Bubbles pop, downturns stop


Here is a brief excerpt from an article written by Martin Hirt, Kevin Laczkowski, and Mihir Mysore for the McKinsey Quarterly, published by McKinsey & Company. To read the complete article, check out other resources, learn more about the firm, obtain subscription information, and register to receive email alerts, please click here.

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Economic downturns are impossible to predict and sure as sunrise. Build resilience now, because when the sun comes up, you’d better be moving.

Waste no time trying to predict the next economic cycle. The running joke is that “experts” correctly anticipated seven out of the last three macroeconomic events. Unfortunately, it is unlikely that the hit rate will be any better next time around.

Geopolitics, economic cycles, and many other forces that can have substantial effects on the fortunes of your business are inherently uncertain. Higher volatility in our business environment has become the “new normal” for many. And while scenario analysis is a worthwhile exercise to rationally assess some of the uncertainties you are facing, there is no guarantee for getting it right.

So if you are concerned about the economic outlook, and if you get challenging questions from your board about the resilience of your business performance, how do you best respond?

It turns out that in times of crisis and in times of economic slowdown, not everybody fares the same. When we traced the paths of more than 1,000 publicly traded companies, we found that during the last downturn, about 10 percent of those companies fared materially better than the rest. We called those companies “resilients”—and we were intrigued. What made them different? Was it sector related? Did they simply get lucky?

Your business context is and will remain uncertain. But if you get moving now, you can ride the waves of uncertainty instead of being overpowered by them.

As we investigated more deeply, we found some noteworthy characteristics in how resilients weathered the storms: how they prepared for them, how they acted during tougher periods, and how they came out of them.

We will share some of the more specific findings with you below, but let’s start with the core insight right here: Resilients moved early, ahead of the downturn. They entered ahead, they dipped less, and they came out of it with guns blazing.

In short, your business context is and will remain uncertain. But if you get moving now, you can ride the waves of uncertainty instead of being overpowered by them.

How the resilients performed

In our book, Strategy Beyond the Hockey Stick (Wiley, 2018), we researched more than 2,000 companies over two decades to show that corporate performance follows a power curve. A small number of companies capture the lion’s share of global economic profit, while the vast majority return just slightly above their cost of capital. Moving up the power curve requires big moves: dynamic resource reallocation, disciplined M&A, and dramatic productivity improvement. Those findings held across economic cycles.

Our latest research focused squarely on what specifically helps companies thrive through downturns. The focal point of our analysis was a group of approximately 1,100 publicly traded companies, across a wide range of industries and geographies, with revenue exceeding $1 billion. We found that between 2007 and 2011, in each of 12 economic sectors analyzed, there also was a power curve of corporate performance, measured in terms of total returns to shareholders (TRS) or excess TRS growth during that period, relative to the sector median. The top quintile of companies in each sector—the resilients—delivered TRS growth that was structurally higher than the median in their sector (see Exhibit 1 for a representative analysis in the technology, media, and telecommunications sector).

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In the three boom years before 2007, the resilients actually underdelivered slightly on TRS. However, they opened up a slight TRS lead relative to their sector peers during the downturn and extended this lead through the recession (Exhibit 2). By 2017, the cumulative TRS lead of the typical resilient had grown to more than 150 percentage points over the non-resilients. This lead was tough to reverse: nearly 70 percent of the resilients remained top-quintile performers in their sector, with just a small fraction of the non-resilients joining them.

When the economy started heading south, what distinguished the resilients was earnings, not revenue. Barring a few sectors that were exceptions, resilients lost nearly as much revenue as industry peers during the early stages of the slowdown. However, by the time the downturn reached its trough in 2009, the earnings, measured as earnings before interest, taxes, depreciation, and amortization (EBITDA), of resilients had risen by 10 percent, while industry peers had lost nearly 15 percent.

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Here is a direct link to the complete article.

Martin Hirt is a senior partner in McKinsey’s Greater China office, Kevin Laczkowski is a senior partner in the Chicago office, and Mihir Mysore is a partner in the Houston office.

The authors wish to thank Tanguy Catlin, Cindy Levy, Mary Meaney, Philipp Radtke, Kirk Rieckhoff, Hamid Samandari, Sven Smit, and Maria Valdivieso de Uster for their contributions to this article.

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