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BUSINESSSTRATEGIESANDPERFORMANCE

DURINGDIFFICULTECONOMICCONDITIONS

FortheDepartmentofBusinessInnovationandSkills(BIS)

JohnKitching

RobertBlackburn

DavidSmallbone

SmallBusinessResearchCentre,KingstonUniversity

SarahDixonSchoolofManagement,BathUniversity

June2009

URN 09/1031


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Contents

EXECUTIVESUMMARY..........................................................................................................i

1.INTRODUCTION,RESEARCHOBJECTIVESANDMETHODS................................................1

2.RESEARCHCONTEXT.........................................................................................................4

2.1DefiningDifficultEconomicConditions.................................................................................4

2.2TheCurrentCrisis..................................................................................................................6

3.ANALYTICALFRAMEWORK.............................................................................................10

4.THEBUSINESSSTRATEGYANDMANAGEMENTLITERATURE.........................................13

4.1BusinessStrategy:GeneralConsiderations.........................................................................14

4.2StrategicAdaptationtoEnvironmentalJolts,TurbulenceandRadicalInstitutionalChange

15

4.3StrategicAdaptationtoRecession......................................................................................16

4.4Retrenchment

Strategies

....................................................................................................

17

4.5InvestmentStrategies.........................................................................................................21

4.6AmbidextrousStrategies...................................................................................................24

4.7 BusinessSizeasanInfluenceonStrategicAdaptationtoDifficultEconomicConditions.27

4.8InternationalExperience.....................................................................................................29

5.CONTEMPORARYCOMMENTARYONTHECURRENTCRISIS..........................................31

6.STRATEGICRESPONSESINTHERECESSION:DELIBERATIONSFROMATHINKTANK.....37

6.1IntroductionandObjectives................................................................................................37

6.2BusinessResponsesinRecession........................................................................................38

6.2.1

Knowledge

Base

...............................................................................................................

38

6.2.2UnevennessofRecession.................................................................................................406.3ModellingStrategicChange................................................................................................40

6.3.1TypologiesofStrategicChange........................................................................................416.3.2StrategicThinkingandStrategicActions..........................................................................42

6.4TheRoleofInnovationunderRecessionConditions..........................................................42

6.5RolesforPublicPolicy.........................................................................................................44

6.5.1LegitimiseChangeandInnovationwithinOrganisations.................................................44

6.5.2StimulateExperimentalApproachestoSupportingInnovation......................................45

6.5.3PromotetheProvisionofFinance....................................................................................466.5.4PayAttentiontoBusinessExits........................................................................................46

6.5.5Consider

Small

Firms/New

Firms

Initiatives

.....................................................................

46

6.5.6Redefiningsectorsandcrosssectorinitiatives................................................................47

6.5.7PolicyMessagesforRecovery..........................................................................................47

6.5.8HarnessingCreativityandSourcesofNationalExcellence..............................................476.6ConclusionsandImplicationsfromthethinktank.............................................................48

7.ASSESSMENTOFDATASOURCES...................................................................................49

8.CONCLUSIONS.................................................................................................................53

APPENDIX...........................................................................................................................56

REFERENCES........................................................................................................................57


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EXECUTIVESUMMARY

IntroductionandResearchObjectives

Thisreportreviewstheavailable literatures inorderto: (i) identifythepressures,

threats and opportunities facing businesses operating in difficult economic

conditions suchas those currentlybeingexperienced in theUKandglobally; (ii)

identify the strategies adopted by businesses that have experienced such

conditions; and (iii) assesswhich strategiesproved tobeproblematic and those

thathaveallowedbusinessestoresponddynamically,surviveandemergestrongly

aseconomic

conditions

improved.

Sourcesforthereportincludeacademicstudiesofbusinessresponsestorecession

andother environmentaljolts,contemporarycommentaryon thecurrentcrisis,

and the deliberations of a thinktank involving leading academic experts on

businessstrategyandmanagement.

The literaturedirectly focusedonbusiness responsesduring recession is limited

andpartial.Thesearchwas,therefore,extended towider literaturesonbusiness

responses to environmental shocks/jolts, endgame strategies in declining

industries and business turnaround. These literatures provide support for the

analysis presented, although their relevance to recession conditions has to be

demonstratedratherthanassumed.

Uncertainty

Previousrecessionsprovidepointerstopossiblebusinessresponsesbut,giventhe

specificitiesofthecurrentcrisis,itisdifficulttopredicttrendsorprescribecourses

ofactionwithahighdegreeofconfidenceintheirlikelysuccess.


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The increasing globalisation of economic activity the interconnectedness of

economic activity across national frontiers renders the current crisis different

frompreviousrecessions.

Thecurrentrecessionmaywellconstituteastructuralbreakorphaseshiftinthe

economy, inwhich thepreviously held assumptions about how it functions and

economicmodelsareopentoquestion. Theoutcomeofthecurrentrecessionmay

beaneweconomicorder,thenatureofwhichcannotbefullyunderstoodtoday.

Recessions impactunevenlyon industries,countries, regionsand firms.There is,

therefore,no

single

recession

effect

for

businesses,

nor

any

particular

best

way

toadapttorecessionconditionsapplicabletoallbusinesses. Recessionsgenerate

contradictorytendencies,forinstance,decliningaggregateexpenditureandfalling

inputprices.

EmpiricalResearchonStrategicAdaptationtoRecession

Creative destruction. For some analysts, recessions are regarded as periods of

creativedestruction,duringwhichsomebusinessesand industriesdecline,often

terminally,while new ideas, technologies, products and industries emerge and

becomethedrivingforcesofsubsequenteconomicactivityandgrowth. Recession

conditionscontributetothiseconomicrestructuringthroughstimulatingbusiness

churn, the entry and exitof firms, and bymotivating incumbent firms to adapt

productsandbusinessprocesses. Thinktankparticipantsbelieved thatdynamic,

innovativenewbusinesseshaveanimportantroletoplayin leadingtheeconomy

outofrecession.

Organisational inertia and opportunity. Adapting to environmental shocks,

including recession, is a capability business leaders have to develop in order to

survive. Oneviewargues that,during recession, incumbent firms tend to suffer

fromorganisational

inertia,

which

prevents

them

from

adapting

appropriately

to


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environmentalshocks. Conversely, the pitstop theoryofbusinessbehaviour in

recessiontreatsfirmsasmorewillingtoinnovatebecausetheopportunitycostsof

notundertakingsuchactionare lower thanduringmorebuoyant times.BothUK

andinternational

data,

for

example,

from

Japan

and

Russia,

suggests

that

recessionimposesthreatsonbusinessesbutalsoopensupnewopportunities.

Businessstrategies.Recessionspresentbusinesseswithadilemma:whethertocut

coststoconserveresources,ortoinvestinnewproductsandprocessestoexploit

competitorweakness.

Ingeneral

terms,

the

literature

identifies

three

broad

categories

of

strategy

in

recessionconditions:retrenchment,investment,andambidextrousstrategies.

o Retrenchment strategies involve cutting operating costs and divestment of

noncoreassets. Theseappeartobethemostcommonapproachesadoptedby

businesses to deal with recession conditions, especially in the shortterm.

Analystsreportdivestmentofbusinesses,closureofestablishments,reductions

inemployment,expenditurecutsonawiderangeofactivities includingR&D,

marketingandemployeetraining.

o Investment strategies involve expenditure on innovation and market

diversification.Recessionisregardedasanopportunityto implementstrategic

changethatwouldotherwisenothaveoccurred. Manyoftodayshousehold

names launched successful businesses during recessions. The evidence on

businesses adopting investment strategies to manage through recession,

however, ispatchy. Suchstrategiesare riskyandmany firmsare likely tobe

toopreoccupiedwithshorttermsurvivaltothinkaboutinnovationandgrowth,

orlacktheresourcestoimplementsuchstrategieseffectively.

o Ambidextrous strategies combine retrenchment and investment. It is likely

thatmost

firms

adapt

under

recession

conditions

through

judicious

cost/asset

cuttingbehaviourand through investment inproduct innovation andmarket


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development.Choosingtheappropriate investmentstomakeandcoststocut

takes on additional importance during recession when market selection

pressuresareattheirmostsevere.

StrategyandPerformance

No single strategy. Business performance is highly variable under recession

conditions,andnoparticularstrategycanguaranteesurvivalandsuccess. Much

dependsoncontingentfactors,forexample,businessresourcesandrelationswith

other stakeholder groups partners, competitors, customers, suppliers,

governmentand

others.

Business characteristics andperformance. The literature suggests that business

performanceunderrecessionconditionsdoesnotmapcloselyontoorganisational

characteristics such as business size or sector. Small enterprises are not

necessarilymorevulnerabletorecessionthan largerorganisations,despitemedia

headlinesthatoftenpresentacontraryposition.

Past and future performance. Individual business performance rankings differ

acrosstheeconomiccycle. Prerecessionperformanceisnotareliableindicatorof

within or postrecession performance. This suggests that businessesmight be

abletoadapttorecessionconditionsinsuperiorwaysthatleadtoadvantagesover

competitors.

Cost efficiencies might not be sufficient. Thinktank participants argued that

business strategies should involve more than simply securing cost efficiencies.

