In 1999, a major North American company with 80 regionally oriented divisions launched an effort to enhance its operational effectiveness. Pilot programs in select markets achieved 10 to 15 percent cost reductions, while increasing sales by more than 15 percent. On the heels of this success, the company trained more than 25 “change agents” to roll out the program. Then a recession hit, and executives in the company’s headquarters got nervous. In their search for quick savings opportunities, they fired the change agents and asked each of the 80 divisions to continue on its own. A year later, as performance deteriorated, a major private-equity firm acquired the company. Although the firm tried to reinstate the improvement efforts, the capacity and appetite for thoughtful change had evaporated, and the company endured four years of zero profit and sales growth.

The company’s experience typifies the kind of mistakes companies can make as they slash costs during downturns. During the 2001–02 recession, for example, some were quick to cut operational overhead. These cuts made it challenging for executives to manage day-to-day execution and service or plan for further performance improvements that would enable them to emerge from the recession successfully. Similarly, during the...