Turbulence can be defined as the many unpleasant bumps that follow a recession, often for many months or even years. In the two most recent recessions prior to the current one, for example, unemployment peaked 15 and 20 months after the downturns officially ended.

Turbulence varies widely by industry. Following the recession of 1973–1975, the nondurable goods sector made a full recovery within three quarters, but durable goods didn’t recover fully for four and a half years, and other sectors needed two to three years to bounce back.

Therein lies a lesson, Rigby says. “Recessions are like hurricanes: they hit different areas with different intensities.” How a specific company responds will depend on how sensitive its industry is to a downturn, and the strength (or weakness) of its strategic and financial positions. An accurate self-assessment is an important first step toward charting a course through turbulence.

darrell_rigby2“Too often, cost-cutting resembles the binge-and-purge behavior of the chronic dieter: the weight comes off this month, but the pounds are packed back on the next.”
— Darrell Rigby, Bain & Co.

Despite his caveat that “there is a time for caution and a time for increased risk-taking,” however, it’s clear Rigby believes that recessions and the turbulent times that follow them offer many companies an ideal chance to move ahead of competitors. In the first two years of a recovery, he said, half of the total profit growth comes in the first two quarters. “If you miss the apex of the recovery,” he said, “you miss an enormous opportunity.”

To seize that opportunity, Rigby stresses four major categories of activity: clarify strategies and shift resources to core activities, aggressively manage costs and cash flows, increase revenues and margins, and prepare for bold moves such as a game-changing acquisition.

Not every action will apply to every company, of course. Stronger companies have more options, while weaker companies will probably focus most of their activities on managing costs and cash flow. Even here, however, strong companies can make substantial gains by, for example, driving complexity out of the business. Honda offered far fewer build combinations for its popular CR-V (104, versus 124–199 for competitors), allowing it to boost quality and drive out costs. Wal-Mart hopes to retain some of the higher-income customers who have recently begun to shop there by focusing its efforts on remodeling current stores rather than opening new ones.

No matter how a company drives cost out of its business, however, Rigby says that one key to success will be to keep those costs out for good. Too often, he says, cost-cutting resembles the binge-and-purge behavior of the chronic dieter: the weight comes off this month, but the pounds are packed back on the next.

Perhaps surprisingly, Rigby believes that one legacy of the current recession will involve technology, specifically “the rise of electronic media to communicate with your customers.” Apple, Netflix, H&M, Kroger, Shutterfly, and others have enhanced customer loyalty through a range of electronic outreach efforts.

“People tend to get very risk-averse in turbulent times” says Rigby, “but that can be like swerving from one guardrail to the other.” Among the cautious behaviors he cautions against: moving the corporate innovation portfolio exclusively toward short-term, relatively risk-free bets. He says companies should rebalance that portfolio, channeling some resources to innovation efforts that have the potential to pay off handsomely.

More prosaically, he says that today offers the best environment in which to make an acquisition for the next seven to eight years.