Firmsadoptinganambidextrousapproach, combining costefficiencydriveswith

significant innovationandexplorationactivity,mightbemore likely tocreate,or

takeadvantageof,marketopportunitiesduringrecession.


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Businesssizecanaffecthowrecessionconditions impactonbusinessesand their

abilitytorespond. Themore limitedresourcebaseofsmallenterprisescompared

with largerfirms,particularly intermsoffinanceandmanagementcapabilities,can

affecttheir

ability

to

scan,

analyse

and

respond

to

major

environmental

change.

Conversely, small firms often possess the flexibility to adjust resource inputs,

processes, prices and products quickly in response to environmental shocks.

Strategic flexibility, the ability to respond quickly to changing competitive

conditions has a positive influence on performance after a crisis. The research

suggests,however,thatthere isnooverallsimple neteffectofrecessionbysize

offirm.

Throughput and prices. Macrolevel, quantitative studies of asset prices and

quantities indicate thatquantitiesvarymore thanpricesover thebusinesscycle,

including during recession periods. This implies that most firms respond to

macroeconomic shocks such as recession by maintaining prices, with the

consequencethatfewerunitsaresold.

Current business strategies. Commentators report both retrenchment and

investmentstrategiesintheperioduptoearly2009. Sourcesidentifyvariouscost

cuttingactivities,includingreducedstafflevels,ownersworkinglongerhours,and

pay freezes and pauses. Others describe the recession as an unexpected

opportunity to identify new markets and develop new products to secure a

competitive advantage. Understandably, commentators are lessable toexplore

theoutcomesoffirmsactions. Data is lackingastothe longterm,andeventhe

shortterm,consequencesoffirmsadaptationsunderrecessionconditions.

The role of government The literature suggests that government has a role in

encouraging innovationandbeingmore flexible in thedeliveryof support. This

might involvepromotingcrosssectorandcrossspecialism linkagesanddialogues

withorganisations inordertospark ideasfor innovation. Proppingupoutmoded


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business models or industries in structural decline, a process accentuated by

recession,maybelessdesirablethanmoreexperimentalformsofintervention.

Assessment/interpretation

Studies of business adaptation under recession conditions vary in scope and

quality. Much analysis and commentary is descriptive, and often prescriptive,

rather than explanatory. Sources often provide little explanation of why

businesses adapt in theways they do, the conditions that enable,or constrain,

particularadaptations,orthespecificfactorsthataffectperformanceoutcomes.

Fewacademicstudiesspecificallyexplorethecauses,processesandconsequences

ofstrategicadaptationunderrecessionconditions. There is,therefore,aneedto

drawonstudiesofadaptationtoenvironmentalshocks/jolts,endgamestrategies

indeclining industriesandbusinessturnaround. Therelevanceofsuchstudiesto

understandingbusiness adaptation under recession conditions has tobe argued

forratherthanassumed.

Many studies identifyparticular adaptationsunder recession conditions, such as

adjustments inmarketing,R&D, training, and pricing. They tend not to report,

however,whether such changes constitute a fundamental strategic change, for

example, as part of a retrenchment or investment strategy, as distinct from an

operationalchange.

In an increasingly global economic system, where competitors, customers and

supply chains operate across national frontiers, the stakeholderswhose actions

influence firms strategic adaptations and performance are frequently nonUK

actors. Theliteraturefocusingonorganisationalresponsestorecessionconditions

rarelytakessuchglobal influencesexplicitly intoaccount. Perhapsthisrelates,at

least in part, to the previousUK recession occurring nearly 20 years agowhen

globalisingtendencieswerelessprominentthantheyaretoday.


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Thereareseveralmajorgapsorweaknessesintheliterature:(i)alackofrigorous

academic studies focusing specifically on strategic adaptation under recession

conditions;(ii)asimplisticapproach,failingtoelaboratetheinternal(business)and

external(market,

institutional,

cultural)

conditions

that

make

particular

strategic

adaptationspossible,or impossible; (iii)a limitedunderstandingof thepowerful

influence of globalising tendencies upon firms strategic adaptations under

recession conditions; (iv) a failure to link business strategy with performance

outcomes,or toexplainwhy someorganisational strategiesaremore successful

thanothers;and(v)thelimitedrelevanceofpriorresearchtotheconditionsofthe

currentcrisis.


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1.INTRODUCTION,RESEARCHOBJECTIVESANDMETHODS

Thisreviewseeksto:

Identifythe

pressures,

threats

and

opportunities

facing

businesses

operating

in

difficulteconomicconditionssuchasthosecurrentlybeingexperiencedintheUK

andglobally;

Identify the strategies adopted by businesses that have experienced such

conditions;

Assesswhich strategiesproved tobeproblematicand those thathaveallowed

businesses to respond dynamically, survive and emerge strongly as economic

conditionsimproved.

Forecasts vary as to the severityof the current global downturn. InMarch2009, the

InternationalMonetaryFund(IMF)predictedtheworldeconomywouldshrinkby1.3per

cent during 2009, the first contraction for 60 years (IMF 2009a), despite the fiscal

stimulusimplementedbymanyoftheG20governments;thiscontrastswiththeforecast

of 0.5 per cent growth in January (IMF 2009b). In May, the National Institute for

EconomicandSocialResearch(NIESR)suggestedadeclineof0.5percent(NIESR2009a).

In June, theWorldBank reportedamorepessimisticoutlook,predicting globalGross

DomesticProduct (GDP)willcontract3percent,1amarkeddrop from itsMarch2009

estimateof1.7percent(WorldBank2009).

Keyeconomic indicators tell the storyof the recession in theUK. GDPhas fallen for

threesuccessivequarters0.7percentinQ32008,1.6percentinQ42008and1.9per

centinQ12009(ONS2009a) andfinancialcommentatorspredictafurthercontraction

during2009and,possibly,2010. Forecastsfor2009includetheChancellorsestimated

3.5 per cent decline (HM Treasury 2009a), with others ranging from 1.3 per cent

through to 4.5per cent (HMTreasury2009b;CBI2009a; IMF2009a;NIESR2009a)

manyofwhicharemorepessimisticthanforecastsmadeatthestartoftheyear. One

1

http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:22209360~menuPK:34463~pagePK:3

4370~piPK:34424~theSitePK:4607,00.html


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veryrecentestimatesuggeststhattherateofdeclinemaybeslowing:NIESRreportthat

GDPdeclinedonly1.5percentinthethreemonthstoAprilandonly0.9percentinthe

threemonthstoMay(NIESR2009b).

The crisis has been particularly keenly felt in the UK because of the degree of

dependence on the hardhit financial services sector and the high level of household

indebtedness. Theeconomicoutlookregardingthedepthanddurationofthedownturn

remainshighlyuncertain (BankofEngland2009). Somesuggest theUKwill return to

growth in2010 (HMTreasury2009;NIESR2009b),whileotherspredict furtherdecline

(IMF2009a). TheUKFTSE100 index shows that sharepriceshave fallenbyaquarter

duringthe

12

months

to

June

2009.

Business

and

consumer

confidence

in

the

UK

have

fallensubstantially. Profitwarningshita7yearhighin2008(Ernst&Young2009)anda

string of recent surveys highlight the decline in sales, employment, investment and

expectations(BCC2009a;CBI2009b,c;SERTeam2009; IFFResearch2009). Onestudy

suggeststhatonein56UKbusinesseswillfailduring2009withafurtheronein50failing

during 2010 (BDO Stoy Hayward 2009). Many UKbased companies have already

reportedsubstantialjoblosseswhileothershavecloseddown. UKunemploymentrose

to 2.22millions inMarch 2009 (ONS 2009b), further reducing consumer purchasing

powerand confidence.UKhousepriceshave fallenalmost16per cent in the year to

May 2009.2 Repossessions for the first threemonths of 2009 show a 50 per cent

increaseoverthesameperiodayearago.3 Lowaggregatedemandisreflectedinfalling

prices. The retail price index forApril 2009 showed a fall in the annual rate for the

second consecutivemonth, to 1.2 per cent, the lowest figure since recordsbegan in

1948 (ONS 2009c). Such difficult economic conditions pose major threats to, but

perhapsalsoofferimportantopportunitiesfor,businesses.

The review focuseson the advanced economies, principallyOECD countries (Western

Europe,NorthAmerica,Japan)duringthepost1970periodinordertoinformanalysisof

prevailing UK conditions, although where relevant, experience in other parts of the

world isdrawnupon. Theseeconomieshavechangedsubstantially in recentdecades,

2http://news.bbc.co.uk/1/hi/business/8035363.stm


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makingcomparisonsacross timeandspacedifficult,butsourcesareexplored tosee if

thereareanylessonsthatcanbedrawnfrombusinessresponsestothemacroeconomic

shocksofthe1970s,80s,90sandthedotcombubbleof20001. Crucially,globalisation

processeshave

intensified

during

the

past

thirty

years,

with

economic

activities

increasingly interconnected (e.g. Frieden 2007). The evolving global landscape of

economicactivityreshapes the threatsbusinesses faceand theopportunitiesavailable

to them; firmsmust adapt to this changing context if they are to survive and thrive

duringgoodtimesandbad.

Sourceswereidentifiedusingsearchesoflibrarymaterials,electronicdatabases,Google

Scholarand

other

Internet

sources.

