Learning from companies that thrived after the Great Depression

BOOK REVIEW: Accelerating Out of the Great Recession: How to Win in a Slow-growth Economy By David Rhodes and Daniel Stelter…

BOOK REVIEW: Accelerating Out of the Great Recession: How to Win in a Slow-growth EconomyBy David Rhodes and Daniel Stelter; McGraw Hill, $22.95

HISTORY HAS much to teach us if we look closely enough at the parallels. Much of this well-researched book by two senior partners of the Boston Consulting Group looks at the companies that thrived during or just after the Great Depression of the 1930s. And there are clear lessons for today’s managers.

Ironically, given its perilous state, the US auto industry provides some of the best examples of how to thrive in a downturn.

In the Great Depression, General Motors, for example, acted decisively to savage its cost base, allowing it to cut prices by as much as 70 per cent on its top-of-the-range cars. The company used the same engines and parts across models to further reduce inventories and create flexible capacity. It expanded aggressively into the lower end of the market.


At the heart of the strategy was the idea of aligning its product offering to a consumer with less money to spend. As a result, GM stole market share and achieved higher margins than Ford on similar products.

Chrysler, meanwhile, focused its attention on improving efficiency on its production lines. It also kept an eye on the longer term, investing in research and development. The New Deal, which included a nationwide highway expansion programme, would, it correctly concluded, create a new demand for more powerful cars which it quickly brought to market, stealing a march on competitors.

Indecision and inflexibility at Ford, on the other hand, meant it lost sales and market share that was to affect it for years after.

One of the central tenets of this book is that hunkering down to ride out a recession is not an option for management.

Moreover, the prospects for growth anytime soon in the world economy are slim, according to the authors, who paint a rather depressing picture of the aftermath of the financial crisis. Consumer over-indebtedness in many global economic powerhouses, such as the US, will reduce demand as deleveraging occurs. China alone cannot stimulate an economic recovery.

In this context, the first thing management should consider is defending their firm’s position, the authors advise. Managing cashflow carefully and negotiating with suppliers are priorities. And while the climate might be a good opportunity to invest, this should only be done if the cash position of a company is stable.

Costs should be eliminated wherever possible. But in reducing payroll the focus should be on cutting the overall overhead while retaining talent – so wage cuts should be favoured over layoffs. Once costs are reduced, prices should be brought down to match consumer expectations.

The authors are not slow to derive inspiration from the past.

Take IBM for example. In 1929 only 5 per cent of business accounting functions were automated and its then president, Thomas J Watson, thought the increasing complexity of business functions would make business machines indispensable.

Automation also equated to cost reduction, a key requirement in the Great Depression. So while sales of its other products declined, IBM accelerated the development of a state-of-the-art accounting machine which proved a hit. It also offered a lease option on the machines as well as outright purchase, thus aligning itself with the position of capital-starved customers.

Then there are times when you need to take the fight to competitors. McDonald’s, for example, ramped up its new store openings in the US by more than 50 per cent in the recession of the mid-1970s while its arch-rival Burger King was slowing openings due to the caution of its new owner, Pillsbury. This gave McDonald’s an enduring competitive advantage.

Management should also be attuned to new markets. Countries once seen as sources of cheap labour are themselves now emerging as consumer markets and these will be among the few growth areas in the years ahead.

In this vein, GE is pioneering what it calls reverse innovation where the firm’s units in emerging markets drive innovation initiatives locally before they are disseminated to developed markets – a globalisation strategy in reverse.

A further challenge for management is adjusting to the greater role government will play in business. Executives will have to put more emphasis on government relations to influence regulation and the scope of future stimulus programmes. The social contract may be on the way back again with workers poised to regain an influence last enjoyed more than 20 years ago.

If politicians and workers grow in influence in the slow growth era that the authors predict, the big casualty – at least in the short term – will be shareholders. Even Jack Welch, the well-known former chairman and chief executive of GE, told the Financial Times recently that “on the face of it, shareholder value is the dumbest idea in the world”.

In the new era, Rhodes and Stelter conclude, managers will need to find a balance between shareholders, customers and employees to find a more sustainable formula for success and this could be one of the most positive outcomes from the Great Recession.

Frank Dillon is a freelance journalist and media lecturer