SOURCE: The Boston Consulting Group

The Boston Consulting Group

June 17, 2009 09:48 ET

Today's Business Leaders Should Learn From Companies That Outperformed During the Great Depression, Says Boston Consulting Group Report

Analysis of Depression-Era Winners -- Such as P&G, IBM, GE, DuPont, and Even GM and Chrysler -- Reveals What It Takes Not Only to Survive the Downturn but to Thrive in the Upturn

BOSTON, MA--(Marketwire - June 17, 2009) - Business executives today should learn from the companies that emerged from the Great Depression in a much stronger competitive position, according to a new report by The Boston Consulting Group (BCG).

Most companies performed badly during the Depression, but some fared far better than their peers. To understand what drove industry-beating performance, BCG studied the companies that performed relatively well. The firm analyzed the shareholder value performance of about 140 companies representing nearly 80 percent of the New York Stock Exchange's market capitalization and identified about 30 outperformers based on cumulative total returns from the market's 1929 peak to its 1936 peak.

Daniel Stelter, global leader of BCG's Corporate Development practice and a coauthor of the report, "Green Shoots, False Positives, and What Companies Can Learn from the Great Depression," said there is much that today's top managers can learn from the Depression era's stars: "Companies that succeeded did so because they undertook a set of bold and decisive moves -- and although they may have had some good luck, it is hard to argue that they did not earn their good fortune."

As the authors acknowledge, history is written by the victors. But survivor bias notwithstanding, the report (part of BCG's ongoing "Collateral Damage" series of papers on the current downturn) describes in detail the stories of six companies that used the crisis to fundamentally improve their competitive position: General Electric, IBM, Procter & Gamble, DuPont, and -- perhaps ironically given their current struggles -- General Motors and Chrysler. "We believe the lessons are just as relevant today as they were nearly 80 years ago," said Stelter.

General Motors: An Early and Decisive Response to Cut Costs and Refocus the Product Range

Similar to today, the automobile industry was among the most adversely affected in the Great Depression. Half of all automakers closed down. Yet two companies managed to thrive: GM delivered a profit in every year of the Depression and Chrysler showed a loss in only one year. The actions taken by the two companies during this period strengthened GM's position as the market leader and propelled Chrysler into second place. In contrast, inaction and some poor choices significantly hurt Ford Motor Company's position and permanently damaged the smaller competitors in the auto industry. So what did GM and Chrysler do right?

GM was quick to mothball plants and lay off workers in 1930, rapidly scaling back production in its middle-market and expensive brands and driving a one-third reduction of the breakeven point on its lower-end Chevrolet brand. Limited backward integration kept fixed costs low and transferred risk to suppliers, allowing a quick scaling down of production. GM maintained a policy that no more than 33 percent of parts would be manufactured internally. It also used the same engine and parts across different brands to further reduce inventories and create flexible capacity. At the heart of GM's success was its decision to realign its product offering to fit the needs of a consumer base with less money to spend -- "a car for every purse." It expanded aggressively into the low-priced car market by shifting production to Chevrolet, its high-volume discount brand.

Chrysler: From Start-up to "Big Three" Through Efficiency and Innovation

Like GM, Chrysler -- a start-up until it merged with a larger company (Dodge) in 1928 -- eschewed backward integration, enabling it to remain flexible when the Depression began and to cut costs quickly. But what truly differentiated Chrysler was its focus on cost reduction through efficiency. Chrysler realized a 50 percent increase in production efficiency, which gave the Plymouth, its recently introduced discount brand, the highest unit profit of any auto brand in the 1930s. The company also correctly predicted that the road expansion program undertaken as part of the New Deal would lead to greater demand for faster, more powerful cars. The carmaker had the courage to continue to invest in R&D during the tough times, becoming the first manufacturer to use a wind tunnel to design more aerodynamic cars. Its innovative "airflow" design and semi-unit body construction used for building faster cars became the industry standard.

General Electric: Began Strong, Finished Stronger

Going into the Great Depression, GE was already a thriving company. However, as the largest player in its industry, GE quickly suffered the full brunt of the downturn. When sales dropped off in 1930, the company was quick to respond by cutting costs and reducing excess capacity, but it did so in a well-thought-out and disciplined fashion. To retain as much of its talent as it could and maintain its competitive advantage in the long term, it shortened the workweek, cut wages, and shifted skilled employees to lower-skilled jobs rather than lay them off. Perhaps most pivotal to its long-term success was its sustained investment in innovation. Although GE's management felt obliged to cut R&D spending in half between 1930 and 1933, it cut less than the company's competitors did. And after 1933, it increased R&D every year for the remainder of the 1930s. This greater commitment to innovation positioned GE to benefit from New Deal government spending and laid the groundwork for later successes in a variety of fields.

IBM: Bold Moves by a Smaller Company

Much like GE, IBM was in a sector hard-hit by the Great Depression. Thomas Watson, IBM's president, realized the significant potential for growth in his new industry. Assuming correctly that the business machine market would continue to grow despite the economic downturn (because companies would seek efficiency improvements during tough times), Watson made two fundamental decisions. First, IBM would maintain its production capacity and not lay off workers. Second, it would increase its investments in innovation. Watson used mergers and acquisitions to increase innovation capacity, acquiring three companies between 1930 and 1933 -- notably Electromatic Typewriters, which provided IBM with the technology to develop the electric typewriter. At the same time, when the opportunity arose, Watson divested the company's weighing-scales division. IBM vaulted from fourth position in the market before the Great Depression, with 11 percent of market share, to a close second (behind Remington Rand), with 22 percent of market share in 1939.