A

substantial

amount

of

grey

literature

providing

commentary and analysis of the current crisis, and business responses to it, has

appeared, including newspaper articles and studies by business bodies,management

consultantsandothers. Sourcesvaryintheiraimswhetherdescription,explanationor

prescription andquality. The reviewplacesgreatestweighton sources thatpresent

convincingexplanationsastowhybusinessesadaptinthewaystheydo,linkingbusiness

responses totheconditions thatenableorconstrainthem toadapt inparticularways,

and demonstrating how adaptation influences performance. Sources focusing

specificallyonfirmsstrategicadaptationsunderrecessionconditions,however,arefew.

The report is structured as follows. Next,we define difficult economic conditions,

providesometheoreticalapproachestounderstandingeconomiccrisesandofferabrief

diagnosis of the current situation. The third section proposes a framework for

understandingfirmsstrategicadaptationstorecessionconditions. Thefourthdiscusses

the academic literature and the fifth examines contemporary commentary on the

currentcrisis. Thesixthsectionprovidesasummaryofanexpertthinktankdiscussion

ofthecurrentsituationandbusinessstrategy. Keyfindingsarepresentedandrelevant

issuesofconcerntopolicymakersidentifiedinaconcludingsection.

33http://news.bbc.co.uk/1/hi/business/8051510.stm


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2.RESEARCHCONTEXT

2.1DefiningDifficultEconomicConditions

Thissectiondefinesdifficulteconomicconditionsinordertoestablishthescopeofthe

materials eligible for inclusion. Difficult economic conditions are defined primarily in

terms ofmacroeconomic recession (falling national GDP) and, secondly, in terms of

environmental jolts, shocks or hostility, including secular decline in the fortunes of

particular industries. This permits a distinction to be made between businesses

experiencingperformancedeclineduringperiodsof recession,orotherenvironmental

shock, and those suffering declinedue to failure to adapt successfully to competitive

pressuresinbuoyantconditions.

Marketeconomieshavehistoricallybeenpronetofluctuations boomsandslumps in

aggregate activity over time. Analysts claim to have detected a pattern in these

fluctuations,referringtochanges ineconomicactivity intermsofaneconomiccycleor

as long waves of capitalist development. These fluctuations, or long waves, were

broughtto

international

attention

by

Kondratiev

in

the

mid

1920s

(Mager

1987).

Investigatinginternationaldataonpricesfromthelate18thcenturythroughtothestart

of the 20th, Kondratiev identified three phases of the economic cycle expansion,

stagnationandrecessioneachcompletecycletakingapproximately50years. Atthat

time,Kondratievclaimedtohaveidentifiedthreecycles. Economistshavesubsequently

claimedtohavedetecteda fourthanda fifth Kondratievwavebasedaroundoil,cars

andmass production, and information and communications technologies respectively

(e.g.Freeman

1984).

Althoughmanyanalystsacceptthateconomicfluctuationsoccur,thereislessagreement

as to theircauses. Someattribute fluctuations to thebunchingof innovations;others

linkfluctuationstothecollapseofaggregatedemand,itselfduetodeclininginvestment

and animalspiritsamongbusinesspeople;yetothersviewtherecurrentupswingsand

downturnsasaninherentfeatureofthemarketsystemratherthanasaconsequenceof

shockssuchasnewinnovations. Underthelatterview,marketeconomiesareperceived


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as prone to overaccumulation as firms pursuit of profit encourages continued

investment until a situation of overcapacity is created, with too many goods and

servicesproducedrelative to the levelofaggregatedemand. Overcapacityultimately

leadsto

acrisis

of

declining

profitability,

business

failure,

rising

unemployment,

and

declining consumption a consumption crisis. Access to credit can support

consumption foraperiodoftime,butnot indefinitely. Ifcreditbecomesrestricted,or

consumersbecomeunable to service theirdebt, thenconsumption is likely todecline

withconsequencesforGDPandothermacroeconomicindicators.

Regulation theoryprovidesawayofunderstandinghoweconomic, socialandcultural

institutionsand

norms

play

arole

in

stabilising

market

economies

and

creating

the

conditions for continued business profitability (e.g. Jessop 1990). Economic crisis

encouragesGovernments to reconstruct the conditions forprofitablebusiness activity

throughredesigningtheinstitutionalandculturalframeworkwithinwhichfirmsoperate.

Thereisnoguarantee,however,thatanyspecificsetofGovernmentpolicieswillresolve

thecrisis. Regulation theoristsperceivesuccessfulpoliciesasonly temporary fixes to

the problem of continued accumulation, owing to the crisisprone nature ofmarket

economies, rather than as a permanent resolution. Advancedmarket economies are

argued to have passed through distinct historical periods, characterised by specific

modesofregulationwhichprovideparticularfixestoparticularcrises;periodshavebeen

referred to as Fordism, Postfordism and AfterFordism (e.g. Peck and Tickell 1994;

Beynon and Nichols, 2006). The UK, and indeed the world, economy may be

approachinganother structuralbreakor phaseshiftandbeabouttoentera further

distinctive period of economic development. Such a break would have important

implications for the organisation of economic activity and for the strategies of

incumbentandnewenterprises.

For somecommentators, recessionsareperiodsof creativedestruction,ofeconomic

restructuring, during which industries decline, often terminally, while new ideas,

technologies, products and industries emerge and become the driving forces of

subsequent

economic

growth

(e.g.

Bryson

1996).

Recession

conditions

contribute

to

economic restructuring throughat least twodistinctprocesses: first, throughbusiness


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churntheentryandexitoffirms;and,second,bymotivatingincumbentfirmstoadapt

productsandprocesses inorderto increaseormaintainbusinessperformance. Hence,

economiesadaptthroughchangesinthepopulationofbusinessesandthroughchanges

inthe

behaviour

of

incumbent

firms.

Our

focus

is

primarily

on

adaptation

by

existing

firmsbutacompleteaccountshouldalsoexplorecyclicaleffectsonnewfirmformation

andexit.

Recessions impact unevenly on industries, countries, regions and firms (e.g.

Connaughton and Madsen 2009) and contribute to structural economic change as

resources are transferred between existing industries, and from existing to new

industries.Particular

recessions

present

particular

threats

to,

and

enable

particular

opportunitiesfor,particularfirmswithimplicationsforstrategyandperformance. Akey

issue, therefore, is what lessons the experience of previous recessions provides to

businessesandpolicymakers.Weendeavourtodrawtheselessonsout.

2.2TheCurrentCrisis

Particular recessionshaveparticular causes that shape thedepthanddurationof the

downturn. Theworldwide recession of 19734, for example,was influenced by the

embargoimposedbyoilproducingcountriesandthesubsequentrise inoilprices. This

contributed to stagflation in theadvancedeconomies highprice inflationcombined

with weak economic growth from which the UK recovered slowly throughout the

1970s. The early1980sUK recessionwas induced largely byGovernment policies to

restrict themoney supply inorder to contain inflationary pressures. The impacton

interest rates and sterling led to intense difficulties for UK firms unable to access

investment finance, and for exporters. The early1990s UK recession was, in part,

caused by UK Government attempts to peg sterling to the European Exchange Rate

Mechanism (ERM),culminating in BlackWednesdaywhichsaw interestratesrise five

percentinasingledaybeforewithdrawal. This,again,impactedparticularlystronglyon

UKexporters. TheUKexperiencedasustainedperiodofeconomicgrowth from1992,

withGDP rising every quarter even during the dotcom bubble slowdownof 20001.

This

slowdown

led

to

a

market

re

evaluation

of

over

priced

technology

companies,

although GDP recovered with few apparent longerterm repercussions for the UK


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7

economy. The present crisis exhibits similaritieswith the crisis of 1929. Bothwere

precededbyhighcreditgrowthandanassetpricebubblethatledtosubstantiallossesin

thebankingsector(vonMehren2009).

Whiletheprecisecausesofthepresentglobalcrisis,andtheweighttobeattachedto

them inparticularnational contexts, continue tobedebated, anumberofpoints are

widely accepted. The immediate trigger for the recession was the financial crisis,

embracing banks and other organisations in many countries, engendered by the

widespread default of subprimemortgage holders in the USA. But, commentators

argue, forsuchdefaultstogeneratewidespreaddamagetotheglobal financialsystem

andthe

world

economy,

arange

of

contributing

conditions

needed

to

be

in

place

(e.g.

Glyn2006;Blackburn2008;Peston2008;Hildyard2008;Cable2009;Wong2009;Rapp

2009;Jain2009;Cloke2009;Swan2009;HouseofCommonsTreasuryCommittee2009).

Causesof thecurrentrecessionreportedly include: the limitedreachof theregulatory

framework, that required banks to weight assets according to their risk but also

permitted the creation of new, structured finance products to escape regulatory

requirements; the availability of funds to Western capital markets, including

considerableamountsfromChina,facilitatinglending;lowinterestrates,stimulatingthe

demand for credit for investment and consumption, and consequent high levels of

indebtedness; the emergence of a shadow banking system enabling financial

organisations to take on certain banking functions and loosening the rules governing

borrowingandlending;thefinancialisationofdebt,enablingtheconversionofconsumer

debt into tradeablesecurities (includingmortgagebackedsecurities)whosevalue,and

associated risks,weredifficult toestablish4; the global tradingof such securities, that

transmits problems internationally; finance providers remuneration systems that

encourage excessive risktaking with little concern for borrower default, partly

motivated by traders beliefs that Government will intervene in the case ofmarket

4Onecommentatorhasdescribedthemarketforderivativesasagiantpyramidscheme,

whereby some initial investmentcangenerate40 times the initial investmentwithout

any change in the real economy underlying such transactions (Hutton 2009). An

estimateoftheglobaltrade inderivativesputsthefigureat12timestheentireglobal

capitalbase

(Cloke

2009).


