Businesses are Born During Recessions

Updated: Apr 24

It's easy to focus on the bloodbath we are seeing right now (especially in the retail sector) but, paradoxically, huge businesses are born during recessions.


First, let's survey the carnage.


1. The Retail Bloodbath


In Australia we have seen the demise of Style Runner (saved via acquisition), Harris Scarfe, McWilliam's Wines (140 years old), EB Games (closing 19 stores), Bardot (closing 58 stores), Australian Geographic/Curious Planet (closing 63 stores), Jeanswest (closing 146 stores), Skins, Napolean Perdis, Kikki K, Zanui, Max Brenner, Roger David, Esprit, Gap and Avon (pulled out of Australia).


And that was before COVID19. I wonder how retail is doing now?


Globally, we are also seeing a generational shift in business leadership. These retirements were announced or completed before COVID19:

Nike CEO, Under Armour CEO, Linked In CEO, IBM CEO, Harley Davidson CEO, MGM Resorts CEO, Salesforce Co-CEO, Mastercard CEO, Bill Gates (retires from Microsoft Board).


Change was already coming for the cultures of businesses around the world long before the coronavirus popped up in China. Now, change has been amplified with millions suddenly working from home, unemployed or re-evaluating their careers entirely.

This is a perfect storm for business change. Bankruptcies, new startups, major pivots...it's all about to happen and change the business landscape as we know it.


2. Crises, Recessions and Depressions All Present New Opportunities.


What do these companies have in common? They were all founded during a recession or depression. It's easy to look back and say 'of course, they have a great product!' but imagine pitching a startup to VCs right now in the middle of a global pandemic and lockdown. Recessions are difficult times in which to launch a new product, service or company right?


I thought so. But the data says the opposite - downturns are where powerful competitive advantage is found.



This is a Bain & Company study of 3,900 similar companies worldwide (median size $2bn). They ALL had >10% EBIT (profit) growth per year from 2003-2007. Suddenly, during the GFC recession, they split into 2 groups and diverged.


This is unexpected.


You would expect both groups to flatline or decline during the recession, with the winners taking off as they exited the recession. Strangely, the winners started 'winning' immediately and locked in a 17% compounded annual growth rate compared to 0% for the losers.


This ultimately reflects in market capitalisation where the winners group finished 3 times larger (about $6bn larger) by 2017.



Clearly, financial downturns are times for strategic moves to lock in profits and growth that may last for a decade. The winners did exactly that during the GFC - being opportunistic with M&As, headhunting and R&D. Losers slashed and burned in an effort to survive and emerged from the recession with decimated talent pools and anaemic product innovation pipelines.


3. Rearrange the Board - Find New Opportunities



Financial crises, recessions and depressions rearrange the board and unearth hidden opportunities. The more disruptive the downturn, the greater the depth and number of opportunities because opportunities appear in only 2 ways: discovery and creation.


Discovery of Opportunities

The unrivalled Peter Drucker documented this extensively¹, defining entrepreneurship as the purposeful search for change and the opportunities that result. In discovery, good business looks for opportunities rather than creating them:


4 Sources of Opportunity Inside Your industry

1. Unexpected Success or Failure. Ever used a post-it note? They were a failed industrial product at 3M by a scientist who, trying to develop a super-strong adhesive, accidentally created a weak, reusable, pressure-sensitive adhesive. It languished as a failed project for five years until a fellow scientist used it to gently hold a bookmark on the page of a hymn book he sang from in church.²



"You can learn from success, but you have to work at it; it's a lot easier to learn from failure." -CEO of 3M Corporation

A Raytheon engineer was tinkering with a radar (to detect enemy aircraft during World War II) and found it melted the chocolate bar in his pocket. Sensing a new cooking technology, Raytheon started selling the USD$52,000, 340kg, fridge-sized oven they named the 'RadaRange'.³


Today we simply call them 'microwave ovens'.


Unexpected successes or failures tell us that we've missed a potential opportunity.


2. Market Incongruities. The difference between what is and what should be. This can be a mismatch in customer demand and product capability (Xero - 'Beautiful Business' unseating MYOB; Facebook toppling MySpace) or it can be a mismatch between a product's capabilities and potential (iterations of the Blackberry being completely replaced by the iPhone).


3. Innovations in Process.

Is it the real McCoy?

Trains in the 1870s had to stop frequently and be oiled by hand. Elijah McCoy tired of this and designed a lubricating cup that automatically dripped oil on the required parts.⁴ The McCoy Lubricator became a necessity for all heavy machinery and legend has it that other engineers, wanting to avoid inferior copies, would ask 'is it the real McCoy?'.


This etymological legend has since been disproven but the process of automatic lubrication definitely has not. Automatic lubricators were a revolutionary change in process that enabled railroads to increase profits and speed while lowering maintenance costs.


4. Changes in Your Industry/Market. These are the obvious changes such as regulation/deregulation, competitor entrants/shifts, that can all present new opportunities.


3 Sources of Opportunity Outside Your industry

1. Demographic Changes. Populations will age, grow richer/poorer, become educated and present new opportunities at each stage. This is why many companies have followed Baby Boomers and adapted to their life stage.


2. Meaning and Perception Changes. Public perception of smoking is no longer cool and cigarette companies are seeing opportunities dry up. Sentiment toward obesity has shifted and given rise to lifestyle and health-based companies. Environmental concerns have driven the adoption of hybrid and electric vehicles.


3. Knowledge Breakthroughs. This is the realm of inventions, innovations, discoveries. Think biotechnology, artificial intelligence, nanotechnology. Any time new knowledge (scientific or non-scientific) is acquired by humans, entire new vertical and horizontal opportunities appear.


