8 Best Investment Strategies During A Recession

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    Research and development (R&D) investment is the strategic cornerstone of modern-day companies wishing to compete, grow and thrive. This is true during good economic times and no less so during times of crisis when new and more efficient products can shield companies from decline and set them up for strong growth in subsequent recovery periods.

    Nevertheless, as a crisis and uncertainty unfold, firms are pressed to control costs and maintain liquidity. In this situation, R&D activities may receive increased scrutiny, along with all other company operations. Dilemmas abound as leaders struggle to balance the need to cut costs with the risk of losing technological advantages due to decreased funding availability.

    Studies conducted over multiple recessions have shown that companies that continue to invest heavily in R&D will grow, while competitors that decrease these investments face increased risk of suffering from decline. R&D activities signal to both customers and investors that they can rely on the firm to produce superior products. The higher the leverage, the bigger the impact of profit and stock returns.

    A good example is Apple.

     In 2001, the dot-com bubble burst, leading to exceedingly hard times in Silicon Valley and the tech sector at large. In response, leadership at Apple began significantly increasing R&D spending. The results are well-known. With the introduction of the iPod and subsequent introduction of iTunes in 2003, the iPhone in 2007 and the App Store in 2008, Apple came roaring out of the recession to take the lead, selling 4.3 million iPhones and 2.5 million Macs during the last three months of 2008 and reporting 123% growth in iPhone sales year over year in Q1 of 2009 in the midst of the subsequent subprime crisis. I don't believe Apple could have achieved such astounding success without consistent and focused investments in R&D even during the most difficult of times.

    Harvard Business Review published the fascinating findings of a seminal study conducted in 2010 that analyzed the strategies and outcomes of 4,700 companies across three recessions. The authors identified four classes of crisis response strategies based on specific combinations of changes in resource allocation.

    • Prevention-focused companies. They played defense, cutting back in one or more areas without increasing investment in any area relative to their competitors.

    • Promotion-focused companies. They adopted a fully offensive strategy, increasing expenditures in one or more areas without cutting in any area relative to competitors.

    • Pragmatic companies. They combined defensive and offensive moves by reducing operational expenses or headcount while at the same time investing in areas such as R&D, sales or capital equipment.

    • Progressive 

    companies. They fared the best by far. By deploying an optimal combination of offensive moves (investments in multiple areas, including both marketing and R&D) and defensive moves (specifically focused on operational efficiency), these companies bested the other three groups by a wide margin, enjoying a 37% chance of becoming industry leaders following the recession.

    Other studies conducted during the 2008-2009 crisis, including multiple surveys by McKinsey & Co., showed related findings, with leaders of innovation-focused companies indicating they are maintaining or even increasing their R&D investments to avoid product delays and maintain their competitive edge in the market. Many top companies save money by a renewed focus on optimized R&D processes that boost strategically promising efforts and increase focus on efficient project execution, raising productivity, increasing time to market and improving their bottom line to the benefit of all stakeholders.

    Long periods of economic expansion can make companies a little complacent. When markets slow down, business owners need to focus with laser intensity, taking out the magnifying glass and looking at where they can cut costs and increase efficiency through innovation.

    Unfortunately, this can mean layoffs. The good news is that intentional spending in R&D could reveal the best ways to save on energy, trim material usage and tighten the supply chain to reduce waste. This will lighten your footprint on the planet independent of the necessary belt-tightening.

    See this as an opportunity to deep dive into goals. Businesses that can adapt quickly will have a better chance of succeeding. Plan ahead for potential slowdowns. Make sure to provide above-and-beyond service to your current customers. Their loyalty will ensure consistent and reliable revenue, especially during times of crisis. As time goes on, reassess what works and what doesn't, and increase conversations through trial and error.

    Although the urge to reduce costs is understandable in trying times, the data shows that the optimal crisis response should entail maintained or increased investments in the area of R&D as the best path to survival and growth in today's world. Such investments should be made all the more wisely by leveraging the best available specialized engineering talent and maintaining a culture of innovation in order to ensure success in the middle and long-term.

    Forbes Technology Council is an invitation-only community for world-class CIOs, CTOs and technology executives.

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    Source : https://www.forbes.com/sites/forbestechcouncil/2020/05/29/why-you-shouldnt-cut-rd-investments-in-times-of-crisis-and-recession/

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