We have a lot of signs that we are in, or on the edge of, a seriously long and painful recession.  According to Merrill Lynch today (read report here) the S&P 500 was down 8.7% in June, down 18.3% from the October, 2007 peak. GM is at a 53 year low, and swap spreads price in (for both it and Ford) a 70% probability of bankruptcy in 5 years – 30% in one year.  Home prices nationally are down 20%, and there is no visibility when the decline will stop.  All the major banks are at multi-year lows due to the crisis in mortgage-backed securities.  For the first time ever, the Conference Board survey showed more people expect their incomes to decline than there are people who expect an income increase in the next 6 months.  Oil and gasoline prices are at record highs.  The dollar is at multi-year lows compared to other currencies and fears of inflation are keeping bonds from increasing in price.

Otherwise, everything’s great!

So, what are your plans?  Do more, better, faster and cheaper?  Often, the first thought is to cut resources.  Cut back and "wait it out."  Hope that you can survive the recession, and live to compete again "when things return to normal."  But that approach is very likely to be your end.  You may not survive the recession.  If it lasts longer than anticipated, or is deeper than anticipated, you could well run out of resources and that’s that!  But, even if you do survive, recessions do not end by "things returning to normal."  Recessions end when the economy changes creating more growth.  After all, recessions are about periods of negative growth – about economic stalls – and they end when something comes onto the landscape allowing growth to return.

It is during recessions that new products have their greatest likelihood of success.  Examples: 

• in the 1974 recession Japanese auto manufacturers made their great launch in the USA as they positioned their smaller cars as a good replacement for quality-short, high cost American made cars.  GM, Chrysler and Ford never fully recovered and have lost market share ever since.
• in the 1991 recession many data center budgets were cut.  When budgets returned computer usage switched to PCs – leaving mainframe and mid-range manufacturers in decline.  This change eventually wiping out DEC and Wang – and caused IBM to convert into a services company.
• in the 2001 recession companies and individuals stopped magazine and newspaper subscriptions.  As we moved into the mid-2000s people turned to the web for news and now many traditional publishers are in deep financial trouble.

Many companies retrench competitively during a recession.  They try to Defend & Extend their old positions while waiting for the good old days to return. They blame the recession on external events (like oil prices or government actions) and think that the end of the recession will put them back in the same competitive position they were in before.  They try to maintain the business while waiting for better days.  But that’s not how the world works.  While they are maintaining, other competitors are gaining ground!

The economy does not return to growth magically.  It returns based upon new, more productive products entering the marketplace.  During recessions is when customers are incented to try new technologies and products to see how they perform.  They switch to products that may have less capability, but are less costly, and then realize they perform well enough to keep using them.  Simultaneously, the greater use of these new products allows them to develop into better products, eclipsing older products and technologies.  What might have been a "worse" product at the recession’s outset, but cheaper, becomes better and displaces the former product by recession end.  Think about hybrid or fuel cell cars today.  Or web conferencing. 

Great companies do not try doing more of the same, but cutting costs, during a recession.  Weaknesses which were starting to show up become full-blown breakdowns in a recession.  Customers hurt by the recession no longer will pay for the high cost of the product or service and start searching for alternatives.   They don’t stick on the same product, but become adopters of alternative platforms.  When the recession ends, they are converted and never go back to the old technologies and products, allowing old competitors to fall into the whirlpool.

As you enter this recession, what are you doing to Disrupt your Success Formula?  How are you attacking Lock-ins?  What White Space do you have to develop new solutions that can pull you out of the sales funk?  It may feel uncomfortable at a time of struggling sales to do new things – but now is when it is most critical to move beyond Lock-ins.  Those products which looked less capable, but offered 80% of the traditional product at half the cost are the ones most valuable in a recession.  Those customers who you could ignore during rapid growth due to their limited loyalty are the ones at the front edge of alternatives who can be most insightful about what it takes to succeed in the future.  Competitors that were leaders in old technologies can be undercut with new products or services that provide new solutions while saving money – making them vulnerable while you bring new products to market.

During recessions "Creative Destruction" is high.  Becoming a better, stronger company does not mean cutting costs and surviving.  Coming out of a recession stronger requires developing a focus on the future – one unencumbered by your old Lock-ins and Defend & Extend practices.  Then figuring out how to undercut competitors by using new solutions for which they are unable to react.  Disrupt your thinking about what works, attack Lock-ins and become committed to testing new solutions.  And set up White Space to figure out the technologies, products and services which will allow you to grow again.

Recessions are not pleasant.  But Phoenix Principle companies can use them to better position themselves for future growth.  And in the process slingshot past long-standing competitors who are less willing to Disrupt and use White Space.