31 Jul 09 Recession: Understanding the business and psychological impact

Overview: Recession – Understanding the business and psychological impact

This briefing provides the results of a web-based survey conducted on this site between February and May 2009 to determine the real costs and impact of the recession – especially from the perspective of the psychological impact upon organizations’ human resources.

The key findings are:

• Respondents largely discount the possibility of a rapid economic recovery.

• Rather than just being an economic recession, severe misgivings were expressed regarding the values and culture that have developed in both the business world and society in general. These cultural attributes are seen as the real driving cause behind the economic downturn. We therefore face not just an economic recession, but a cultural recession.

• The psychological impact at the human level is worryingly high. Over 80% of respondents reported seeing multiple symptoms of stress amongst colleagues and over 70% self-reported experiencing multiple symptoms of stress.

In the light of these findings a range of coping and response actions for managers is introduced at the end of this briefing.

Introduction: Survey structure and objectives
When this survey was constructed, we were particularly interested to discover views of:

(a) How long the recession would last.
(b) What was its real cause.
(c) The perceived long-term business impact.

But, most importantly, we wanted to ascertain the human cost, not in financial terms, but in terms of the stress and anxiety that respondents saw around them and experienced on a day to day basis.

The survey was therefore structured to focus on these four key issues.

This briefing firstly analyses findings in respect of the economic dimensions – views on how long the recession could last and how deeply businesses’ products and services could be affected.

We then proceed to look at the perceived real cause of the recession – who or what really is to blame?

The penultimate section is arguably the most important and examines the human psychological costs.

Finally, pointers for the role of corporate leaders and managers in a recession are provided in the last section.

Recession: The economic impact
Two broad questions concerned us:

1. How long did respondents think that the recession would last?

2. What impact would the recession have on their business – in terms of what they offered to their customers?

1. How long did respondents think that the recession would last?
We firstly asked respondents to estimate the duration of the recession or “downturn”* in respect of the country in which they were based. In this study, 91.8% of respondents were located in the UK. Therefore, we report here views in respect of the outlook for the UK only as shown below in Exhibit 1:

* Note that “the downturn” was defined as “the period embracing either negative or sub 1% GDP growth”.

Only just over 8% of respondents thought that we faced a quick “V” shaped recovery.  Most saw a longer period of effectively, economic stagnation.

Respondents thought that the UK would fare comparatively well when contrasted with the global economy.  Respondents’ views on the global outlook are shown in Exhibit 2:

Here, respondents expect a lingering recovery globally.

In terms of returning to normal levels of profitability after the downturn ends, respondents were divided broadly 50/50 with just under 50% thinking that recovery of profitability would just take a year – of the remainder just over 20% were looking at three or more years to recover profitability:

2. What impact would the recession have on their business – in terms of what they offered to their customers?

Just under 10% thought that there would be no impact on offerings – the majority acknowledging that some adjustments would have to be made.  13.9% however felt that deeper changes would have to be considered in terms of the products and services that their businesses offered:

Recession: The real causes

Next, we wanted to understand what, in respondents’ minds, were the real causes of the downturn.  We gave respondents a range of suggested causes to choose from plus a free format option.  Respondents could choose more than one cause and the result is shown in Exhibit 5:

The results surprised us and point to more deep-rooted and widespread problems than we first envisaged. The survey results indicate that far from facing a conventional economic recession, society and business in general are both facing a cultural recession.

The findings point to the values that are perceived now to be a deeply ingrained part of government, the business world and even social behaviour as being the real instigators of the economic meltdown. In terms of the underlying cause of the downturn, over 75% of respondents pointed towards a “short-term profit focused culture”, but an analysis of supporting comments from respondents showed us that cultural shortcomings were seen to exist within most, if not all, elements of our society.

Recession:  The human cost

The last section of the survey introduced the need to look beyond the financial cost that the downturn is imposing on business and society. In this section we try to look at the human cost – particularly in terms of anxiety and stress.

