How Challenger Companies Win a Recession

How Challenger Companies Win a Recession

Most economists and business leaders predict a recession will hit in 2024. So, they’re preparing for the downturn as if it was a category five hurricane: They shutter what they can (cut costs); whittle daily life down to the barest necessities (conserve cash); then wait out the storm and hope for survival. Hunkering down is a conventional approach, but successful companies see recessions less like a person facing a storm, and more like a racecar facing a sharp turn.

Borrowing an analogy from Bain, these winning companies know when to apply the brakes, lean into the curve, then power out. They leveraged the effect of a recession to pass incumbents, and maintain their lead for years after the economic crisis ended.

These winners are more than feel-good stories of a few lucky outliers who increased advertising while others cut back. Their strategies were a combination of maneuvers, both offensive and defensive, that allowed them to accelerate through the open lanes without ignoring their blind spots. These strategies have proved so effective, they're backed by empirical data:

  • Starting with a Harvard Business School analysis of 4,700 public companies during the recessions of 1980, 1990, and 2000…
  • Their findings were supported by a more recent Bain study involving 3,900 companies…
  • And a McKinsey study came up with nearly the same results a year later.

According to their research, there’s a playbook for challenger companies to win a recession.

Business cycles are not storms

Good and bad economic times are both part of a normal business cycle. If you think of a business cycle like a racetrack, growth periods are the straightaways. Recessions are the turns, with some sharper than others. It’s difficult for challenger companies to move ahead during growth periods because their competitors have more money and market leverage. The time for challenger companies to take the advantage is when the economy is coming out of sharp turns.

Consider how, in the late 1920s, Kellogg’s and Post were neck and neck, each owning similar shares of the ready-to-eat cereal market. During the Great Depression, Post did the predictable thing: it cut expenditures and waited for better times. Meanwhile, Kellogg’s increased advertising and launched a new product: Rice Krispies. This strategy put Kellogg’s in the lead, which they’ve maintained ever since.

When the dotcom bubble ruptured in 2001, Apple, to outward appearances, was confined to making personal computers, but had less than three percent of the PC market. Sony was riding its 20-year reign as king of the personal audio market—a product category Sony founded with their Walkman franchise.

The early 2000s didn’t seem to be a good time for premium products. But that’s exactly when Apple decided to release iTunes and, a few months later, the iPod. Apple had spent the early part of the dotcom bust re-imagining what the personal audio market looked like. They revolutionized the music industry, and Sony never recovered. iTunes and the iPod enabled Apple to build an ecosystem that locks users into Apple’s entire product line.

As most retailers pulled back spending and hunkered down during the 2000 recession, Target increased its marketing efforts, opened hundreds of new locations, reconfigured its stores to include more food, grew its online sales, and partnered with well-known designers to introduce new products. It also cut costs by improving its productivity and increasing efficiencies within its supply chain operations. The company grew sales by 40% and profits by 50% over the course of the recession. Target rose to become a hybrid retail leader (online and offline), second only to Walmart, where it remains today.

What fueled these successes? These companies became experts at building optionality into their businesses. Not just in one or two areas, but throughout their operations, from how decisions are made to the talent they attract, and from their supply chain to their point of sale. Such as how Apple leveraged contractors and freelancers to prototype, develop and package the iPod. Target employed performance based advertising programs.

In its most basic form, optionality means building in flexibility throughout the value chain. Optionality is especially important when a situation is uncertain or risky, such as during a recession. Because options give you control—and that starts with how you cut costs.

Brake strategically

It’s wise to cut costs as you enter a downturn. But across-the-board cuts can eliminate horsepower instead of conserving fuel. You’ll make more strategic cuts when you master the balance sheet instead of relying on the profit and loss statement (P&L). That’s because the P&L doesn't provide the same strategic view of assets, liabilities, and shareholder equity that the balance sheet does.

When looking at the balance sheet, you’re looking for strategic areas to pull back growth plans. For example, you may determine that some anticipated product launches should be cut, or you might defund marketing programs that are no longer core to the business.

Cut costs, not capacity

Research shows companies that emerged the strongest from an economic downswing relied more on operational improvements than layoffs to cut costs. This is where it’s beneficial to master the balance sheet.

Scour your balance sheet to identify where you can remove the middleman, reduce service fees, and pay by usage or performance.

For example, computing usage usually fluctuates throughout the year. Instead of managing computing on-premise, which involves the fixed costs of maintaining servers and other resources, you could move computing to the cloud. You’ll no longer have servers to maintain and you pay by usage. These cost savings are why, during the Great Recession, cloud computing saw rapid adoption. Prudent challenger companies took advantage of its optionality.

Rather than hire full-time employees who you may not have enough work for later, you could contract independent professionals on demand. Then you gain the ability to quickly ramp teams up and down, and to contract specialists with the skills to meet your changing needs.

Although layoffs may be unavoidable, you could automate more tasks to gain efficiencies and save more jobs. Building in the right automation allows you to move employees to work on more critical projects that are core to your business, and to respond faster to changing circumstances. This is why researchers at Bain and McKinsey determined that digital was a huge accelerator for challenger companies.

