Recently a client asked Blue Canyon, “There is a lot of uncertainty right now – we’ve had a long run of consistent growth, and I fear this has allowed us to get complacent. We aren’t forecasting a downturn, but we realize we need to be prepared. What should we be focusing on?”

These fears are neither unfounded nor unique. Markets have entered an anxious period recently, and many are concerned about the economic impact of a tumultuous geopolitical climate. The latest tensions surrounding US-China tariffs, an impending British exit from the EU, and a struggling German economy weigh heavily on the minds of global companies. Add to these fears, the recent warning signs from several leading economic indicators suggest that a downturn is a real possibility.

Despite the current market discomfort, there remains plenty of room for optimism in the US. High levels of American consumer confidence and record-low unemployment numbers indicate that the US economy remains strong and could see sustained growth for the foreseeable future. Many economists have theorized that the next US downturn will only be a temporary slowdown, and not similar to the great recession in 2008.

Given the variety of indicators and opinions surrounding the topic, predicting the exact timing, severity, and duration of a recession is impossible. However, down cycles in the economy are inevitable, and it’s essential for today’s corporate leaders to have a robust and specific playbook for when the economy weakens.

Each recession has different causes and attributing factors, which present new challenges. It’s also important to learn from prior recessions and acknowledge that yesterday’s playbook is unlikely to succeed again without alterations. To be best positioned for a downturn, companies should focus on the following four fundamental tenets: create flexibility, target winning relationships, shift offerings, and identify smart acquisitions.

Four Fundamental Tenets for Positioning in a Downturn

Create Flexibility

When preparing for an economic downturn, successful firms begin by envisioning the future state of the business over the next two to three years. Then they can establish a critical path for reaching the desired goal. This helps them perform robust scenario planning exercises, and stress test their forecasts for a variety of factors to identify the vital capabilities and necessary resources. Once identified, firms can generate action plans to ensure those capabilities and resources are available.

Based on the clarity of the future state and potential scenarios, business leaders can create room to maneuver around the obstacles that will confront them in a downturn. They do this by increasing flexibility and by identifying what is core to the future of the business. Elements that are less valuable can then be deemphasized or withdrawn.

Top-tier companies are also proactive in identifying where they can get the most bang for their buck from efficiency gains and spending cuts, while maintaining performance. However, cost-cutting should not be uniformly applied across the business, and prepared companies already know where these efforts should be focused. The most promising expenditures in research and development, marketing campaigns, and digitalization efforts, etc. will need continued funding, as they are the growth engines that drive the company’s future. Rash decisions to cut back on these efforts will create an opening for competitors to pass you by.

Target Winning Relationships

Customer relationships vary across a broad spectrum and it’s imperative to identify winning relationships in downturns. These relationships can sustain your business by lessening the impact or, under ideal circumstances, even drive growth.

Identifying important customers and channel partners and their respective market positions is a critical undertaking. Evaluating the financial health and strategic importance of each customer will help you prioritize accordingly. Customers who serve end markets that are less cyclical, or even countercyclical, are clear examples of critical relationships. These relationships will mitigate the effects of a recession and help you emerge from a downturn in a stable position.

Channel partners – dealers, distributors, wholesalers, integrators, and contractors – often provide services that are essential to end-customers. Aligning with strong partners will help these services continue to capture customers, minimizing downturn losses. It is also important to gather information from these partners, as they will provide additional context into changing customer needs.

While your focus should be on successful relationships, it is imperative to maintain other customer relationships in more cost-effective ways. Ongoing customers should be reviewed across cost-to-serve dimensions, and costly relationships should be reformulated through the development of self-serve methods. The creation of an inside sales team and a robust digital system for smaller customers can reduce costs and free up sales teams to focus on higher growth and/or margin winning client relationships. Modifying marketing efforts to reach non-target customers in innovative, low-cost methods is crucial to maintaining relationships. It is vital to evaluate returns on marketing effectiveness and utilize new digital channels and analytics to wring as much as possible out of your marketing budget.

Shift Offerings

During downturns, purchasing behaviors shift, and the offerings you should focus on must move as well. Customers transition from making large investments with a focus on expansion to smaller investments with the goal of getting the most out of what they have. Offerings that support this shift are better positioned for success. Examples include offerings focused on parts, maintenance, equipment life extension, “good enough” solutions for short term use, as well as scalable solutions that allow for lower upfront expenditures. Many companies also double down their efforts to secure stable recurring revenue streams from customers by having high attachment rates for service contracts, extended warranties, consumables, etc. that are sustained through a downturn. Marketing and sales efforts should shift their emphasis towards these types of offerings, while product management teams need to understand what offerings fit these dynamics or develop such offerings quickly.

