I just read an article in Fortune called Managing your business in a downturn. The author, Ram Charan, says that smart executives can use the downturn to make their companies better, stronger, and faster by following these four steps:

• Keep building. You should build on your personnel by rewarding excellence and by poaching good talent from other companies. He also says that you should keep from cutting key areas like product development, innovation, and brand building. The article makes this point with a quote by Ray Gilmartin, Merck’s ex-CEO, as Gilmartin looked back upon the early 2000s when the big pharma increased its R&D budgets despite difficult business conditions: “When you are being hammered from all sides, it’s important to reinforce your core values – and research excellence was one of ours.”

• Communicate intensively. Get information from the front lines to the operating people as quickly as possible — because the pace of decision making needs to pick up when the economy slows down. The author makes the point that when facts change, so should your strategy. (Note: one of my favorite quotes from Jack Welch is: “Deal with the world as it is, not how you’d like it to be.”)
• Evaluate your customers. The focus goes from P&L to cash and receivables in a recession. So there’s a different benchmark for good customers. The article says that “you don’t want to be this decade’s Nortel or Lucent, which continued to ship to companies whose ability to pay for equipment, it turned out, was nil.”
• Just say no to across-the-board cuts. You will likely need to make cuts in your business, but don’t just slice evenly across the company. Make sure that there is a purpose in how you make cuts. The author says: “It may be useful to clean out the metaphorical attic – for example, by pruning your product line. Procter & Gamble (PG, Fortune 500) did that in the late 1990s and early 2000s, shedding stagnant brands like Comet and Crisco.”

My take: Charan’s article makes a ton of sense. The way I think about it, firms can take one of two paths in hard times:

1. Manage their way through it. In this approach, executive teams react to market conditions by making widespread cuts in an attempt to maintain short-term profitability targets. After the recession lifts, these firms will often need to rebuild their employee and customer relationships.
2. Lead their way out of it. In this approach, executives intensify their company’s focus on the long-term purpose of the firm and make targeted cuts in areas that are not core to that purpose. After the recession lifts, these firms are set for a quick shift into growth mode.

The bottom line: Which path will you take?

This blog post was originally published by Temkin Group prior to its acquisition by Qualtrics in October 2018.