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Strategies for Surviving an Industry Downturn

Posted by | Fuld & Company

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In late October, GE announced that it is spinning off its oil and gas business and merging it with Baker Hughes, embarking on a strategy of convergence, expanding its offerings and therefore the potential revenue it can generate, to remain vibrant and viable in the current industry downturn. In 2014, GE Oil and Gas developed a business plan based on oil prices of approximately $100 per barrel, but by January 2016, oil prices plummeted to $27 a barrel, resulting in a 30% drop in profitability. Developing strategies for how to respond to downturn is critical.

During a downturn, one might naturally assume your competitors will implement a “batten down the hatches” strategy and wait for sunnier days ahead. But that may not be the case. Companies might also automatically implement aggressive cost cutting measures to meet financial targets and assuage increased pressure from internal and external stakeholders. But that may be insufficient. It’s in a market down turn when companies are motivated, even forced, to quickly adjust their strategies to navigate the “new normal” all in the name of survival.

While the oil patch is a great place to see new strategies being developed and implemented to deal with an industry downturn, it’s by no means the only place.

Downturn in the Defense Sector

The defense sector, whacked by the 2009 Budget Control Act also known as sequestration, and the attendant decline in U.S. defense spending is another good example. In the wake of sequestration, many defense sector watchers predicted that the large defense contractors were headed for a steep decline in earnings, yet despite these predictions, Northrop Grumman’s share price is up 600% since 2009, General Dynamics’ up 300%, and Lockheed Martin’s up nearly 330%. The increases suggest these companies not only survived, they thrived. How did they do it?

There are several basic strategies employed to not only survive, but thrive, during a downturn: consolidation, convergence, new market entry, or innovation, typically via new technology adoption. 


Consolidation, the means for gaining economies of scale, is a common survival tactic. Though it may seem counterintuitive, it’s not unusual to see increased merger and acquisition activity during a downturn. Relatively stronger players will often acquire peers in the interest of achieving “synergy savings,” spreading their overhead costs over a larger operating base.

Perhaps more important strategically, acquirers are taking advantage of lower valuations to increase their market position so as to significantly benefit during the eventual upswing. This is the “bigger is better” approach to survival.  Facing an extended and severe oil price decline throughout the 1990’s, oil companies, turned en mass to consolidation creating the supermajors of today. In 1998, BP merged with Aamco, Exxon merged with Mobil, and Total acquired Petrofina. The following year, Chevron acquired Texaco and Total acquired another competitor, Elf Aquitaine. Between 1998 and 2000, four of the top 25 corporate mergers were in the oil and gas sector, representing a combined total of over $350b in acquisition spending.


If consolidation generates economies of scale, convergence generates economies of scope.

Convergence enables companies to efficiently expand the scope of their operations to an adjacent sector or market. Extending the scope of the business allows a company to generate additional revenues while also realizing overhead cost savings.

While many characterized Shell’s $50b acquisition of British Gas as consolidation, the acquisition is better characterized as convergence. Specifically, this merger allows Shell to extend its dominance in oil to adjacent fossil fuel sectors such as natural gas.

The deal mentioned at the outset of this article, GE and Baker Hughes, is another example of convergence in which GE is primarily an equipment and component manufacturer and supplier while Baker Hughes is fundamentally a services provider. Representatives of the two firms billed the combination as the first “fullstream” services company—meaning it will cater to the upstream (exploration and production), midstream transportation, and downstream refining and marketing sectors of the industry.

New Market Entry

When business conditions in one geographic market sour, companies are often forced to look to new geographies as growth catalysts. This strategy has been key for leading defense companies who have expanded abroad with alacrity and pursued sales to foreign militaries to offset declining U.S. military spending. Today, non-U.S. market sales represent a significant share of defense contractor financials.  In Q3 2016, Lockheed Martin recognized 30% of revenues from foreign sales, up from 21% in Q3 2015. Boeing has also increased its focus on foreign military sales, including major weapon system sales to Saudi Arabia and India.

In the oil and gas industry, the current downturn is pushing companies to expand beyond their traditional geographic asset base to acquire low cost resources or enter high growth markets in new geographies. Woodside Petroleum, historically focused on assets and customer markets in Asia, has taken a $440m stake in an oil field off Senegal.  The deal provides Woodside with the opportunity to procure oil at just $2.24/barrel, a major cost advantage even in low crude price oil environment.

Others including Shell and Total are expanding their downstream operations aggressively in China and India, chasing robust refined product demand as a way to offset low oil prices and lower demand growth in the US and Europe.


An industry downturn and the attendant pressure to mitigate the financial consequences will motivate even the most staid and conservative companies to innovate; to explore new technologies, new business models, or organization structures. Think of it as a “desperate times call for desperate measures” strategy.

The recent World of Watson conference where dozens of companies from a variety of different industries revealed how they are applying cognitive computing to improve their business operations was a window on just such innovation.

Once again, the oil patch is a hot bed of this sort of innovation. Woodside Petroleum reported it has deployed numerous instances of IBM Watson for a rather wide variety of applications including legal, health/safety/environment, asset maintenance, project development, and drilling. According to Woodside, the Watson cognitive computing platform has significantly improved the ability to access relevant data, allowing Woodside’s staff to focus more on analysis and decision-making and far less on data acquisition.

In the defense sector, contractors have focused on honing their production efficiency implementing a variety of new manufacturing technologies including additive manufacturing, robotics, and powder metallurgy.

All of these survival strategies, implemented singly or in combination, contribute to a company’s resilience in the face of an industry downturn. The imperative to survive in the face of what may be prolonged challenging industry conditions leads companies to make bold moves they may never have contemplated during boom times. For this reason, it’s critical that strategists consider not only the options for their own companies but consider how the prospect of tough times ahead may inspire competitors to act in ways that disrupt the status quo and redefine the industry’s competitive dynamics.

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