From a long-term strategic perspective, firms need to determine how they can structurally set themselves up to be more recession resilient. Many products have robust aftermarkets, which warrant consideration if they aren’t already a component of the business. For example, Blue Canyon worked with a manufacturer of industrial equipment who had a large professional customer base. Because the professionals couldn’t afford equipment downtime due to service issues, the manufacturer created a service division capable of responding to field maintenance requests. This division generated strong revenue even during market slowdowns when customers would delay new equipment purchases.

Pricing in a Downturn

Recessions naturally cause downward pressure on price as demand falls, but it is imperative to think about the value your products deliver before automatically cutting price. Consider if your clients derive the same value (or in some instances more value!) from your products during a downturn as they did previously. If so, cutting price only gives them an unnecessary concession. However, pricing has many dimensions, and buyers become more risk-averse in recessions. To combat this, consider changing pricing models through methods such as leasing options, pay as you go, or buyback programs, that reduce the customer’s risk of purchasing. Hyundai successfully implemented a buyback program in 2009 for customers who lost their jobs, helping ease fears of making large purchases. As a result, Hyundai was one of the few automakers to sell more cars in 2009 than it did in the previous year.

Finally, shifting offerings should include a survey of all current products and services offered. Resources should be removed from under-performers and focused towards higher performing offerings, without eliminating products which would put important customers at risk.

Identify Smart Acquisitions

While maneuvering in a downturn, leaders must take care to keep one eye on the horizon and be vigilant to prevent an inward-only mindset. It’s also important to recognize outside opportunities which were previously unavailable, which leads us to the last tenet.

During the challenges of a recession, firms should recognize moments of great opportunity and act. As economist Paul Romer once famously said, “a crisis is a terrible thing to waste.” The decline presents an opportunity to take advantage of a strong position with strategic mergers and acquisitions (M&A). This helps businesses seize market share and drive long term growth. However, if you hesitate, you’ll miss the opportunity, making it important to identify targets beforehand. Recession acquisition strategy should center on three specific objectives: strengthening the core business, improving technology, and capitalizing on strategic market adjacent opportunities.

M&A Opportunities in a Downturn

Foremost, a company should focus on strengthening its core business. During the decline some competitors may struggle and become significantly undervalued compared to previous positions. Acquiring a competitor can quickly yield substantial increases to a firm’s market share or allow for geographic expansion. Beyond core competitors, firms should examine product distribution networks to see how the players are faring in the recession. If some of those players are challenged, explore the benefits of forward integration (e.g., greater control of the channel, capture more of the value chain). This might produce compelling results and warrant making downstream acquisitions.

Outside of direct competitive acquisition, advancing a firm’s technology base should be a preeminent goal through both complementary and transformational acquisitions. An example would be acquiring the premier analog manufacturer of a device that is only available in digital form in your existing product catalog. Conversely, a transformational technology acquisition involves a substantial revamp of your offering. An engine components manufacturer buying an electrical propulsion manufacturer, for example. Empirically, firms that advance their technology during a recession outgrow their competitors significantly in the following years.

Finally, you must keep an eye out for opportunities outside of your core competencies. Having a strategic adjacent market acquisition strategy in place can help you enter new markets. One clear-cut method is to acquire companies with new products and services that focus on your existing customers. Targeting firms that allow you to access new customer segments using your current products is another. Finding acquisitions that enable you to create new and novel applications for your existing products is a third method of successfully targeting adjacencies. An example of this was a Blue Canyon client, a large engine manufacturer, that leveraged its position to assimilate a non-traditional fuel cell technology into their offerings through several strategic acquisitions. As the recession broke, the firm saw considerable gains through its newer offerings that helped it seize market opportunity from its more narrow-minded competitors.

Focused acquisitions through these methodologies are imperative for companies no matter the state of the economy. Although it may seem risky, one of the best times to prioritize M&A is when things are the bleakest. As the adage goes, “the time to buy is when there’s blood in the streets.” With these priorities in mind, take advantage of the financial flexibility your pre-recession activity generated and seize the moment.

Conclusion

The current business environment can be unnerving to navigate, but recessions are an inevitable part of the economic cycle. Mixed signals in the media and marketplace, originated by local and global factors, can lead to uncertainty. However, by laying down a foundation for success through flexibility, targeting winning relationships, and shifting offerings, you can be confident entering a downturn. Plus, if you proactively identify smart acquisition plays, you can take advantage of the downturn and position your business for long-term growth. Adding a proven framework to your playbook makes sure you are prepared for the next eventual economic decline.