There were two perspectives that we wanted to examine. The first was the degree to which respondents were seeing symptoms of stress amongst their colleagues. The second asked if respondents themselves felt under pressure.

Exhibit 6 looks at the question of stress amongst respondents’ colleagues:

If any of these symptoms were experienced in isolation they may cause mild to moderate concern, but when experienced in combination they can make for worrying reading. For example, over 80% of respondents noted multiple symptoms of workplace stress amongst their colleagues. Only 2.5% of respondents did not see any of these symptoms amongst their colleagues.

We asked respondents how well equipped they felt do deal with these issues. Encouragingly, just over 31% felt that they could handle this challenge on their own. A further 48% thought they could help with access to some specialist support. Finally, just over 7% thought that they either could not help or would need access to significant levels of specialist support.

In Exhibit 7 below we can see that a similar picture emerges when looking at respondents’ personal reaction to the downturn:

These results show respondents’ own, personal reactions, to the downturn.

Again the results give cause for concern – 70% noted multiple symptoms ranging from “lack of focus” through to “depression”. A small number, only just over 8%, had not experienced any symptoms.

Taking Action:  More than waiting for green shoots

Obviously, more needs to be done than waiting for “green shoots”.

Leaders must now consider how they are going to face the strategic, cultural and the psychological implications of this downturn.

Whilst many of the issues being observed and experienced by people in the workplace stem from pressures both personal and professional, business leaders must play a critical role in supporting their employees through this difficult time.

This research points to at least three inter-linked key tasks for business leaders.

The first is the management of businesses through a potentially protracted period of either negative or negligible economic growth that we refer to as “the downturn” in this report.

Businesses now need to strongly consider the competitive strategy that they need to operate in such an environment.

The second task is to respond to the major cultural concerns that this exploratory study has surfaced. As we have already mentioned, there are opportunities for leaders to ensure that their businesses’ culture and values are clearly separated from “the root causes” described in this report.

The final task is of course helping employees to deal with the psychological implications of the recession and the uncertainty it brings. Without attention to this dimension, there could be considerable costs both in terms of individual anxiety and loss of business efficiency.

There are at least two broad courses of action for business leaders to consider at this stage. The first concerns the issue of business strategy itself. The second focuses upon the human impact of the recession.

Looking firstly at business strategy, there is great uncertainty regarding the recovery path that the advanced economies will follow. The newspapers are full of reports of “U”, “L” and “W” shaped outlooks. Additionally, it is held that recessions are times of change and “creative destruction” – new opportunities will eventually rise from the ashes.

From a strategy perspective there are two actions that businesses can undertake to help manage this period of transition and ambiguity.

Firstly, businesses should consider the impact of two alternative scenarios – the first a relatively rapid “U” shaped recovery, the second an extended “L” shaped outlook. Both will require different responses. Having a thought out plan for each now will help businesses respond rapidly.

Secondly, new opportunities will appear as we move out of recession. Some of the respondents have echoed this view in their responses to this survey. It is important now to set up projects to sense how customers’ needs are changing so that this new knowledge can be brought back inside the organisation. This early capture of knowledge and experiences will form a vital foundation for the crafting of new strategies going forward.

Both these exercises provide an opportunity for staff engagement and act to demonstrate that the organisation is constructively tackling the challenges of recession.

The second broad course of action focuses more directly on the human costs revealed in this survey.

There is now obviously the need for managers to actively look for the symptoms of anxiety and stress. Once symptoms are identified, if they are tackled appropriately it can have a direct and positive impact on issues such as employee mental health, productivity, staff recruitment, retention and customer relations.

Managers who have been coached in how to identify the signs can often tackle it at source. Research consistently demonstrates that managers with an ‘open door’ policy and those who ‘walk the floor’ and get to know their team will have lower instances of stress and related issues in their teams. Managers need to be aware of their role in managing and influencing their teams. Coaching managers to understand the significance of stress and its impact and how to create a ‘culture of communication’ is critical.

In conclusion, in the current economic climate, stress and related symptoms are on the increase. It is vital for the health of both the individual and the organization that managers are trained to be aware of the signs and are supported to act swiftly and appropriately to reduce the triggers to the stress that they have control over.