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instability;thefailureofcreditratingagenciesandauditorstoassessthevalueandrisk

offinancialassetsandproductsappropriately;andthehousingandassetbubbles,that

encouraged investors,businessesandconsumers to takeondebt. Volatility inenergy

pricesduring

2008

also

contributed

to

the

climate

of

economic

uncertainty.

Eachof these factorshasarguablycontributed to thepresentcrisis, firstby impacting

finance providers balance sheets and, second, by influencing the demand for, and

supply of, credit to businesses and individuals. Defaults on subprime mortgages

triggered defaults on other financial products, as payments to creditors holding

derivative products could not bemade. This encouraged investors to recover their

investments,stimulating

arun

on

anumber

of

institutions,

exemplified

by

the

case

of

NorthernRock. Fearofexposure towhathavebecomeknownas impairedor toxic

assets caused banks to reduce lending to each other and this stimulated a general

contraction of liquidity in the wholesale financemarkets. The global nature of the

financial services industry led to problems originating in the US subprimemortgage

sector being transmitted throughout the world. The crisis has led to the collapse,

Governmentbailoutorpartialnationalisationofmajor financial institutions in theUS

and Europe; tomajorprogrammesof fiscal andmonetary reform;and to support for

businessesandhomeownersintheUKandelsewheretocombatthecrisis(HMTreasury

2009;IMF2009a).

PreviousrecessionscanprovidepointersastopossibleresponsesbyUKbusinessesand

policymakers but, given the specificities of the current crisis, it is difficult to predict

trendspreciselyor toprescribe coursesofactionwithahighdegreeof confidence in

theirlikelysuccess. Onekeyfeatureofthepresentsituationwithstrongimplicationsfor

businessresponses,andonewhichrenders itdifferentfrompreviousrecessions, isthe

increasingglobalisationofeconomicactivity. Globalisationreferstothemultipleforms

of interconnectednessbetweenpeopleandplacesviaflowsofgoods,services,finance,

people and information (e.g. Holton 2005; Perrons and Posocco 2009; Hazakis and

Siousouras 2009), including the crossborder valuechainsofmultinational enterprises

(Prakash

and

Hart

2000).

Such

processes

have

been

encouraged

by

the

declining

costs

of

transport and communications, reduced barriers to trade, the collapse of command


18/77

9

economies and the influence of liberalmarket ideologies (Gilpin 2002;Harvey 2007).

Globalisationprocessesarecomplextocomprehend,andevenmoredifficulttomanage

(MicklethwaitandWooldridge2003),asbusinessactivitiesandoutcomesareinfluenced

bythe

actions

of

distant

others

and,

reciprocally,

local

action

influences

those

far

away

(e.g.HuttonandGiddens2001;Giddens2002). Globalisationcreatesnewopportunities

and threats (PrakashandHart2000),addssubstantialcomplexitytobusinessdecision

making, and generates endemic volatility and uncertainty in market processes that

increasestherisksofchoosingandimplementingparticularstrategies. Marketinstability

hasbeenparticularlypronounced inthefinancesector,wherethescaleandvelocityof

financialmovementsacrossnationalbordershas increasedthevulnerabilityofnational

Governmentsto

sudden

shifts

(Gilpin

2002;

Glyn

2006;

Allen

and

Gale

2008).

Currency

speculators can have a serious impact on nationalGovernment aims and policies, as

happenedintheUKin1992. Evenlarge,powerfulmultinationalsmayfinditdifficultto

manage global influences that inevitably shape business adaptation and performance

underrecessionconditions,whetherornotbusinessowners/managersareevenaware

ofthem.

Theglobalnatureof thecrisis, itmightbeargued,has thepotential togeneratemore

farreaching consequences thanotherpost1970 recessionsbecauseof theeffectson

thesupplyofbank finance. The recent IMF reviewof recessionsand recoveries in21

advanced economies found that recessions associated with financial crises, and

recessions thatarehighly synchronisedacrosscountries, havebeenmoresevereand

longerlastingthanrecessionsassociatedwithothershocks(IMF2009a:ch3). Recovery

tendsalsotobeslower. Creditrestrictions impactuponbusinessesdirectlyby limiting

accessto finance for investmentorworkingcapitalpurposes,and indirectlyby limiting

customerscapacitytopurchasethegoodsandservicesbusinessesprovide. WithBank

ofEnglandbaserateatitslowestinits300yearhistory,0.5percent,theissueisraised

as to whether there are more fundamental reasons for the recession than credit

restrictions.


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10

3.ANALYTICALFRAMEWORK

An analytical framework for examining business strategy and performance during

difficult economic conditions is presented in Figure 1. Business strategy and

performance varywith resources and capabilities,owner/manager perceptionsof the

threats faced and opportunities available (e.g. Thomas et al. 1993), and the wider

organisational,market, institutionalandculturalcontexts (e.g.ClarkandMueller1996;

Schoenberger 1997;Whitley 2007). The capital, labour and productmarketswithin

whichfirmsoperate, theirsensitivitytoeconomicdownturn,andthewiderinstitutional

context,

including

the

quantity

and

quality

of

government

support

to

business,

are

major

influences on how firms adapt to recession conditions, and their subsequent

performance.

Firmsresourcesandcapabilitiesmaybeexploitedtoincreaseoperationalefficiency,or

dynamic capabilities may be developed to explore new opportunities for revenue

generation. To leverage theircapabilities, firms implementavarietyof strategies, for

example,portfolio

strategy

(divestment,

acquisition,

alliance,

new

product

development),growthstrategy (forexample,consolidation,withdrawal, launchingnew

products, entering new markets), business strategy (for example, cost focus,

differentiationorhybrid)andfinancingstrategy(forexample,debtrescheduling,raising

equity). Strategies are implemented through a range of revenue generation and

efficiencyenhancing actions. Performanceoutcomes include sales, profit andmarket

shareachieved.


20/77

Market(anddegreeaffectedby

recession)

Industrycontext(anddegreeaffectedby

recession)

Government(extentofbailout)

Environment

Innovation/

exploration

Organisations

existingresources

andcapabilities

Organisations

dynamic

capabilities

Operational

excellence/exploitation

Capabilities

GrowthStrategy

(new

products/new

markets)

Portfoliostrategy(retrenchment,

divestment,acquisition,

jointventure,NPD)

Businessstrategy(cost,differentiation,

hybrid)

Financestrategy(loanrescheduling/equity

etc)

Strategies

Measurestaken(bottomlineefficiency,

costcutting,financing)

Measurestaken(topline revenue

generating)

Actions

Figure1AnalyticalFramework


21/77

12

Recessionsgenerate contradictory tendencies, some constraining firms fromachieving

theirobjectives,whileothersareenabling. FallingGDPexertsdownwardpressureon

consumer expenditure and confidence, with implications for business performance,

whileat

the

same

time

influencing

asset

prices

downwards,

which

is

enabling

for

resourceacquisition. Decliningaggregatedemandisalsolikelytoleadtobusinessexits,

particularly among new firms (Geroski et al. 2007), thereby enabling highermarket

sharesforsurvivingfirms. Bothprocessesconstrainingandenablingsurvivingfirms

occursimultaneously,butunevenly,duringrecession. Firmsexperience,andcontribute

to, these tendencies in particular ways through their resource acquisition and

mobilisation activities. There is no single recession effect for businesses, nor

consequentlyany

particular

best

way

to

adapt

applicable

to

all

businesses.

Successful

strategies to cope with recession are likely to be contextspecific, varying across

industrialandgeographicalsettings.

Marketsimpartpressureonfirmstoadapttochangingcircumstances,ortoriskdecline

andexit. Butbusinessesvaryintheir interpretationofmarketsignalsandexpectations

of stakeholders responses, including actual and prospective partners, competitors,

customers, suppliers, investors and Government, among others. Identification of

particularthreatsandopportunities,however,tellsusnothingabouthow firmschoose

toadaptorwhytheydosointhewaystheydo,orwhattheconsequencesofadaptation

are. Businesses always have some discretion regarding the strategies they adopt,

although the degree of choice is often severely constrained by resources or

circumstances (e.g.Whittington1989). Largerenterprises, forexample,mightpossess

greaterdiscretionconcerningstrategychoiceowingtotheirsuperiorresourcebaseand

higher resilience toenvironmental shocks. Firms takestrategicdecisionsaboutwhich

goodsandservicestoprovide(and,therefore,whichmarketstoenterorexit),andhow

toproduce them, setprices,andattractparticularkindsofcustomers. This is trueof

businessesduringrecessionsandinbuoyanttimes.

All businesses are involved in a network of relations with other stakeholders

competitors,

for

example

and

this

influences

business

strategy

and

performance.

