Recessions

What Really Prevents Companies from Thriving in a Recession

It’s about knowing how to reallocate — and deallocate — resources.

by

Ranjay Gulati

and

Mark Wiedman

by

Ranjay Gulati

and

Mark Wiedman

September 02, 2020

David Malan/Getty Images

Summary.

Even in the best of times, many companies fail to fund and staff new opportunities. As decades of research have shown, leaders fear threats to their status and power and so become attached to existing businesses and budgets, regarding them as entitlements and as a baseline for determining what’s “fair.” So, what might break the lethargy? An external trauma or force, such as a global pandemic or other crisis event, certainly helps. But two key measures to enhance their agility and flexibility include setting the strategic frame for resource reallocation decisions by focusing people on a positive vision of the future and reforming the budgeting process to outline metrics that be used to evaluate both existing and potential projects.

Business leaders know they should “never let a good crisis go to waste,” but very few of them actually live this maxim. In a study of companies’ performance during and after the past several recessions, one of us found that 17 % didn’t survive (because they filed for bankruptcy, were acquired, or went private), and of those that did, the vast majority — 80% — were still struggling three years later to match their pre-recession growth. Only 9% of surviving companies “roared out of the recession,” posting results that exceeded both their peers and their pre-recession performance. These firms managed a delicate dance, playing both offense (investing in growth opportunities including new businesses) and defense (cutting costs and finding operational efficiencies) in response to external shifts. Even while reducing overall spending, they were able to carve out resources for new endeavors.

Ranjay Gulati is the Paul R. Lawrence MBA Class of 1942 Professor of Business Administration at Harvard Business School. He is the author of Deep Purpose: The Heart and Soul of High-Performance Companies (Harper Business, 2022).
Mark Wiedman is a senior managing director and head of international and corporate strategy at BlackRock. He is also a member of the firm’s Global Executive Committee.

What Really Prevents Companies from Thriving in a Recession

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