Clayton Christensen on how companies can thrive in a down market.
Question: How can companies benefit from a down market?
Christensen: There are a lot of examples of how a company can do this. Let me point to Huntsman Chemical as one example. Huntsman Chemical builds or makes commodity chemicals of various types, polystyrene and so on. What they have done is when you’re in the bottom of a recession, cash strap companies whose volumes have dropped so much in a scale intensive or fixed cost business like chemicals are very willing to unload their capacity at [fire sale] prices. And so what Huntsman has done over the years is he’s bought these plants from competing companies when they were cheap, when demand was low, to have it available so that when the industry picks up again, he’s got the capacity to catch the increase in demand and grow the business. Andrew Carnegie did the same thing in the steel industry. He always invested to build capacity when the market was down so that he could then catch the wave of growth that followed the recession. So that’s one way how the strong can become stronger, is if they take action now to build capacity so that they’re there for the upswing. The second way is to disrupt because disruption always brings to the market products and services that are more affordable, and during a recession, more affordable products face a much larger demand as the demand for luxury products decline. And so it’s really a great opportunity for disruptive innovation as well.
Question: What do companies do wrong during recessions?
Christensen: They layoff the wrong people. And one of the dilemmas, of course, is it’s the people at the top who constitute the true overhead of the business, they’re the ones who decide who ought to be laid off and, of course, the instinct of most people is not to layoff themselves. And so they look below them at who can we let go. Generally, the most important people to keep are those that are involved in developing the next generation products. If you keep them, then when the economy turns, you’re ready to blowout a new wave of growth. And you also want to keep your sales people, because they’re the ones who keep the customers’ fires going. They’re the ones that can learn, you know, how the customers are doing in this turnaround business, so they’re the wrong people to layoff. The right people to layoff are the true administrative overhead people who are looking after today but aren’t laying the foundation for tomorrow’s growth.