Industryrecipesforaction,andmarketsizeandstability/volatility,forexample,influence


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13

managerial behaviour and its outcomes. Firms operating in markets demanding

frequent product innovation forexample,many consumer electronicsmarkets are

likely to facepressures to innovateevenduring recessions. Innovationoften requires

continuedinvestment

in

R&D,

training

and

intellectual

property

rights.

Firms

with

limited resourceswhoareunable tosecureadditional financemight find itdifficult to

undertakestrategiesinvolvingcostlyinvestment. Conversely,inpricesensitivemarkets,

firmsmust considerwhetherprice reductions,orpricemaintenance, ismore likely to

generate higher revenues, particularly where competitors are doing the same.

Recessionconditionsmight,ofcourse,stimulatesales forparticularkindsofgoods, for

example, where customers switch to lowerpriced providers in order to reduce

expenditure.Insolvency

services

firms,

for

instance,

might

increase

sales

as

the

number

ofbusinessexits rises anddemand for such servicesexpands. Recessions generate a

diversityofthreats,opportunitiesandbusinessresponses.

The performance consequences of strategic adaptation are similarly variable. Firms

adaptingquickerandbetterwithoutknowledgeofwhatconstitutesbetterinadvance

will be more likely to survive the recession and position themselves well for the

recovery. But, however firms choose to adapt during recession, their actions will

generate longerterm consequences. Cutting investment expenditure in order to

conserve resources, for instance, might ensure shortterm survival but may also

adversely affect firms ability to competewhen the upswing comes (Smallbone et al.

1999a). Alternatively,maintainingresourcesatprerecession levelsmight leadtoslack

capacity,excessiveoverheadsanddecliningprofitability.

4.THEBUSINESSSTRATEGYANDMANAGEMENTLITERATURE

Inthissection,wereviewtheacademic literaturefrombusinessstrategy,management

andorganisationstudiestoaddressthefollowingquestions:

How do businesses adapt to the competitive environment during difficult

economicconditionsinthewaystheydoandnototherwise?

Whydobusinesseschoosetoadaptinthewaystheydo?

Whatconditionsenable,orconstrain,particulartypesofstrategicadaptation?


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14

How do such adaptations contribute to short and longterm business

performance?

Thereare

alimited

number

of

studies

specifically

addressing

business

responses

under

recessionconditions,sotheliteraturesearchwasextendedtoincluderesearchonfirms

responding to environmental jolts such as market turbulence, hypercompetition,

secular industrial decline, and business turnaround. Adaptation to a changing

environmentisanecessaryconditionoforganisationalsurvivalunderbothrecessionand

buoyantconditions;failuretoadapt leadstoperformancedeclineandexit. Theremay

beusefullessonstolearnfromnonrecessionspecificsources.

4.1BusinessStrategy:GeneralConsiderations

Businessstrategyisessentiallyabouttwoquestions:whatkindofbusinessisthefirmin?

And,giventhischoice,howdofirmscompete? Strategicmanagementisconcernedwith

how firms generate and sustain competitive advantage in order to generate superior

profit. Indevelopingstrategy,firmsundertakethreesetsofactivities: strategicanalysis,

strategic choice and strategic implementation. Typically, businesses are reported to

assess their strategic position by: (a) scanning the environment for potentialmarket

opportunitiesandthreats:(b)evaluatingtheirstrategiccapability;and(c)assessingthe

enablersandconstraintsofstrategy. Firmsdifferinhowtheyundertaketheseactivities.

In large enterprises, strategic analysis, choice and implementation are often distinct

activities,carriedoutbydifferentpeople,whereas insmallfirms,asinglepersonmight

performallthree,oftenatthesametime(Curran1996;OGorman2006).

There are two mainstream schools of strategy in the contemporary literature: the

positioning school and the resourcebased view (RBV). The positioning school,

popularisedbyPorter (1980),views the firmasconcernedwithachieving strategic fit

withitsenvironment;thatis,withevaluatingthecompetitiveforcesoperatingwithinthe

environment(PortersFiveforces)toassesswhereandhowbesttocompete. IntheRBV

school, initiatedbyPenrose (1959) and laterdevelopedbyRumelt (1984),Wernerfelt

(1984),and

Barney

(1991),

afirms

competitive

advantage

lies

mainly

in

the

bundle

of

resourcesatitsdisposalandhowitcanstretchthesetoachievecompetitiveadvantage.


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15

Recentanalystshaveextended theRBVusing the conceptof dynamic capabilities to

refertothefirmsabilitytodevelopandextendresourcesandcompetencestoadaptto

achangingenvironment(Teece,etal.,1997;EisenhardtandMartin,2000;Teece,2007).

Inaradically

changing

environment,

such

as

the

current

recession,

the

concept

of

dynamiccapabilitiesmaybehelpful indevelopinga framework forunderstandingwhy

some firmssucceed,someekeout survival,and some fail. Thereare, therefore,dual

conceptsof strategic fitand strategic stretch,ormore colloquially lookingat the firm

from the outside in, or from the inside out. Both perspectives are important in

explainingbusinessbehaviour,includingadaptationunderrecessionconditions.

4.2Strategic

Adaptation

to

Environmental

Jolts,

Turbulence

and

Radical

Institutional

Change

Adaptingtoenvironmentalshocksisacapabilityallbusinesseshavetodevelopinorder

to survive. Environmental shocks,orjolts, reshape theopportunities and threats the

firm facesandare likely torenderexistingbusinessstrategies ineffective (Meyeretal.

1990). Differenttypesofenvironmentalshockcanoccurwithwhichbusinesseshaveto

cope;suchshockschangethelevelofenvironmentalmunificence,thelevelofresources

available inaparticularenvironment. Recession,anenvironmentoffallingGDP, isone

type of shock. Much strategy literature is concerned with strategic change in

circumstancesofenvironmentaljolts, turbulence, radical institutionalchange, industry

deregulation or hypercompetition. Although this literature does not always relate

specifically torecession,certain themesmayberelevant.GrewalandTansuhaj (2001),

for instance, show that strategic flexibility, the ability to respond respond quickly to

changingcompetitiveconditions(Hitt,etal.,1998)hasapositive influenceonbusiness

performanceafteracrisis.Otherssuggestthatdiscontinuouschangewithinanindustry

stimulates the formation of interorganisational relationships, promotes

experimentationwith new organisational forms and precipitates affiliations spanning

industry boundaries (Meyer, 1982). Interorganisational networks absorb uncertainty

arising from revolutionary change. Dixon et al. (forthcoming) discuss the dynamic

capabilities required to survive and succeed in a transition economy namely, the

interactions

between

exploitation

learning

(learning

to

do

things

better)

and

deployment

capabilitieswithin theorganisation,and the interactionsbetweenexploration learning


25/77

16

(creation, experimentation) and the search and selection capabilities required to

manage innovation routines. Theconceptof the ambidextrousorganisation (Heand

Wong, 2004; Raisch and Birkinshaw, 2008; Tushman and O'Reilly, 1996) may be of

relevancehere.

4.3StrategicAdaptationtoRecession

Strategicchangeisoftenacomplexprocess,involvingplanningbybusinessownersand

seniormanagers,andentailing longtermconsequences forbusinessperformance. In

hypercompetitive or crisis situations, however, shortterm considerations might be

dominant. Business restructuring in the form of replacement of managerial elites,

functionalreorganisations,

and

other

changes

to

internal

arrangements

are

often

a

precursorto,oraconsequenceof,strategicadaptationtorecession(Whittington1991;

GeroskiandGregg1994).

Recessionspresentbusinesseswithadilemma (Chastain1982;Deansetal.2009). On

theonehand,firmsexperiencepressurestocutcostsinordertomaintainsurvivalinthe

shortrun at the riskof reducing capacity to such adegree that the firm isunable to

adapt adequately when recovery comes. On the other, businesses might also face

pressurestomaintaingreatercapacity,andthereby incurhighercosts intheshortrun,

in order to retain the capability to adapt when the upswing comes and realise

opportunitiesforlongtermvaluecreation. Silberston(1982)distinguishesthestatically

efficient firm,onemaking themostefficientuseof resources ingivencircumstances,

with the dynamicallyefficient firm,onecapableof survivingchangingcircumstances.

Clearly,businessesmustbeabletobebothstaticallyanddynamicallyefficientiftheyare

toendure. Firmsmustbeabletocuttheirclothtosurvivepresentconditionswhileat

the same time continue to invest in business development if they are to sustain

satisfactory performance beyond the recession. So how, then, do businesses adapt

underrecessionconditions?

There are a number of approaches to explaining how firms adapt under recession

conditions.

One

view

argues

that

incumbent

firms

suffer

from

organisational

inertia,

which prevents them from adapting to new, hostile environmental conditions.


26/77

17

Alternatively,thepitstoptheoryofbusinessbehavioursuggeststhatinrecessionfirms

aremorewilling to innovate because the opportunity costs of not undertaking such

action are lower than duringmore buoyant times (Geroski and Gregg 1997). Failure

mightinduce

unsuccessful

firms

to

search

for

alternative

ways

of

doing

things

(Cyert

and

March1963). Businessesaremorelikelytohaveslackcapacityduringperiodsoffalling

sales, as resource stocks exceed current use. Under such circumstances, businesses

mightbring forward investmentand innovationplans to takeup the resource surplus

andbecause incentivestocontinuebusinessasusualarereduced. Ontheotherhand,

successalsocreatesorganisationalslack,generatingadditionalresourcesforinnovation

(BourgeoisIII,1981).

