Last week, a friend of mine was talking to me about the tight economic situation and its effect on the job market. Then, he made an off-the-cuff remark, which I later realised was rather profound. He said, when the times are good, any good management consultant can land a plum role in mainstream industry, but when the times are bad the same roles are open only to ex-McKinsey consultants.

When the economy is in vibrant growth mode, it’s a rising tide that lifts all boats. Even moderate talent is in short supply compared to jobs available, and the average person can get lucky without much effort. However when economy is doing badly, companies can aspire to hire the best-talent for the same price that they would have otherwise shelled out for above-average talent during normal times, since availability of talent is in excess while jobs are in short supply. You can call this simple economics, flight-to-quality or survival of fittest, but this phenomenon is applicable across the world of commerce.

When times are tough, the best in the industry are able to retain their market share and even grow at the cost of weaker peers in the industry. Successful firms typically display one or more of the following characteristics:

Geographic leadership: Firms that dominate a particular geography (that is, are either number one or two, locally, regionally, nationally or globally) generally have higher recall and stronger entrenchment within the catchment area that provides strong roots to bank on.

Segment leadership: Similarly, firms that are number one or two in their respective product/customer segments also have a better shot at protecting their turf through specialisation.

Technology/change leadership : Firms that are leaders in innovation and have the potential to change the landscape of the industry

Financial leadership: Firms that are cash-rich, use little or no leverage and have huge reserves to ride through tough phases, provide customer discounts/credit if required and take big investment decisions when the others are retrenching

Operational leadership: Firms that are able to deliver their product or service in the most efficient and effective manner

It is probably evident from the above list that the odds are tilted against smaller and younger companies and in favour of larger and older companies. But small companies possess the rare passport that can change the rules of the game — innovation and change.

Being agile by definition, smaller and younger companies can retain and grab market share even during the toughest of times, provided they redefine value to customers. As companies become very large, bureaucracy inevitably sets in unless there is a strong culture to retain the chutzpah, making it easier for smaller companies to quietly turn the table on them.

There are enough case studies that fit into this category — Walmart against Sears, Micromax against Nokia, and so on. Also, smaller companies tend to have higher stakes involved in ensuring survival as promoters tend to have most of their wealth tied up in its ownership.

Still, the risks borne by smaller companies are high during recessionary times and this is the primary reason why investors often flee from small companies to larger companies during times of economic uncertainty.

Typically, small companies have high sensitivity to macro variables and tend to report wild swings in top line and bottom-line, resulting in relatively higher beta. On the contrary, when times are good, small companies — due to their low base effect — are able to grow faster on a percentage basis relative to their larger peers. Needless to say, size is a key risk factor in asset pricing models – a la Fama and French.

(The author is a business consultant. The views are personal. Feedback can be sent to >perspective@thehindu.co.in )

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