Procter & Gamble: Relentless Expansion

Unlike capital goods and business machines, the categories in which P&G operated remained relatively resistant to the Depression in terms of sales. P&G was able to continue to increase both sales and profits, widening the lead over its closest competitor. P&G identified two key opportunities. First, competing brands were advertising less, so P&G was able to increase advertising spending to gain share. Second, P&G identified several gaps in the market and, with a strategy of acquisition and innovation, moved to fill them with new products. And at a time when competitors were putting less marketing and other support behind their products, the cost of P&G's strategy was relatively less than it would have been under normal business conditions. Leveraging developments in the chemicals industry, P&G introduced the first synthetic detergent in 1933, the first synthetic shampoo in 1934, and the first liquid oral dentifrice in 1938. All of these products were successful -- but they were also precursors to many products launched in the 1940s and 1950s, such as Tide and Crest, two of the most successful brands in the company's history.

DuPont: Rapid Innovation

In the years before the Great Depression, the U.S. chemicals industry had experienced a period of innovation and success. Much of that success continued through the 1930s, but DuPont significantly outperformed the industry, increasing its profits by 60 percent between 1929 and 1937. Rather than cut back in response to the Depression, DuPont expanded. With R&D budgets at most companies being cut and the rate of new patents shrinking nationally, DuPont reoriented its research program to focus on innovations with a near-term payback. Investment in R&D led directly to the introduction of neoprene in 1931 and nylon in 1939, giving the company a first-mover advantage with two of its most successful products for decades to come. DuPont was also one of the first companies to introduce an acrylic glass product (Lucite), launching it in 1936. With sales falling 50 percent between 1929 and 1933, continuing to increase R&D was a risky decision, but it paid off quickly. In 1937, 40 percent of DuPont's sales were of products that had not existed a decade earlier.

Lessons for Today's Executives

The success stories of these six companies and others that outperformed during the Depression offer important lessons for today's business leaders, the BCG report argues. Among them:

1. Control costs: cut costs early and decisively, strengthen the core, increase flexibility, and protect cash. Aggressive cost cutting and tight cost management are obviously crucial in a recession. However, the first lesson from the Great Depression is that it is not enough to cut costs. Well-managed companies also use the opportunity to strengthen operations, variabilize cost structures, and reduce breakeven levels. For example, GM and Chrysler successfully used external vendors to strategically manage costs, and were able to significantly cut breakeven levels through improvements in production efficiency. Maintaining a healthy balance sheet, a good cash position, and access to credit are also preconditions for pursuing the winning strategies of past recession champions. All of the winning companies BCG analyzed were able to succeed only because they managed to secure their financial fundamentals.

2. Protect revenues: reprioritize the portfolio in line with changing preferences, review marketing carefully, capitalize on government spending, and accelerate product launches. The 1930s saw consumers trading down heavily. Companies that were able to shift to lower-priced, better-value product offerings won disproportionately. Those that anticipated and capitalized on government spending (including New Deal programs such as the Tennessee Valley Authority and the Rural Electrification Administration) also saw outsized revenue gains. During downturns, companies tend to put the brakes on product development, believing that the upturn will be a safer time to launch new products. Many of the winners BCG studied -- such as IBM, GE, and P&G -- successfully launched new and better products during the Great Depression, gaining share at a lower cost and then benefiting in the upturn as competitors struggled to catch up.

3. Invest in the future: commit to R&D and keep an eye out for value-adding M&A. Recessions, though difficult, do eventually end. Successful companies go beyond the necessary short-term measures (conserving cash, cutting costs, and protecting revenues) to invest in the future. The successful investments made by companies such as DuPont, GE, and Chrysler in the 1930s differentiated them from their competitors for several decades to come. Even more important, innovation was the catalyst for periods of renewed growth. Several of the Great Depression winners proved that with competitors weak or failing, stronger players can take advantage of opportunities to make acquisitions that are more affordable and more likely to create value.

The report notes that all the companies that emerged as winners from the Great Depression had one thing in common: they used their strength to compete on the most critical success factor in their industry. Once companies have done their homework and determined what is required to ensure survival, they need to pick their battles and invest heavily in a limited number of initiatives, say the authors. Expending scarce resources across too many initiatives risks wasting a unique opportunity.

"Companies today are facing similar if not quite such dramatic challenges: rapidly declining demand, a strong tendency toward trading down by consumers, fundamental shifts in industry structures, increased protectionism, and a stronger government role," said David Rhodes, global leader of BCG's Financial Institutions practice and coauthor of the report. "Companies that act quickly and decisively to control costs and protect revenues in a demanding environment will succeed today and lay the foundation for long-term success."

BCG's "Collateral Damage" Series

Based on its long history of helping companies survive and thrive during global economic downturns, BCG created its "Collateral Damage" series, which identifies the "new realities" of a world in crisis. The series is providing a big-picture analysis of the crisis as it evolves in different regions, countries, and sectors. It offers senior executives practical guidance for protecting their companies from the worst of the crisis and preparing them for economic recovery.

Current titles in the series include:

-- "Collateral Damage: What the Crisis in the Credit Markets Means for Everyone Else"

-- "Collateral Damage, Part 2: Taking Robust Action in the Face of the Growing Crisis"

-- "Collateral Damage, Part 3: Asia, Advantage, and Action"

-- "Collateral Damage, Part 4: Preparing for a Tough Year Ahead: The Outlook, the Crisis in Perspective, and Lessons from the Early Movers"

-- "Collateral Damage, Part 5: Confronting the New Realities of a World in Crisis"

-- "Collateral Damage, Part 6: Underestimating the Crisis"

To receive a copy of the report or arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.

About The Boston Consulting Group

The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients in all sectors and regions to identify their highest-value opportunities, address their most critical challenges, and transform their businesses. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 66 offices in 38 countries. For more information, please visit www.bcg.com.