For simplicity, three types of business strategy are distinguished: retrenchment,

investment,andambidextrousstrategies. Itisworthnotingthatstudiestendtosuffer

fromsurvivorbias,thatis,theyreporttheperceptionsandactionsofsurvivingfirms;itis

unclearwhether, and how, these differ fromnonsurviving firms. The three strategy

typesarediscussedbelow.

4.4 RetrenchmentStrategies

Retrenchment strategies involve cutting operating costs and divestment of noncore

assets. In timesof recession,businesshorizonsoften shortenwithowners/managers

focusingon immediatesurvivalratherthanon longtermaims. Believing it iseasierto

reduce costs than generate additional revenue,many businesses choose to retrench.

Commentators report divestment of businesses, establishment closure, reductions in

workinghoursandemployment,expenditurecutsonawiderangeofactivitiesincluding

R&D,marketing andemployee training (Rones1981; Shama1993;Geroski andGregg

1997;MichaelandRobbins1998;DeDeeandVorhies1998).

Geroski and Greggs (1997) study of 600mainly largeUKmanufacturing and service

companies during the early1990s recession found that most firms adapted by

refocusingthebusiness,understoodlargelyintermsofcontrollingcosts,particularlyby

laying

off

labour

and

closing

establishments.

Expanding

or

reducing

product

lines

was

much lesscommon. Theauthorsargued that,during recession, firmshaveadditional


27/77

18

incentivestocutcosts,incontrasttocyclicalupturnswherethereislessincentivetodo

so because revenues are rising. Investment in plant and equipment declined but

investment in intangibles like training, R&D and advertising was affected less by

recession.The

study

provided

limited

evidence

for

the

pit

stop

theory

of

business

behaviour during recession: only a small number of businesses brought forward

investmentplansbecausetheyhadtheresourcesandtimetodoso.

Thebusinessesmostaffectedby recessionwereholdingcompanies, thosewithhighly

dispersedownershipstructures,andthosethatgrewunusuallyfastduringthemidlate

1980s. Interestingly,businessperformance rankingsdifferacross theeconomic cycle.

Prerecession

profit

performance

is

no

indicator

of

within

recession

or

post

recession

profit performance (Geroski and Gregg 1997), suggestingmarket selection pressures

operateonfactorsinadditiontoprerecessionprofitperformance. Previouslyprofitable

firmsmightexperiencespecificcostordemandshocksduringrecessionthatcontribute

to poor profit performance. Conversely, previous poor performers may adapt to

recessioninwaysthatenablethemtoincreaseperformance.

Innovationactivityisoftencutduringrecession. GeroskiandWalters(1995)foundthat

that innovation activity tends to vary over the business cycle, with fewer major

innovations and patents awardedduringperiodsof downturn. Businesses undertook

considerableorganisationalrestructuringtoo,although lessthanduringthe immediate

prerecession period which witnessed high levels ofmerger and acquisition activity.

Business expenditure on R&D in the advanced economies declined during the 1990s

recession, falling as a proportion of GDP in the years 199095 (OECD cited in Lord

Sainsbury2007). Insuchanenvironment,onemightexpecttheemphasistobeoncost

ratherthanqualitydriveninnovation,asusersplaceapremiumonlowcost(Leadbeater

andMeadway2008). Oneexampleisthelowcostairlinesthatemergedfromtheearly

1990s recession. Accenture (2003a) found that many UK companies followed the

conventionalwisdominrespondingtothedownturnof20001bycuttingcosts,delaying

investmentandretreatingtocoremarkets. But,theauthorsargue,thiswasamistake.

The

best

performers

in

the

period

following

the

early

1990s

recession

were

argued

to

be


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19

those experimenting with new business models, making strategic acquisitions, and

developingnewmarketorcustomerniches.

Studiesoften

provide

descriptive

data

on

firms

adaptations

to

recession

conditions

but

littleinsightintomotivationsfortheparticularadjustmentsimplemented,theconditions

thatenableorconstrainsuchadaptations,ortheimpactonperformance(e.g.Juddand

Lee1981;ChurchillandLewis1984;Barrett1990;Altany1991a,b;Sample1991;Shama

1993;Lansley1997;BeaverandRoss2000;Janoff2001;Cooke2002). Thesestudiesare

notwithoutmerit; it isamatterof thedepthof insight theyprovide. Description isa

necessary,butnotsufficient,condition forofferingapowerfulexplanationofhowand

whyfirms

adapt

in

the

ways

they

do

during

recession.

Description

alone

might

lead

casualobserverstobelieveallfirmsareabletoadaptinsimilarways. BoththeRBVand

positioningschoolswoulddisagreewiththisview,explainingbusinessresponsesunder

recessionconditionsintermsofresourcesandindustrystructuresrespectively.

Harrigan(1980)investigatedfirmsendgamestrategiesinsevenUSindustriesindecline

duringthelate1970s. Thestudyfocusedonhowbusinessescopeinanenvironmentin

whichfuturedemandisexpectedtobe lowerthancurrentdemandand,therefore,the

resale value of business assets is likely to decrease over time. Harrigan identified a

rangeofstrategiesvaryingintermsofthelevelofmarketsharesought,andthedegree

ofreinvestmentneededtomaintainaparticularstrategicposition. Strategiesinclude:

increasedinvestment,withtheaimofattainingmarketleadership;

holdingtheinvestmentlevel,tocontinuewithtacticsusedpreviously;

shrinkingselectively,torepositionthebusiness,byretrievingthevalueofsome

priorinvestmentswhilereinvestingelsewhereifnecessary;

milking the investment, to harvest the value of earlier investments,without

regardforlongrunpositioning;and

immediatedivestmenttorecoupassetvalue.

Endgame strategies were associated with various market characteristics, industry

structuraltraits,

the

needs

of

the

firm

exogenous

to

the

endgame

industry,

and

the


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20

firmsinternalstrengthsrelativetoindustryrivals. Businesssurvivalandsuccessrelate

tomatchingstrategy to the endgameenvironment. Pressuresonprice,capacityand

marginsvaryacrossdecliningindustries,asdothecustomerbase,technology,marketing

andcompetitive

response.

There

may

be

some

overlaps

between

firms

strategies

duringrecessionandendgamestrategiesindecliningindustriesbut,perhaps,thisshould

not be pushed too far unless recession pushes an industry into an endgame

environment. Otherwise, firms are likely to perceive the recession as a temporary

interruption toapreexistingdemand trend lineandbehavewithaview toexploiting

opportunities once recession passes. Business strategieswould then likely reflect an

understandingof the longertermopportunities likely tobecomeavailable rather than

necessarilypresupposing

demand

to

be

on

aterminally

downward

trajectory.

The business turnaround literature investigateshowbusinesses takeaction to arrest

performance decline and then improve (e.g. Hofer 1980; Slatter 1984; Robbins and

Pearce II1992;GrinyerandMcKiernan1992;Pearce IIandRobbins1993;Winn,1996;

Barker and Duhaime 1997). The bulk of this literature does not relate strategy and

performancetorecession,althoughturnaroundattemptsoftenoccurduringperiodsof

recession. Slatter(1984)reportsrecessionasthefifthmostcitedtriggerofdecline,out

of18discussed. Turnaroundsituationsvarywithregardtothenatureandextentofthe

performance decline, and the benchmarks against which decline is measured for

example, a firmspecific historical standard, or an industry or national benchmark.

Turnaround is also defined variably by analysts: as some specified increase in

performance relative to an historical, industrial or other benchmark within some

specifiedperiod. Studiestypicallyidentifyretrenchmentand/orinvestmentresponses

tosecuresurvivalandimproveperformance(e.g.RobbinsandPearceII1992;Denisand

Kruse 2000), although such attempts might fail (e.g. Slatter 1984; Pajunen 2008).

Reviewsoftheturnaroundliteraturesuggestthatretrenchmentisthekeytosuccessful

turnaround,eitherasastandaloneapproachorasaprecursor toa recoverystrategy

(Pearce IIandRobbins1993;Duhaime andBarker1997). Aquestionarisesas to the

relevanceof the turnaround literaturederived frompooradaptation toenvironmental

change

during

buoyant

conditions

for

business

adaptation

during

recession.

Arguably,

businessesare likely toadaptdifferently in recessionandbuoyantconditions,as they


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21

perceivemarket opportunities and threats differently. Buoyant conditionsmaywell

supportabroaderrangeofstrategiesthanrecessionconditions,wheremarketselection

pressuresarelessforgiving.

Insummary,retrenchmentstrategiesappeartobethemostcommonapproachadopted

bybusinessestodealwithrecessionconditions,especially intheshortterm.Lookedat

inapositivelight,thecurrentrecessionprovidesastimulusforfirmstoreexaminetheir

portfolios and focuson the core, aswellasgiving them agood reason for increasing

efficiency cuttingoperatingcostsanddivestmentofnoncoreassets. Lookedat ina

negative light, cost and assetcutting might be considered a kneejerk reaction to

adversemarketconditions, rather thanaproactive strategic repositioningof the firm,

andonethatweakensthecapacityofthebusinesstorespondwhenconditionsimprove.

