The technology, media, and telecommunications (TMT) sector has enjoyed unprecedented growth over the past decade. Seven of the ten largest companies by market value are TMT companies. Incumbents such as Apple, Disney, and Verizon have been joined by a quickly scaling group of disruptive players such as Alibaba Group, Alphabet, Amazon, Facebook, Netflix, and Salesforce, all of which have been buoyed by consumers’ and businesses’ growing appetite for technology products and services.
Yet the current growth outlook is uncertain. Business investment in the United States contracted in the second quarter of 2019, as did the GDPs of Germany and the United Kingdom, two of the largest economies in the world. Although we cannot predict when a downturn will occur—and there is no way to know how damaging it will be—most people agree we are closer to the next one than we are to the previous one.How the next downturn will affect individual TMT companies is also impossible to predict, but one thing is certain: the top tier of them, which we call “resilients,” will outperform the rest of the sector by a significant margin, according to our research examining the most recent two recessions. The research shows that how you manage through a slowdown largely determines how you come out the other side, not just in immediate recovery but for several years after.
First and foremost, winning is about more than cost cutting. Resilients bested the majority of their competitors not only by battening down the hatches but by taking several key strategic actions, some of which were counterintuitive, and no-regret moves. These included increasing the productivity and amount of their sales and marketing investments, continuing to invest in their core product engine, creating capacity by reducing leverage going into the slowdown, and remaining active in M&A and divestments.
Of course, every downturn is different, and each company will play the next one differently. Any upcoming slowdown will be a significant opportunity for a company to set itself up on a long-term trajectory of outperformance. Well-capitalized disruptors will likely go on the offense, using the slowdown as an opportunity to strengthen their long-term strategic positions. Incumbents—many of whom have been using much of their cash flows to drive returns to shareholders through share buybacks and dividend increases—will need to start making some hard choices on where to keep investing and put more emphasis on new digital and analytics tools to drive the next leg of efficiencies.
Regardless of their starting position, leaders of TMT companies need to start planning—and taking action. Execution of strategic preparations will take time, as will securing critical buy-ins from management teams, boards, and shareholders. Successful strategic plans will need to take a long-term view and not give in to short-term impulses and pressures. In order to succeed, companies cannot afford to wait for the onset of a downturn to make no-regret moves.
Lessons in resilience from recent downturns
To understand how executives should approach the next downturn, we analyzed around 3,000 companies in TMT over the past 20 years across nine subsectors. What we learned is that how you operate heading into and during a slowdown matters greatly. In recent downturns, only about 20 percent of companies in TMT “got it right” and accelerated their performance relative to peers. Amazingly, the enhanced performance of these resilients during the downturn accelerated coming out of the downturn and led to significant additional gains in the years following (See Exhibit 1).
TMT as a sector has outperformed most other sectors in economic profit across the most recent two downturns, reflecting its overall strength and suggesting its companies may enjoy a relative tailwind compared with those in other parts of the economy. At a subsector level, the research revealed that how you play is critically important, in addition to where you play—particularly in slow times. For example, during the 2007–11 recession and recovery, resilient companies outperformed nonresilients in their respective subsectors by significant margins—up to 46 percentage point outperformance in total shareholder returns growth and up to 67 percentage point outperformance in economic profit growth (See Exhibit 2).
According to our research, the outperformance of resilients in past recessions was driven by four key actions.