The point here is that the more optionality you build in, the more financial and operational flexibility you gain.

Having financial and operational flexibility enables you to cut costs, not capacity. Then, when demand returns, your profits can grow faster as incumbents struggle with higher costs and a smaller workforce.

What’s more, the capacity and cash you gained going into a recession will give you a firmer grip on the wheel as you approach the sharp turn ahead.

Lean into the curve

Creating financial and operational flexibility enables you to get through a recession by reducing debt, lowering costs strategically and precisely, and moving quickly to a variable cost structure wherever possible.

And the added flexibility also enables you to bounce back faster by giving you more capital to invest during the recovery period.

It may seem counterintuitive to spend more money during an economic crisis, but research shows that’s when winning companies raise capital expenditures (CAPEX). They do it to set themselves up to pass competitors while the caution flag is out.

Consider how Apple and other challenger companies used the recovery period to :

  • Release new products, which required investing more into R&D
  • Expand capacity and reach by pursuing merger and acquisition (M&A) activity at bargain, but not fire sale, prices
  • Lay the groundwork for future growth by investing in operational improvements
  • Raise brand awareness by spending more on marketing across channels

McKinsey backs this up with empirical data. They refer to companies that perform higher than their sector average as Resilients. Those who perform below average are Nonresilients. What the Resilients did differently is they optimized their balance sheet by creating optionality, thus enabling them to increase CAPEX to speed up growth.

Resilient companies

How Adobe leaned into the curve and won

In the early 2000s, Adobe was a licensed software company losing their dominance to growing competition and a digitizing world.

Adobe went on the offensive by updating its product offerings. In 2001, they released InDesign in direct response to a competitor product, QuarkXPress. A couple of years later, Adobe tied its branding and products together by bundling all of their products into the Adobe Creative Suite.

In 2005, Adobe acquired competitor Macromedia. Gaining Macromedia’s products, including the popular Dreamweaver, instantly boosted Adobe’s market share. The acquisition also filled Adobe with web design talent—skills Adobe lacked but would later require when it finally embraced the internet.

Over the next few years, Adobe continued making its products easier to use, which significantly expanded their market share. As they became a more accessible and mainstream brand, they were primed to make their next big move.

In 2008, during the Great Recession, Adobe set themselves up for the future by evolving from selling software through CDs and licenses to being a cloud-based SaaS company, selling a suite of tools through subscriptions at an attractive entry price. All of the investments paid off through steady growth year over year. From 2015 to 2021, the company tripled its overall revenue from around $5 billion to almost $16 billion.

Adobe leaned into the curve and won. They exemplified how increasing CAPEX is akin to amping up horsepower—which is what you’ll need to speed past incumbents as the economy begins to strengthen.

Power out onto the straightaway

Every company can leverage optionality to cut fuel costs and add horsepower, but larger companies have so much mass that it takes them longer to make changes. This is where mid-market challengers have an advantage.

You could move like a nimble sports car against larger rivals, who resemble lumbering 18-wheelers. As the turn begins to straighten, they’re just trying to keep their hands on the wheel.

This is the point that you’ll find the most opportune opening to hit the gas and power past these larger rivals. Meaning, as the economy recovers, invest more into advertising, expand your teams, and enter new markets.

This is where the optionality you built into your workforce, using on-demand professionals, can help you take aggressive action with less risk. With on-demand talent:

Stay stronger for longer

You don’t want to spin off the track as your company enters a downswing, but you don’t want to miss the race either. Seize the opportunity by creating optionality throughout your operations, so that you can conserve cash and invest in the company’s future with less risk.

This strategy isn’t for gaining a one-time jump on your competitors. This strategy enables challenger companies to surpass incumbents and remain in the lead for years after the recession ends, as Bain discovered:

“The winners grew at a 17% compound annual growth rate (CAGR) during the downturn, compared with 0% among the losers. What’s more, the winners locked in gains to grow at an average 13% CAGR in the years after the downturn, while the losers stalled at 1%.”

Winning companies

When you look for areas to create greater optionality, you’ll come up against some long-held beliefs. It may be difficult to give up some of those old “this is how we’ve always done it” practices, so start small and stick with it. You can’t grow by hanging onto limitations.

In creating workforce optionality, there is a way to start small and still make a noticeable impact towards powering the company ahead. Upwork gathered the best practices in “Strategic Guide to Build a Blended Workforce.”

The guide is based on over 25 years of experience aiding companies—including Microsoft, Automattic, and AirBnB—in successfully leveraging independent professionals for business growth. In the guide, you’ll get:

  • A four-step framework taking you from implementation to program growth
  • Tips for avoiding common pitfalls along the way
  • Case studies from multiple industries

Use the framework to get a headstart in creating the workforce optionality required to win a recession. Download your free copy.


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Author spotlight

How Challenger Companies Win a Recession
Tim Sanders
Vice President of Client Strategy

Tim Sanders is the author of five books, including the New York Times bestseller "Love Is the Killer App: How to Win Business and Influence Friends." He was the chief solutions officer at Yahoo! and early-stage member of Mark Cuban's, and a faculty member of the Global Institute of Leadership Development.

How Challenger Companies Win a Recession
Vice President of Client Strategy

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