If you would like to talk about the actions that businesses can take to mitigate the impact of the downturn please do contact me.

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Tags: economic downturn, economic recession, human resources, psychological impact, symptoms of stress

25 Feb 09 Recession: Looking for stress points

In my last posting Davos 2009, Recession and Business Strategy: Quo Vadis? I included some straightforward questions to start the process of “stress testing” your business strategy.  In this posting I would like to explore the issue of “Stress” from a different perspective, which has a distinctly human element.

Unfortunately all the dials (or most of them) are pointing to a period of prolonged economic recession.  And we cannot be sure, with any degree certainty, what the post recession world will look like. As I explain in my recession scenarios,we could face four completely different worlds.

This means, probably for the first time in our lives, that we will have to live through a period of extended business and strategic ambiguity.  Some observers tell us that we are entering a depression that could last for up to 10 years.

We know too little, from both strategy and human perspectives, of what the challenges are for living and managing in a such a period of extended ambiguity.  Together with my colleagues, I am interested in exploring further the strategic and psychological implications both of this economic downturn and the prospect of a long period of “strategic ambiguity”.

I would therefore be grateful if you could spare a few minutes to complete the following survey.  It can be completed anonymously and only the aggregated findings will be published.  The results will help us to gain a deeper understanding of the challenges that we face. To participate, please click on the button below.

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Tags: business strategy, economic downturn, economic recession, human perspectives, survey

10 Nov 08 Recession and Strategy: The old questions don’t work anymore

Overview

We are all deep into the annual planning process. But this time the challenges are different and therefore the questions that we should address must change. An era of uninterrupted economic growth has come to an abrupt halt. The hopes emanating from last year’s planning cycle, that the world would experience just a temporary economic slowdown, have been dashed at least for those of us in the developed economies.

The one uncomfortable fact that we must now face is that no one knows, with any degree of confidence, what the business environment will look like next year, let alone in five years time. We are entering a true period of uncertainty.

The future shape of the world and therefore the competitive strategies that we must craft to survive and flourish will be formed by a complex confluence of global, national and socio-demographic forces. I will explore these forces, their interaction and, most importantly, future global formative events that could have a material impact upon the structure of our business environment later in this briefing series.

But now onto some suggested questions that you should now be considering as part of your current business planning process.

The New Questions

Whilst the future is clouded, there is a range of questions that must be addressed during this year’s planning process. To help you, I am going to suggest that we divide or categorise our questions into three different time periods:

Period 1: Managing the Present: The next 6 months.

Period 2: Surviving the Middle Years: 12 to 48 months out and

Period 3: The Long View – New Strategies for New Markets: The 5 year view

Each of these periods will have different challenges and therefore different questions must be presented and answered.

Period 1: Managing the Present

The short-term focus is making sure that the business is in a fit state to survive, grow and potentially out-manoeuvre more inwards thinking competitors. The issues to consider have been dealt with in my briefing Recession: Key Questions for Business Survival and Growth, but the central message was do not take actions that would make contraction and decline a self-fulfilling prophesy for your business.

Three of the key questions that could help you in the immediate future are:

(i) How are our customers’ needs and decision making criteria changing in the short-term? In past briefings I have referred to this as the “Aldi Effect“. Customers’ needs, or more importantly, decision criteria will change more than once during the cycle of this downturn. Customers will make certain immediate changes to their decision criteria. One simple example is that “eating in is the new eating out” – as restaurants empty takeaway pizza operations flourish. The first task is to identify how customers are now changing what they buy and how they make up their minds. This is as much true for business to business markets as it is for consumer markets. In business markets the perceived risk agenda will be changing as will the decision making process and the composition of the key people involved in the decision making process. This is a question that must be answered now, as it will have significant implications for your offerings and management of target customers over the next 12 months.