Creation of Opportunities

The more popular understanding of innovation today centres around disruption and the creation of opportunities. This is based on the 'father of entrepreneurship' and Harvard Professor Joseph Schumpeter who defined opportunities as disruptions that are created (not discovered) by change agents that we call 'entrepreneurs'.⁵


Think of Elon Musk, Jeff Bezos, or Google. Creation theory says that it's all about these individuals and companies that are disruptive and innovative. Regardless of what opportunities may or may not be out there, these disruptors create opportunity.

From this 'creation' perspective comes all of the popular theories of business innovation: Alertness Model of Market Opportunity, Social Need Model of Market Opportunity, Personality Traits Theory, Locus of Control Theory, and Need for Achievement Theory. These frameworks underpin what is likely every single article you've ever read on the subject so I will not repeat those articles here.


For example, articles like 'The 5 Requirements of a Truly Innovative Company' are embedded with these creative theories where all emphasis is on improving your ability to create opportunities. 'Foster a culture innovation...embrace failure...empower employees to create...dismantle hierarchies...'


A notable exception is the Blue Ocean Strategy which combines both discovery and creation in describing new value frontiers that a firm both creates and discovers.


4. Out-run Your Competitors

Whether through discovery or creation, the upended playing field presents a new landscape to seize opportunities that help a business outrun its competitors.

The winners in the Bain & Company study were quick to identify the season they were in and acting only slightly ahead of their competition resulted in an extraordinary difference in profit and market capitalisation. Just like the losers, they focused aggressively on cost restructuring but they did it earlier - in the moments before the crisis really took hold.


As of mid-April 2020, it is now too late to copy this advantage - but the winners also looked beyond costs and spent most of the crisis adapting their business models and investing and hiring before the market rebounded. This is something all businesses can prioritise now by raising the priority of:

  • aggressive commercial growth plays;

  • opportunistic head-hunting; and

  • proactive mergers & acquisitions.


The best analogy is race car driving. Professionals brake earlier before a corner (restructure costs), deploy technical skill in apex selection and tracking (pivot business model/product) and then accelerate hard after the apex (head-hunting, M&As, investment, product launches).⁶

The inexperienced carry too much speed into the corner (too many costs), continue braking (cost shedding) as they overshoot the apex (mismatched business model) and experience understeer (organisational inertia and resistance to change) before accelerating from a near standstill (lacklustre market demand), never to catch their opponents again.


5. The Prescription for Existing and New Businesses

Here is the prescription to replicate the winners from the Bain & Company study, both for established firms and startups. ABC:


A) Cost Transformation Before the Downturn

Every CFO wants to cut the fat and preserve the muscle, but which is fat and which is muscle? Usually, we look at existing operations and cut as much as we can bear without jeopardising the current business model but the definition of fat and muscle should refer to the new business model that will emerge from the crisis.


Disciplined balance sheet management is just as important as disciplined P&L management because it is the balance sheet that will fuel the growth during and after the crisis.

For new businesses, consider the landscape in 3-6+ months' time and build a structure that suits the predicted reality, not today's reality. Short-term plays for cash might not sustain beyond the crisis so while acceptable, should not be allowed to define the medium-term business model.


B) Go on the Offense Early

The winners went on offense early by preserving or increasing R&D spending, directing sales teams toward new growth (instead of preserving existing revenue), maintaining marketing, and investing in digital transformations.


The losers waited for the recession cycle to clear before moving to offensive strategies.

For new businesses, there is nothing but offense! A crisis is the perfect time to start a business and prepare for the coming recovery. Being nimble is a key advantage of new market entrants and smaller companies so use this to your advantage by pivoting fast and often.


C) Strategic Head-Hunting and Mergers & Acquisitions

Restructuring the business in a recession is the best time because mergers and acquisitions of competitors, products, and customer segments come cheap.


Talent is also cheaper as unemployment bites and strategic head-hunting should be high on the priority list.

A downturn will likely reveal parts of a business that do not fit strategically into future plans. Form a plan to exit products, segments, and legacy assets now and execute that plan when values recover post-crisis.


For new businesses, the development and launch of a minimum viable product (MVP) should happen now. An MVP proven in the fire now will crush when the market returns, as long as it is not solely predicated on short term cash-grabs.


Opportunity is Up, Now is When Winners are Born.


Opportunities for growth increase dramatically during crises, recessions and depressions because new opportunities suddenly become available for discovery or creation.


Some of the most successful brands were launched in downturns, and the best-performing established companies secured their competitive advantage during downturns.


So whether leading an existing business or starting a new one, don't let a downturn go to waste...it could be the very environment that sets you up to surge ahead of slow-moving and reactive competition.




¹Drucker, P. 2006, Innovation and Entrepreneurship, Harper Collins Publishers, New York.

² MIT 2007, Inventor of the Week: Art Fry and Spencer Silver, https://web.archive.org/web/20071014051221/http://web.mit.edu/invent/iow/frysilver.html

³ Tweedie, S. 2015, 'How the microwave was invented by a radar engineer who accidentally cooked a candy bar in his pocket', Business Insider Australia, https://www.businessinsider.com.au/how-the-microwave-oven-was-invented-by-accident-2015-4

⁴Biography.com 2018, https://www.biography.com/inventor/elijah-mccoy

⁵Hagedoorn, J. 1996, 'Innovation and Entrepreneurship: Schumpeter Revisited', Industrial & Corporate Change, vol. 58, issue 3, pp. 883-897.

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