We’ve Been Here Before – How companies survived earlier economic storms

This isn’t the first time companies have had to weather economic storms. And although no two economic crises are exactly alike, there are powerful lessons to be learned from the past.

To understand how companies survived — or even thrived in — previous harsh times, we talked to Nancy F. Koehn, a business historian, author and professor of business administration at Harvard Business School. Here are excerpts of that conversation.

Getting Out of a Pickle

THE WALL STREET JOURNAL: What are some of your favorite examples of companies surviving a downturn?

NANCY KOEHN: The first one that comes to mind is Henry Heinz, who founded the Heinz Co. back in 1869.

He’s getting the thing going, selling mostly horseradish and pickles out of Pittsburgh — and growing very quickly. He’s a brilliant salesman.

Guy Billout

Very suddenly in 1875, a banking crisis makes it extremely difficult for him to get short-term credit — it’s just the kind of issue we’re reading about in the papers now — and he goes belly up. He has to sell his parents’ furniture to pay the liens on his equipment. And in three months, he’s back at it again.

WSJ: How did he do it?

MS. KOEHN: He figured out ways to get his employees to come back and delay wages. He managed to get some of the people that he had rented equipment to, to rent the equipment back to him at half price.

Within a year, he brought ketchup out and is back on his way with some very important lessons and some important innovations.

The first lesson is: Get yourself into business with very trustworthy people, because one of the reasons the business goes quickly bankrupt in the credit crisis is because his partners basically bail out on him. Second, make sure you understand what your demand is. Third, collect your accounts receivable quickly.

And innovation is critical. Heinz, by bringing out ketchup and a bunch of other related products, created and fed a market.

WSJ: What prompted him to decide to start a new product when he’d just gone through this failure?

MS. KOEHN: He is just thinking, “What else can I sell consumers that is affordable and that builds on my own expertise?” So it’s a combination of what do I have, what do I know about, and what do consumers need?

[The Journal Report: Weathering the Storm] Stuart CahillNancy F. Koehn

WSJ: What role does marketing play in downturns?

MS. KOEHN: It is in the early 1930s [during the Depression] that Procter & Gamble Co. says, “We are going to market the hell out of our products, and we’re going to do it on radio,” which was like the Internet of the time, “and we’re going to sponsor these little dramas.” That’s how they came to be called soap operas. So [one lesson in downturns] is market, market. Don’t cut back on marketing.

WSJ: What are some of the more unusual downturn strategies you’ve studied?

MS. KOEHN: I think what Tom Watson Sr. did at [International Business Machines Corp.] during the Great Depression is kind of crazy.

In 1932, he announces that IBM will spend $1 million to build a stand-alone R&D lab [for punch-card tabulating machines] in Endicott, N.Y. Everybody else in this game is slicing R&D. Watson is actually employing more people, building more machines and still telling the factory that even if he can’t sell them, to keep adding to inventory. This puts a tremendous amount of pressure on the business. They’re not selling all the machines.

By 1935, [President Franklin Delano] Roosevelt signs the Social Security Act, and that creates an enormous new market for data processing on the part of companies and on the part of the government. It’s an interesting example of someone who really believed that what he was making had a market and that the market would come back sooner than later.

Too Much Hunkering Down

WSJ: When you’re watching the headlines in the financial press right now, do you think companies are doing too much hunkering down?

MS. KOEHN: I do. At a general level, American business leaders and other managers have spent months in fear mode — primarily in a reactive, fear-driven, fast-acting mode. That is very natural given the shock and speed of this downturn.

WSJ: What leadership traits are required of CEOs now?

MS. KOEHN: Leaders need to think and act as entrepreneurs. One of my colleagues here at Harvard Business School, Howard Stevenson, once defined entrepreneurship as “the relentless pursuit of opportunity without regard to resources currently controlled.” The spirit of this definition is important right now. We have to be thinking — as many are already — about the opportunities that lie nestled within the turbulence all around.

By David Kesmodel

Source: The Wall Street Journal


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