(ii) How can we reduce and manage costs creatively? Rather than opting straight away for across the board headcount reductions or freezes, consider carefully your exposure to frictional costs. By frictional costs I mean the costs related to:

• Activities that are duplicated either in your organisation or elsewhere in your value chain for example similar processes, activities and decisions made both by your organisation and your distributors
• Activities that have historically been carried out but in today’s environment add little value.

Remember that the consultants McKinsey have calculated that most organisations can deliver substantial process cost savings by conducting a ground up review of processes – for example up to 30% gains in direct labour productivity, lower material costs and reductions in establishment expenditure.

(iii) How should we manage the survivors? It is an unfortunate fact that employment levels may have to be reduced. Few organisations will be totally insulated from a contracting economy. If you do have to make staff redundant, consider carefully how you manage and motivate the survivors. They too will still feel insecure and threatened and Human Resource policies must change accordingly.

Period 2: Surviving the Middle Years

Some interesting forecasts have started to appear focusing upon the immediate impact of the “melt down” in the banking and broader financial services sectors.

Some forecasts point to, in London alone, 60,000 job losses in financial services[1]. To put this in perspective, there are some 230,000 people employed in this sector in London and the South East of England[2]. Broadly up to 1 in 4 employees could lose their jobs. This statistic, together with broader global developments, points towards a potential structural shift in the economies of the developed world.

The last time that we witnessed a structural shift in the developed economies was in the late 1970s when, as an example, the UK’s economy made the transition from manufacturing to services. This transition, in employment terms, is illustrated below and it can be clearly seen that the financial services sector came to the rescue as the manufacturing sector withered.

Source: Office for National Statistics. Workforce jobs by industry: United Kingdom, Thousands, Seasonally adjusted.

The issue that we must consider is “What the financial services sector gave, will it in turn take away?”

There is no guarantee that the employment structure in developed economies will be the same after the recession as it was before.

Critically, we need to consider if there will be a post services based economy in the developed economies and what form it could take.

There are a number of forces that could dampen a post-recession resurgence in employment within financial services including:

* Regulation. Regulation will prove to be a key shaping force in a post recessionary world and I will cover this issue in more depth in a subsequent briefing. It looks however currently that at least in the banking sector, innovation in new “products” will be more tightly monitored and controlled.  This brings with it the likelihood that past levels of employment may not return, at least in the developed economies.

* The Emerging Economies. Arguably, when referring to the BRICs (Brazil, Russia, India and China), we should now use the term “emerged economies”. One of the next challenges for the newly emerged economies, and China in particular, will be continue to boost employment growth. We have seen massive investment, within China, in heavy industry. The one problem is that heavy industry is not a significant generator of jobs. But the financial services sector has just that potential[3]. We can therefore expect further inwards and outwards investment in financial services that will, in turn, place financial services organisations in the developed economies under pressure.

As indigenous financial services organisations grow in the emerged economies they will become acquisitive looking, amongst things, for the ability to travel up the learning curve at maximum possible speed. In this scenario, one of the problems faced within the developed economies is that it is relatively easy to migrate financial services sector employment, as the recent trend towards outsourcing has demonstrated. So when organisations are acquired, the employees could be located anywhere globally.

However, the hallmark of the current crisis is that we are at a complex road junction. It is impossible to know which route the world will take.

An alternative argument to that articulated above is that the collapse of Sterling, for example, rewrites the economics of the outsourcing equation and that more jobs eventually could come home. Governments too could take a more protective stance in employment terms in respect of financial services organisations where they have acquired financial interests.

Another buoyant perspective is that increased demand from the new middle classes in the emerged economies could eventually lead to resurgence in the manufacturing sectors of developed economies creating new sources of employment.

What we can be reasonably sure of is that certain sectors of the economy, such as financial services, will probably shed jobs and contract as we progress into recession. Others will be more resilient. The immediate challenge is to look at the transition period, as shown in the illustration above, and address this question:

“Which of our customer sectors are most exposed to decline and which, in turn, may prove to be the most resilient?”

