Media Offense-Defense Combo Works Best Against Economic Headwinds

Before Labor Day, both JP Morgan Chase and KPMG looked into the question of whether the country is headed into an economic downturn within the next year. Chase’s models put the chance at less than 50%. But they note that “volatility and significant corrections in the stock and bond markets were pricing in a much higher recession risk of between 75% and 80%.” KPMG talked to CEOs; 91% of those in the U.S. expected recession within 12 months and only 43% of them thought it would be minor.

Regardless of whether the downturn is coming or has arrived, media and entertainment businesses are already making announcements about cost-cutting and layoffs. Saturday’s update from Disney added that company to a list that already includes Warner Bros. Discovery, Comcast, and Facebook parent Meta. And then there’s Twitter, whose self-styled “Chief Twit,” Elon Musk, closed on the company just before Halloween and almost immediately eliminated half of the staff by email.

It’s true that one of the best ways for a company to survive an economic downturn is to respond quickly. The businesses that are most successful coming out of a recession are those that see it as an opportunity and respond by implementing a carefully crafted plan. At the same time, prudent leaders are aware that they will need experienced and knowledgeable employees to implement the changes.

In 2010, the Harvard Business Review published an article titled “Roaring Out of Recession.” The three authors began the piece by asserting, “Great leaders know that how they fight a war often decides whether they will win the peace.” Looking at results from three prior recessions — 1980, 1990 and 2000 — they created a study group of 4,700 public companies. Of these, only 9% came out of the downturn in a better position than the one they occupied before the financial crisis. These were companies that went on to significantly outperform their peers. This elite group was markedly better on “key financial parameters” and at least 10% better, in terms of sales and profit growth, than their competition.

Strategy, the way companies approached the recession, seemed to be the key differentiator. Dividing the study group into four broad strategic approaches — “prevention-focused,” “promotion-focused,” “pragmatic” and “progressive” — they determined that it was those few companies taking the progressive approach, what the authors described as “the optimal combination of defense and offense,” that were the most likely to be thriving when the economy improved.

No matter what the strategic group, the odds of a company coming out of an economic downturn to outperform the competition aren’t encouraging. Only 37% of those that the HBR authors categorized as “progressive” achieved success. But compare those results to those in the “prevention-focused” group; they were only 21% likely to be at least 10% improved. The other two groups didn’t fare much better. Those “promotion-focused” came in at 26% and the “pragmatic” category measured 29% likelihood.

Of course, no two recessions are alike. What worked in 1990 or 2009 may not be the best solution now. Still, it makes sense to pay attention to past lessons learned and consider how they might apply to current circumstances.

One of the things that strikes me in the HBR piece is that deep, across-the-board, expense cuts, particularly those in staffing, don’t seem to be the answer. Cuts are the primary response from the prevention group. The authors specifically point to the downside of the reduction in force tactic saying, “Companies that rely solely on cutting the workforce have only an 11% probability of achieving breakaway performance after a downturn.” That’s a longshot, at best.

What makes this approach even more concerning now is that businesses are still suffering from the decision to cut jobs during the pandemic-induced downturn. When things quickly turned around in 2021, they found a competitive hiring situation with desirable candidates commanding higher wages and expecting more benefits. Despite recent high-profile layoffs, there are still more jobs than qualified candidates to fill them. This means that companies looking to staff up again when things improve could be facing even higher costs, putting downward pressure on future profitability.

Another thing to consider is that significant reductions in a company’s workforce must be done in a way that is arguably non-discriminatory. In practice, this means approaches such as last in, first out; buyouts; or elimination of a certain category of employee. All of these are likely to reduce diversity and to mean the loss of valuable institutional knowledge. Both equate to fewer opportunities for different perspectives.

The HBR piece stresses, “companies that attend to improving operational efficiency fare better than those that focus on reducing the number of employees.” Actually, the two seem to complement each other. Companies need the different perspectives available from employees who really understand the business to come up with strategies to improve efficiency.

Despite ongoing uncertainty, current financial instability is a real opportunity for media businesses and their leadership. Those that can find the right balance between offensive and defensive strategies may well end up in a better situation three years from now.

That’s not to say it’s going to be easy. But companies like Disney, that take the time to form a task force to review the situation across the entire company, have a better chance of success than those like Twitter that has already had to rehire some fired workers because they were essential to planned new products and which subsequently backtracked on plans for a subscription service that new management had been promoting as a key part of the solution to the service’s profitability crisis.

It will certainly be interesting to watch as this plays out.

Former president and CEO of the Media Financial Management Association and its BCCA subsidiary, Mary M. Collins is a change agent, entrepreneur and senior management executive. She can be reached at [email protected].