There is some sensitivity to thevariable impactsof recessiononparticularbusinesses

and to the heterogeneityof business responses but beyond that, there isoften little

analysis elaborating why firms choose to retrench, the conditions enabling or

constraining retrenchment, or the connections between retrenchment and business

performance.

4.5InvestmentStrategies

Analysts have identified firms choosing to adapt during recession by pursuing

investmentstrategies. Incontrastwithretrenchment,suchfirmsperceiverecessionsas

opportunities to invest, innovateandexpand intonewmarkets inorder toachieveor

extend a competitive advantage during the recession and beyond. Many of todays

household names launched successful businesses during recessions. Rockefeller and

Carnegieestablished

dominant

positions

in

the

emerging

oil

and

steel

industries

during

the 1870s recession by taking advantage of new refining and steel production

technologiesandof theweaknessofcompetitors (BryanandFarrell2008),andEdison

established General Electric (Lynn 2009). Hershey developed their brand and

distribution advantages during the 189397 depression and Kelloggs grewoutof the

1920sdepression(Rumelt2008).Themotor,electricalandchemicalindustriesthatwere

crucialtopostwarBritish industrybecameprominentduringthe1930s. TheMicrosoft

andApple

corporations

were

both

founded

in

the

mid

1970s,

following

the

oil

crisis.


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22

Severalstudiesarguethatfirmsadapttorecessionconditionsbyimplementingbusiness

strategiescentredon investment, innovationandmarketdiversification,and thatsuch

strategieslead

to

higher

levels

of

business

performance.

Examples

include:

new

product

developmentand targetingnewmarketniches (Clifford1977;Hayter1985;Picardand

Rimmer1999); increasedmarketingspending (GoodellandMartin1992;Pearce IIand

Michael1997;Roberts2003;Srinivasanetal.2005;PearceIIandMichael2006);value

centric pricing strategies, whereby resourcerich firms emphasise quality and brand

rather than low prices to attract customers, or, alternatively, adopting predatory

pricingpolicies,tomaintainlowpricesinpricesensitivemarkets(ChouandChen2002).

Navarro(2005)

provides

examples

of

US

based

companies

implementing

counter

cyclical

strategiesregardinghumanresourcemanagement,capitalexpenditure,acquisitionand

leveraging macroeconomic risk. These studies provide descriptive data on firms

adaptationstorecessionconditionsbut, inmostcases, lack insight intowhybusinesses

adjustastheydo,orareunabletoexplainwhysuchstrategiesgeneratehigherlevelsof

performance. Chou and Chen (2002) are unusual in linking strategy under recession

conditionstothefirmsresources.Retailerswithlimitedresourcesweremuchlesslikely

tobesuccessfulineitherprice ornonpricesensitivemarkets.Pettigrew(1985)reports

that ICI sales rosesubstantially in theaftermathof the1973oilcrisis,asshortagesof

petroleumbasedrawmaterialsbroughtabouthigherprices.

Macrolevel,quantitativestudiesofassetpricesandquantities indicate thatquantities

varymore thanpricesover thebusinesscycle, includingduring recessionperiods (e.g.

Bhaskaret al.1993;Geroski andHall1995). This implies thatmost firms respond to

macroeconomicshockssuchas recessionbymaintainingprices,with theconsequence

thatquantitiessolddiminish. Forsomefirms,this is likelytotranslate into lowersales

and, in some cases,exit. Such studiesprovideusefuldataon firms responsesunder

recessionconditionsbut little insight intowhy firmschoose to respond in thiswayor

whetherpricemaintenanceisaccompaniedbyefficiencyenhancingmeasures.

Data

from

studies

of

firms

adapting

to

environmental

hostility

or

jolts

might

also

offer

pointers to how firms adjust to recession conditions. One study of 344 small


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independent US manufacturing firms found that business performance in hostile

environments defined as one threatening the viability of the firm was positively

related to an entrepreneurial strategic posture, an organic structure, a longterm

orientation,high

product

prices

and

aconcern

for

predicting

industry

trends

(Covin

and

Slevin1989).

Morerecentstudiesstresstheneedtoperceivetherecessionasanopportunity,nota

threat(Rumelt2008;WilliamsonandZeng2009). Thecurrentrecessionischaracterised

by its globalnature and the risk that companies inemergingmarketsmightbemore

nimble thanWesterncompanies inadapting,and thuswrestmarket shareaway from

incumbents.Williamson

and

Zeng

(2009)

maintain

that

akey

strategy

Western

businessesmightadopttoavoidthis isto focusondevelopingwhatemergingmarkets

dowellofferingvalueformoney. Theythereforerecommendthatcompaniesinvestin

researchaimedatproductorserviceinnovationthatoffersthesamefunctionalitybutat

lowercost.

In summary, the evidence on businesses adopting investment strategies to manage

throughrecessionispatchy. Suchstrategiesareriskyandmanybusinessesarelikelyto

be too preoccupied with shortterm survival to think about innovation and growth.

Investmentstrategiesrequireresourcesfinance,managerialskills,technicalexpertise

andfirmswithlimitedresourcesarelessabletoimplementthem.Nevertheless,history

hasshownthatcompaniescansecurecompetitiveadvantageduringrecessionsthrough

innovationinproducts,servicesandbusinessmodelsandbyenteringnewmarkets. But

studies often make little attempt to explain why particular firms adopt investment

strategiesortoelaboratetheconditionsthatmakesuchstrategiespossibleor, indeed,

the potential risks of attempting such strategies. Such accounts imply that where

businesses adopt investment strategies, success necessarily follows. The process of

implementing investment strategies and achieving successfuloutcomes is likely to be

much more complex than this suggests. Moreover, such prescriptions ignore the

externalities issue: if all firms adopted investment strategies,would all succeed? In

times

of

recession,

when

many

customers

trade

down

to

cheaper

products,

market


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conditionsmaynotsupportawiderangeofnewinnovationsoralargenumberoffirms

seekingtodiversify.

4.6Ambidextrous

Strategies

Ambidextrousorganisationscombine incrementalchangewithdiscontinuous change,

ortheexploitationofexistingresourcesto improveefficiency,withexplorationofnew

sourcesofcompetitiveadvantageand innovation (TushmanandO'Reilly,1996;Heand

Wong, 2004; Raisch and Birkinshaw 2008). Such organisations are said to combine

retrenchmentandinvestmentstrategies. Indeed,itislikelythatmostfirmsadaptunder

recession conditions through judicious cost/assetcutting behaviour and through

selectiveinvestment

in

product

innovation

and

market

development.

Accenture

(2003b)

reportedthatthiswasrelatedtowhatbusinessesdoduringgoodtimesaswellasduring

recession. Firms are likely to need to combine increased efficiencywith increased

innovation inordertopositionthemselvesforanupturn. Costcuttingalonecan leave

businessesunabletotakeadvantageofanimprovementintradingconditions. Choosing

theappropriate investments tomakeandcosts tocut takesonadditional importance

duringrecessionwhenmarketselectionpressuresareattheirmostsevere. Geroskiand

Gregg (1994, 1997), for example, identified firms implementing a wide range of

investmentandcostcuttingactivities.

Whittington (1989), in case studies of eight large enterprises in the UK domestic

applianceandofficefurnituremanufacturing industries,foundthatcompaniesareable

toexercisestrategicchoiceevenduringrecessionperiods. Firms,especially largeones,

possess the resources to shape theirenvironments and to choose a strategy likely to

bringsuccess inthatenvironment. Recession imposesnosingle logicofcost orasset

reductionon businesses. Case study companies responded to recessionwith varying

mixes of costcutting, divestment, capacity expansion andmarket diversification, and

achieved varying levels of performance. Effective response to recession depends on

firms adapting inways appropriate to their particular circumstances.Not all options

wereavailabletoallbusinessesandsuccessfulstrategiescannotbeimitatedeasily. The

most

successful

companies

maintained

pricing

policies,

stuck

to

the

knitting

regarding

product rangebut investedheavily inproductioncapacity,hadstrong leadership,high


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management morale and unusual freedom from parent companies and external

shareholders. Stable top management was not necessary for success. Where

managementswerechanged,theeffectsweregenerallybeneficialalthough incumbent

elitescan

often

reform

themselves

effectively.

Change

does

not

necessarily

work

and

shouldbedonequickly.

In a separate survey of 103 UK manufacturers in eight sectors during the 1980s

recession, Whittington (1991) identified business strategies and their performance

outcomes. The most commonly reported actions were the introduction of new or

improved existing products and putting pressure on suppliers. Using managing

directorsand

chairmens

responses

to

18

strategy

elements

on

a5point

Likert

scale,

fivedistinctbusinessclusterswereidentified. Thesewere:

themoderateproductdiversificationcluster,the largestgroup,protectedtheir

resourcebasewhileundertakingsomemodestpreemption inexistingmarkets

anddiversificationintoothers;

the protective diversification cluster tended to both protect and preempt,

stressing process innovation, introducing new products, improving existing

productsandincreasingexports;

therationalisingdiversificationclusteremphasisedreducingworkingcapitaland

manpowerbutcombined thiswithanemphasison improvingexistingproducts

andintroducingnewones;

the rationalising focus cluster stressed vertical disintegration, divestment,

eliminating product lines, and cuts in manpower and working capital; these

activitiesbestresembleretrenchmentstrategies;

the conservative rationalisers, focusedoncuttingbackcapital investmentand

demonstratedanunwillingnesstochangethebasicscopeofexistingactivities.

