Have you heard the phrase that “Those who cannot remember the past are condemned to repeat it”? So many leaders just react instinctively to the uncertain economic situation they’re facing, without taking the time to learn from history. Fortunately, we have some clear guidance from the past about the kind of mistakes leaders make in a recession, as well as from research on how our minds can cause us to make bad decisions.
Don’t Compete on Price
Michael Porter, the great theorist of business strategy, identified that companies can pursue either of two broad differentiation strategies successfully.
One type of strategy – being a cost leader – focuses on reducing costs. As a result, the company becomes known for prioritizing low prices and customers specifically go to it for that sake. Another type of strategy involves differentiation based on non-price factors, such as high quality or excellent customer service. Those customers who prioritize such factors shop there.
An excellent example is IKEA versus Pottery Barn. IKEA works hard to provide the cheapest possible price, and its customers know it. By contrast, Pottery Barn offers an upscale experience, and draws a different clientele.
So if you’re not a cost leader, should you try to become one? It’s the natural intuition to do so – you’re tempted to undercut your competitors to keep customers.
Here’s where history is an excellent guide. Researchers examined how 5,278 publicly-traded firms fared in the 2008 recession based on their generic strategy of being either pure differentiators or pure cost leaders. They found that cost leaders fared better in the recession, with higher revenue, better balance sheets, and greater likelihood to survive the recession.
Given this information, many entrepreneurs might be thinking it’s wise to shift toward cost leadership from differentiation based on other factors. But the researchers found doing so is a bad idea. Those companies that tried to do so during the 2008 recession didn’t improve their likelihood of survival, revenue, or balance sheets.
That’s because cost leaders have a large head start: in their branding, systems, and operations. You won’t outcompete a cost leader, and you’ll lose precious resources of time, money, and customer loyalty if you try.
Instead, the researchers found it’s best to make reasonable cuts to your prices, enough so that your customers feel you’re responsive to their situation. Yet the cuts should still enable you to focus on what differentiates you: quality, service, or other factors. In fact, you should double down on your strengths, what makes you special. Know that by doing so, you’re in the best position – as history suggests – to not repeat the mistakes of the past.
Don’t Slash Your Marketing Budget Indiscriminately
It’s tempting to cut marketing budgets in a recession. After all, you can always reinvest into marketing later, when economic conditions improve, right?
Wrong! The problem you’re solving for your clients is still a problem.
But the problem might have evolved in the context of a recession. Or the specific category of client who would be willing to buy your offering at the right price might have changed. Or perhaps the specific offering that appeals most to your clients might have evolved. After all, some industries are countercyclical: dollar and discount stores do well in a recession.
To understand these changes, you need to invest into marketing, not cut it. Double down on doing market research, focusing on the changes stemming from the recession. Understand the evolving needs and capacities of your clients. Then, adapt your offering to fit their needs better. And then invest into marketing to reach these clients with your adapted offering. Firms that did so succeeded in the 2008 recession, and you can do so as well.
Don’t Jump on the Bandwagon
One of our most dangerous cognitive biases – mental blindspots that cause us to make poor decisions when we follow our intuition – is called the bandwagon effect. That term refers to everyone jumping on the bandwagon, meaning aligning with the majority opinion.
Entrepreneurs succeed in launching a startup by doing something different that fills an unmet need of their customers. Yet many seem to forget the basis for their success when a recession looms. They see headlines and hear from peers that they are making pre-emptive cuts and withdrawing job offers, and feel they need to do the same, even if their own balance sheet looks good.
Warren Buffet once said to be “fearful when others are greedy, and greedy when others are fearful.” And that’s excellent advice. It’s why you see Buffet buying distressed firms during downturns, and then making out like gangbusters when times get better.
Your lesson should be to do the same for whatever distressed assets means in your industry. It may be excellent employees who were let go in a round of unthoughtful job cuts. Or it might be suppliers that had their contracts broken and would be willing to offer you a discount.
That’s why I always tell my clients that you need to follow the lessons of history and avoid going with your gut. If you don’t make these three mistakes, and make sure that history doesn’t repeat itself, you’ll be well on your way to helping your company survive and thrive in these troubled times.
Avoid the three key mistakes leaders make in a recession: don’t compete on price, don’t slash your marketing budget indiscriminately, and don’t jump on the bandwagon and align with majority opinions. Click To Tweet
Image credit: Akshay Gupta/Pixahive
Dr. Gleb Tsipursky helps entrepreneurs make the wisest decisions. He serves as the CEO of the boutique future-of-work consultancy Disaster Avoidance Experts. He is the best-selling author of 7 books, including Never Go With Your Gut: How Pioneering Leaders Make the Best Decisions and Avoid Business Disasters and Leading Hybrid and Remote Teams: A Manual on Benchmarking to Best Practices for Competitive Advantage. His expertise comes from over 20 years of consulting for organizations ranging from startup to Fortune 500 companies from Aflac to Xerox and over 15 years in academia as a cognitive scientist at UNC-Chapel Hill and Ohio State.