Scientific research shows: Severe budget and staff cuts undermine companies ability to endure recession

Expectedly 17% of companies will not survive this recession.

80% of the remaining businesses will struggle after three years.

Yet 9% of companies will boast excellent financial performance after this recession.

- Why do some companies fail and some succeed?

Making informed decisions becomes crucial as companies worldwide are now facing financial difficulties and economic turbulence is widely forecasted for many months ahead. In order to help companies fight the crisis, Wörks - a strategic marketing agency from Finland - made a deep analysis of management's best practices in times of crisis and recession freely available for all.

The report is based on the analysis of a large number of scientifically validated studies during recessions and crises between 1980 and 2015.

Based on the analysis of 39 scientifically validated studies on the performance and practices of more than 9,000 companies, the observed changes in purchasing behavior, and the best global management practices during recessions and crises over the course of 35 years, there are ways to enhance the success and beat the odds in recession. 

The report Navigating the recession – a scientifically proven guide for leaders is fully public and free to download from here (note! please see the attachment below for your pre-publication version).

“In these times, reliable scientific information is needed to support companies’ decision-making, as quick surveys, reports influenced by commercial interests, the opinions of other people, personal experience, and “gut feeling” may provide conflicting or incorrect information. That is why we wanted to perform a non-biased analysis and report the results to everyone”, explains Jussi Piri, the CEO of Wörks.

“We put focus on the highest-quality scientific studies (IF> 1). The scientific approach was the best option for this purpose, as science always seeks to objectively examine the interrelationships of different factors and phenomena. In this case, it means providing clear instructions on how to act – and on the other hand, what to avoid – in the current economic situation”, Markus Kivikangas from Steinheide adds.

The report looks at three key themes that influence decision-making:

1. Changes in consumer purchasing behavior during an economic crisis

2. Success factors in business during and after a recession

3. Exceptional circumstances’ influence on decision-making

Main conclusions of the analysis:

1. During an economic crisis consumers' willingness to spend declines, and there is a shift from branded durable items to essential goods and more affordable brands. Although this type of consumer behavior continues long after the recession, it is noteworthy that the consumers’ need for hedonic buying behavior does not disappear, even in times of economic scarcity. B2C businesses should take this into account in their product and service design.

2. Research shows that severe budget and staff cuts are detrimental to companies, regardless of the industry they operate in. Major cuts will weaken a company's ability to survive a recession and slow its recovery and growth afterward. It is noteworthy, that historically family-owned businesses have not cut their marketing and development investments during the economic crisis to an as high degree as other companies have.

3. There are situations where budget and staff cuts are necessary to maintain a company’s operational viability in the short- or medium-term. From a budget perspective, it is advisable for management to avoid cuts in sales, marketing, and product development costs, and instead focus on improving operational efficiency. This can be done by adapting the business model, production, and supply chain to the current situation and optimizing the collaboration network. In addition, research has identified numerous ways to increase a company’s chances of success; we recommend that you also make use of scientific information from an industry-specific perspective.

4. Last, but not least: during a crisis, there is a significant risk of a leader’s decision-making ability being affected through cognitive bias (herd behavior, confirmation bias, representativeness bias, and scarcity bias). Excessive stress may also lead to a “fight or flight” response. It is absolutely crucial, that business leaders take care of their own well-being, as this is proven to maintain or increase decision-making capability. Navigating through these difficult times will be much easier having this ability.