Considering three dimensions – industry sector, geographic area and firm size may be a good way to approach this question in your business. The answer may reveal that significant changes are required in respect of the definition of target customer segments, the products and services that are provided and the distribution channels that are used.

Period 3: The Long View – New Strategies for New Markets: The 5 year view

The argument presented in the last section, that the pre and post recession structures of economies in the developed world may be significantly different, forms the foundation for the most challenging question of all:

“What form will a post recession economy take?”

There is some emerging evidence that economies at least in the developed world may undergo a structural change, just as we witnessed in the 1970s and 1980s.

It may therefore be dangerous to assume that post recession things will be exactly as they were before.

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References:

[1] I. Dey, “Goodbye To The City … And Hello To The Life As A Teacher or Gardener.” The Sunday Times, Nov. 2008, p. 7.

[2] “NGRF – LMI Future Trends – Regional / national dimension (Sector: Financial Services),” NGRF; http://www.guidance-research.org/future-trends/banking/regional.

[3] G. Dyer, “Comment – How the financial crisis is changing China,” FT.com, Oct. 2008; http://www.ft.com/cms/s/0/e5d48044-a04c-11dd-80a0-000077b07658.html.

Tags: business, Business Planning, economic downturn, recession, strategy

24 Jul 08 Recession – A business survival guide (Part 3 – Portfolio Balance)

In past entries I have argued the point that recession is a time to crank up innovation – not to cut investment in it. In my last blog entry I referred to the “Aldi Effect” – in a recession customers will change their buying habits and preferences. The real danger is loss of customers that won’t come back when economic conditions improve.

The latest results from PepsiCo demonstrate this point. Sales of soft drinks and water are declining – due:

1. To less money in consumers’ pockets and
2. Greater environmental awareness – a drive to use less plastic for bottles.

The lesson is that PepsiCo’s sales have been partially saved by the breadth of its product portfolio – snack foods are appearing more attractive to cash strapped consumers.

So a core activity must be now to determine how your customers (consumer or business) will change their buying habits and to supplement, if necessary, recession resistant offerings to prevent a haemorrhage of customers that may never return.

Information Source: Wiggins, J (2008) US economic downturn makes life hard for PepsiCo’s soft drinks. Financial Times. July 24

Tags: business survival guide, economic downturn, Innovation, recession

23 Jul 08 Recession – A business survival guide (Part 2 – The “Aldi Effect”)

In earlier blogs I have argued that in a recession one must not “shoot the usual suspects”. By “shooting the usual suspects” I mean across the board cost cutting in areas such as sales, marketing and new product development.

My point is that during a recession a firm that wishes to survive and grow needs a greater capacity for innovation than in the times of economic buoyancy. The fact is that your customers’ needs and/or buying habits will change during an economic downturn.

One of the central challenges for business leaders during a recession is to at least retain customers. Getting new customers is usually an expensive process. One scenario to avoid is the loss of hard-won customers to competitors that can keep up with changing demand patterns better than you can – winning back those lost customers after a recession has ended may be a harder job than you imagine.

In the UK we already have several examples of this shift in customers’ needs and buying habits. The retailer Marks and Spencer has been hit with a fall in demand for food products.  One of its core offerings are luxury ready cooked chilled meals.  The problem is that customers are re-evaluating their spending patterns and substituting cheaper, more basic ready meals or even doing the cooking themselves form raw ingredients!  The problem for Marks and Spencer is that their competitors are probably better placed to meet this demand shift.  Customers are now spending 20% more at Aldi and Aldi aims to retain its newly found customers.  A similar story can be found in the takeaway meals sector where Domino’s – the pizza chain – has noticed that whilst sales to established customers are falling, sales to new customers have risen by around 20% as consumers opt for a takeaway instead of that expensive restaurant meal.

The central message is that the “Aldi Effect” – customers’ changing needs and buying behaviours – will take place during a recession – and not just in the consumer sector.  Innovation and astute marketing may be needed more than ever during a recession to avoid the loss of customers that may never be won back again when the economic clouds have lifted.

Tags: business survival, economic downturn, recession, Recession Survival & Growth