McKinsey analysis of sector timing in recession

McKinsey did an interesting analysis of which sectors either lead or lagged in both the decline and eventual recovery from a recession.

As you might imagine (especially with this current recession) the speed that companies declined going in was much faster than they experienced coming out during the recovery.

The report notes that history suggests some possible indicators of the beginning of a recovery. “In three of the four most recent recessions, higher consumer discretionary and IT spending led the way. When real EBITA growth resumes in these sectors, it may be a useful indication that the economy is turning around.” We will keep an eye on these sectors!

Business Innovation in a recession drives profit

As we become more entrenched in recession, many companies are thinking that any spending is risky to the health of their companies and are battening down the hatches to cut expenses wherever they can. However, this behavior may actually be contributing to a long-term decline in competitiveness in their industries compared to companies that actually spend strategically during a recession on Innovation to accelerate growth.

An article by McKinsey suggests that companies that invest during a recession actually do significantly better than their peers who choose to cut back. They studied about 1,000 mainly USĀ  corporations from 1982-1999 and identified attributes that industry leaders (top quartile performers) or challengers (those that moved into the top quartile) possessed. Including a contrarian approach to M&A (top performers actually increased M&A during periods of uncertainty), they had quite a different strategy when it came to spending.

Successful challengers actually spent significantly more cash than their more conservative peers during a recession. But what is most striking is their approach to expense spending: with greater focus, these challengers spent more on selling, general and administrative (SG&A) than those competitors that lost market share. In addition, relative to their competitors these successful companies more than doubled their spending on R&D during the recession.

The reward for this approach showed as market conditions improved after the recession as the successful companies’ market-to-book ratios were 25% higher than their unsuccessful competitors.

As part of responsibly managing a company, leaders have to look beyond current conditions
and see that a careful scrutiny of expenses is necessary to assess if all parts of the organization are moving in the right direction. But leaders have to be sure that they are not taking on more risk by failing to invest in the right areas now, to pay benefits later.