Thought Leaders I

Strategies to Think Your Way Out of a Downturn

As U.S. gas prices accelerated above $4 per gallon this summer, sales of sport utility vehicles (SUVs) and large trucks hit a brick wall. By June, sales of SUVs had fallen 34 percent and full-size pickups declined 25 percent from the prior year, according to Ward's Automotive Reports. In this environment, companies had to quickly transform their strategies and their plants.

Like other automakers, Toyota was surprised by the suddenness of the change. But Toyota had built a portfolio that included fast-selling hybrid vehicles, which helped it absorb some of the shock. It retooled its SUV and truck plants and announced plans to produce its hybrid Prius in the U.S. for the first time in Mississippi. Toyota also went against the tide in the auto industry by not laying off full-time workers with the plant closings (although it cut temporary workers). Instead, it announced that it would retrain the employees and assign them to other projects during the shutdown.

Toyota's moves helped to distinguish it from rivals. "Managers not only need to look for ways to cut costs, they also need to look for ideas that will set them apart from their competitors," says Wharton Professor Harbir Singh, academic co-director of Wharton's Strategic Thinking and Management for Competitive Advantage program.

Finding the Silver Lining

Strategy can help highlight the silver lining in the dark clouds of a downturn. In addition to the obvious strategies of focusing on current areas of income and growth, and protecting key assets, Singh discussed a number of strategies that might be useful in this environment:

• Use "real options" thinking: Lack of funds is no excuse for throttling back on innovation. Sometimes innovation can be inexpensive, or even save money. In fact, companies should devote more attention to innovations that can cut costs or provide more value to customers. "Look for new ideas that can reduce costs," Singh says. "Real options" thinking can help. Like financial options, real options in strategy makes small investments in risky projects that create options for larger investments in the future. This helps to manage the risks and minimize up-front investments, while allowing companies to invest in growth opportunities. In a time of economic challenges, companies have fewer "degrees of freedom," he says. By developing a portfolio of options, companies increase their degrees of freedom, gaining more strategic flexibility in an increasingly uncertain environment.
  
  
• Look for fire sales and become a talent magnet: A recession can be a great time to pick up discarded assets as other companies cut their costs. It also can create opportunities to hire talented employees who have been laid off or sidelined by cuts. "Since other companies are shedding employees, make sure you are open to getting talent at this time," Singh says. "A company that remains an employer of choice can be a talent magnet."
  
  
• Identify new markets: While the economic troubles are spreading across the world, there may still be attractive markets abroad. By taking a global view, companies may find opportunities in specific regions or industries that can help offset declines at home. "It is not truly a global recession," Singh says. "Some emerging markets are growing rapidly, and it may be appropriate to turn your attention there. Firms that have invested in global operations or an international mindset may have some advantage now."

Wharton's Strategic Thinking and Management program provides a variety of insights and frameworks for taking a creative approach to strategy. Among many topics, it examines strategy under uncertainty, real options, creating competitive advantage, implementing strategy, and discovery-driven planning.

Opportunities for Alliances

One way to access these new markets is through alliances. Alliances also offer a way to reduce the risk and cost of pursuing strategic options, says Singh, who is academic director of Strategic Alliances: Creating Growth Opportunities and teaches in Wharton's Mergers and Acquisitions program.

"Alliances offer faster access to markets and to resources," he says. "They also offer risk sharing and resource sharing." This flexibility allows companies to ramp up or scale down quickly. As partners scurry to find work in recessionary times, they may be more open to creative alliances or more extensive risk sharing.

But, Singh cautions, half of all alliances fail, so organizations need to devote careful attention to building an alliance capability to design and manage these relationships well. Based on extensive research and consulting with top companies, which he discusses in the Wharton Strategic Alliances program, Singh and colleagues have developed a rigorous approach to building such a capability. This can improve the odds of success.

He stresses that the financial costs of building such a capability are not high. In many organizations, it requires adding only one or two staff members to lead an alliance office, but the knowledge building necessary takes time and commitment by top managers.

No Fear

Above all, leadership and confidence are at a premium in a turbulent environment, Singh says. In a downturn, morale slips, employees become fearful, and this reduces productivity and creativity. "It is important that the organization not become consumed by fear," he says. "It is human nature to be fearful in this type of environment. If you create an environment where people are in fear for their jobs, it will limit your possibilities."