Interestingly,no clear significant relationshipswere foundbetween recession strategy

typesandrecoveryperformance. Thishighlightsthediversityofbusinessresponsesto

recessionconditionsandtheuncertaintyofsubsequentperformanceoutcomes.


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Thereissomeevidencethatfirmsadaptstrategyacrossthebusinesscycle. Inastudyof

the US oildrilling industry, Mascarenhas and Aaker (1989) found that, initially,

businesses continue business as usual, retaining current assets, employment levels,

investment,overhead

and

activities.

As

recession

deepens,

many

businesses

decide

to

implementmajorcost andassetcuttingresponseswith theaimofrefocusingoncore

business. Ifsuchmeasuresfailtoreviveperformance,moredrasticactionwillbetaken.

DuPont reportedly ratcheteddowncapitalexpenditure in2001as recession tookhold

andusedtheincreasedcashreservestotakeadvantageofafallingstockmarkettomake

seven strategiccompanyacquisitions,mostlyatbargainprices (Navarro2005). These

acquisitionsprovided valuablenew technologies topenetratenewgrowthmarketsas

recessionturned

to

recovery.

There

is

no

guarantee,

of

course,

that

fundamental

reform

willsucceed;businessfailureaswellasturnaroundisapossibleconsequenceofstrategic

adaptation (Pajunen2008). Thissuggeststhatfirmsshouldmonitorthebusinesscycle

closely and be prepared to adopt different strategies during boom and recession

periods.

Kksalandzgl(2007),inastudyof172Turkishcompanies,foundthatfirmsfocusing

R&Donproductdevelopmenttocapturenichemarkets,andtechnologyandproduction

methods that save costs,performmost successfully during a recession. Halls (1980)

survey of 64 large US corporations in eight industries in the late1970s in hostile

environments, found thathigh levelsofbusinessperformanceweremost likely tobe

achieved by companies able to achieve either the lowest cost ormost differentiated

position. Survival is possible for those companies reducing asset commitments into

nichesandundertakingmeaningfuldiversification.

Preemptiveactionmightenablebusinesses tocopebetteronce recession starts than

reactingoncedifficulteconomicconditionshavebegun tobite (e.g.BigelowandChan

1992). AstudyofNokia reported thesuccessfulaction takenduringbuoyant times in

anticipation of expected industry changes (Carral and Kajanto 2008). The company

disposed ofmany noncore activities in order to concentrate on themore lucrative

mobiletelephone

market

in

the

late

1990s.

The

implication

of

the

study

is

that


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businessesshouldalwaysbelookingaheadtoanticipateenvironmentalchangesthatwill

impactuponthem,andtakeactiontoadaptbeforeperformancedeclines. Pearceand

Michael (1997), ina studyof118USmanufacturersduring theearly1990s recession,

foundthat

firms

prior

marketing

strategies

influenced

the

extent

of

the

economic

impacton thebusinessand the likelihoodofa timelyand full recovery. Theysuggest

firmsmaintainmarketingactivitiesinthecorebusinessand,duringpeakperiods,expand

cautiouslywithanemphasisonmarketingefficiency. Planning for recessionmightbe

thebestwayof adapting to itonce it arrives,andof facilitating survival andpossibly

growth.

Insummary,

ambidextrous

strategies

seem

to

offer

firms

both

ashort

term

route

to

survival,aswellasalongertermopportunitytosecurecompetitiveadvantage. Neither

retrenchmentnorinvestmentstrategiesalonecanberegardedasuniversalpanaceasfor

recession conditions. Thejudicious combinationofexploitation (improvingefficiency)

with exploration (seeking new sources of competitive advantage) appears to be an

importantstrategyinrecession.

4.7 Business Size as an Influence on Strategic Adaptation to Difficult Economic

Conditions

A firms size can affect both the nature of external environmental impacts and the

mechanismsthroughwhichtheyaretransmitted,aswellasthefirmsabilitytorespond

(Curran, 1996). Themore limited resource baseof SMEs comparedwith larger firms,

particularly intermsoffinanceandmanagement,canaffecttheirabilitytoscan,analyse

and respond tomajor environmental change (Smallbone et al, 1999b). Business size

shapes perceptions of external pressures, threats and opportunities, the business

strategies adopted, and the levels of performance achieved (Curran, 1996).

Interestingly, some studies suggest that small businesses are less likely to perceive

negativeimpactsonperformanceduringrecessionperiods(Shama1993;Latham2009).

Large companies tend to have greater scope for strategic choice because of their

superior resources to scan the environment for potential market opportunities, to

develop

a

wider

range

of

capabilities

and

also

facilitate

greater

resilience

to

withstand

difficulttimes.Thisparticularlyappliesinthecaseofmultinationalfirms,withoperations


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spreadacrosscountries. Smallbusinessesareperhapsmorevulnerabletomarketshifts

asthey lackresourcesandusuallyoperatewithnarrowerproductportfolios,rendering

thematgreaterriskfrom industryrelateddownturns;yetsomestudies findthatsmall

businessesreport

more

limited

impacts

than

larger

enterprises

(e.g.

Shama

1993).

Small

businesses are, therefore,more likely to react to environmental shifts than be in a

position to direct them. But, conversely, small firms often possess the flexibility to

adjust resource inputs, processes, prices and products quickly in response to

environmentalshocks,acrucialcapabilitytofacilitatebusinesssurvival(e.g.Reid2007).

Small firms might also be more willing to engage in risky investment/innovation

behaviour to improve performance because they realise that the current successful

situationcannot

continue

indefinitely.

Latham

(2009),

in

astudy

of

US

software

firms

during the 20013 downturn, found that startup firmsweremuchmore likely than

larger businesses to pursue revenuegenerating strategies as means of coping than

strategiesentailingcostreductions. Suchaview isconsistentwiththewider literature

thatstartupsoftenseektopositionthemselvesinparticularmarketniches.

Within the small business population, there are likely to be variations in how firms

adapt,andtheperformanceoutcomesthatarise fromadaptation (Fuller1996). Some

willadaptproactivelythroughinvestment,innovationandmarketdiversification;others

will adapt though retrenchment; yet others will combine both approaches. Other

typologiesof actionshave identified costand/orprice reduction responses (European

Commission 2004). Smaller firms differ from corporate organisations because of the

particularvulnerabilityofnewandyoung firms toexternalshocks, insufficient time to

accumulate resources to be resilient, differences in financing which increases SME

dependenceonbanksandthetypicallyemergentformsofstrategicadjustmentinsmall

businesses.

Insummary,althoughargumentscanbepresentedtodemonstratethatsmallfirmsare

more likely to suffer during recession, there are counterarguments and, moreover,

business size is only one influence upon performance under recession conditions.

Industry,

geography

and

other

factors

also

play

a

part.

Despite

their

limited

resources,

smallfirmsareoftenabletochartapaththroughdifficulteconomictimesthatenables


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them tosurviveandperhapsevengrow. Weshould,perhaps,bewaryofclaims that

recession has a singular effect on either small, or large, enterprises. Organisational,

market and other environmental characteristics all influence business behaviour, but

agencyfactors

are

crucial

too.

How

business

owners/managers

choose

to

address

the

opportunitiesavailable,anddealwiththethreatsposed,makesanimportantdifference.

4.8InternationalExperience

Inthissection,weconsider internationalcomparisonstoexamineexperienceofcoping

withdownturn inother countries;we focuson JapanandRussia,bothofwhichhave

experiencedprotracteddownturns inrecentyears. Afterseveraldecadesofeconomic

prosperityafter

1945,

the

Japanese

economy

entered

aperiod

of

stagnant

economic

growth during the 1990s, averaging only 1.5 per cent annual growth, and the first

sustained deflation in an industrialised nation in the postwar era (Kuttner and Posen

2001). GDP declined during the late1990s before returning to growth until recently

(OECD2008). GDPbegantodeclineagainin2007,fallingatanannualisedrateof13per

cent during the fourth quarter of 2008, and is predicted to fall more than other

advancedmarketeconomies in the current crisis,with an estimated 6.2 per cent fall

expected inGDPduring2009 (IMF2009a). During the late1990s JapaneseandAsian

economic crisis, some argued for a reflation of the Japanese economywhile others

argued that structural reform was necessary first. Various Government policies to

stimulate aggregate demand, including increases in themonetary base, low interest

rates,bailouts and nationalisationof banks,direct government lending to businesses,

and increases ingovernmentspendingduringthe late1990sareargued tohave failed

andtohaveexacerbatedfiscalproblems(Powell2002).

DataonJapaneseenterprisessuggestsanumberofchangeshavetakenplaceduringthe

protracted stagnation. These include: a decline in the roleof bank financing and an

increasedrelianceonnonbankfinancingforkeiretsuenterprises;changesinownership

structure towards armslength foreign and domestic investment, entailing pressures

towards shareholder valuemaximisation; the dissipation of traditional buyersupplier

ties;

and

changes

in

informal

ties

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