Growing recession concerns in global markets, particularly in China, the EU and the US, are creating stress for the world.
What is a recession?
As defined by Nobel Prize-winning economists Paul Samuelson and William Nordhaus in their book Economics, first published in 1948, a recession is 'a period in which real GDP falls in at least two consecutive quarters.' Popular economics textbooks have long defined recession in this way. It is not perfect, but it has been the most widely used definition in almost every recession since World War II.
The National Bureau of Economic Research defines a recession as 'a significant decline in output, employment, real income, and other indicators that spreads across the economy, lasts more than a few months, and is normally seen in output, employment, real income, and other indicators'. A recession begins when the economy is at its peak and ends when the economy reaches its trough.
During a recession, most companies suffer because of lower demand and revenues and uncertainty about the future.
This may not be the case if you enter a recession with a head start. A 2010 study by academics Ranjay Gulati, Nitin Nohria, and Franz Wohlgezogen found that 17% of the 4,700 companies they analyzed during the 1980, 1990, and 2000 recessions were in serious trouble. But, 9% of the companies didn’t simply recover in the three years after a recession—they flourished, outperforming competitors by at least 10% in sales and profits growth.
How should a company prepare in advance of a recession and what moves should it make when one hits?
Research and case studies examining the recession shed light on these questions. Some of the most interesting findings can be grouped into four main areas:
- debt;
- decision making;
- workforce management;
- digital transformation.
The more you borrow, the more cash you need to make interest and principal payments. Because during a recession, sales usually fall and therefore the company has less cash to finance operations, skillful financial management is needed to survive the economic downturn.
Decision-making is one of the most challenging processes. Because determining and implementing who makes decisions and how they are made can be a prerequisite for a firm's survival. Research has found that decentralized companies are more successful during recessions. This is because they delegated decision-making to lower levels of the hierarchy and were better able to adapt to changing conditions. These firms may be better positioned to weather macro-scale shocks.
Layoffs are not only to the detriment of employees, but also costly for companies. Recruitment and training are expensive. The cost of a new worker to a business is high. Poor job performance, more defective goods, etc. mean extra losses for businesses.
Economic bottlenecks can actually encourage the adoption of new technologies. Companies that have invested in digital technology, logical analysis and agile business practices in a timely manner can better understand the threats they face and respond faster. As we have seen, recessions can create deep and long-lasting gaps in performance between companies. Digital technology can do the same. Companies that ignore digital transformation may find that the next recession makes these gaps unbridgeable.
Nurmyrat Mommayev,
PhD Candidate at Marmara University's Department of Political Science and International Relations in Istanbul, Turkey
