27 Mar 09 Navigating the Recession: The waves of change

A clear point emanating from my earlier posts and, importantly, discussions with business managers and leaders is that we cannot afford just to “sit this one out” and expect the business world (and in fact the world in general) to be in exactly the same shape as it was before when this recession comes to an end.  It is becoming clear now that we are at the threshold of a new world and things will be very different.  The recession scenarios provide us with a mechanism to see what the new worlds could look like, but in this post I would like to start to explore what the process of transition to the new world itself might look like.  When looking at the transition process, I will adopt the perspective of your businesses customers and clients, in other words the phases of change that your clients and customers will go through.

In this post I am going to put forward a proposition for debate that as we go through this journey from recession to recovery there will be multiple behavioural and structural shifts to look out for.  Each will provide challenges but also, and more importantly, will provide new opportunities for your business.  I will describe 5 of these waves of change in this post.  Remember that some will run sequentially and that some will run concurrently.

Phase 1:  Shock and Horror.

Whilst there was some talk about 24 months ago of an impending economic “blipage”, nobody thought it would ever be this bad.  The accepted thinking appeared to be at worst that we would have say a slowdown period of 12 months and then we would get back to growing in a predictable world.  Nobody thought that capitalism might be brought to its knees.  Therefore, when the news broke last year – particularly when Lehman Brothers went down on 15 September – we were all thrown into a state of shock.  It was as if the bottom of our worlds had been pulled away.  A good way of looking at this is to think about that old, but classic, motivation model Maslow’s Hierarchy of Needs.  It was as if the bottom layers, the foundations, had been stolen.  For this reason, people and organisations act a little irrationally during this first phase.  As security is threatened, we need to do something to protect ourselves and this usually means making immediate cost-cutting decisions many of which might not be in the long-term interest of either the individual or the business.  In shock there is the over-riding desire to do just something.  An example is that 74% of Americans intend to cut back on eating out and entertainment [1].

So this is where we are now. In an irrational period.  From a business perspective, it is a period to make temporary adjustments to match these new behavioural patterns.  But it certainly is not the time to make long-term irreversible decisions.  As I try to show in the first illustration below, this is a temporary phase.

And my guess is that we will come to the end of this phase in late 2009.

Phase 2:  Acceptance

Phase 2 is important for three reasons.

1. It represents almost certainly a longer period than the first phase.
2. It is the period when customers adjust to accept the fact that we are (probably) in for the long haul.  Expect therefore more reasoned decision making that will hold for the medium term.
3. During this period the behaviours of Generation Y (the children of the “baby boomers”, Generation X) will be shaped permanently.  Remember that in the last real downturn, Generation Y would have been in nappies (diapers).  What they see and feel during this period will have a permanent impact.  It is the first time that their world will have been shaken and their beliefs and assumptions challenged.  Long-term behavioural changes will appear, such as a move away from external, tangible displays of wealth.

At the time of writing this entry I would say that we are just about to enter this phase – a phase that may last for 3 or more years, but as I show in this second illustration, the impact is far more permanent.

Phase 3:  Emergence

At some point the stimulus packages and measures that are now being put in place will bear fruit.  Confidence will be restored.  Demand will increase.  New demands and needs will appear, but these will have been materially shaped by experiences (that are now largely unknown) that will have occurred during phase 2 – Acceptance.  New customer segments will appear. But the effect may not be so dramatic in the long-term in terms of customer needs.

Phase 4:  Restructuring

I opened this post by saying that we can’t just sit this one out.  One of my propositions is that certain developed economies need to undergo second order macro economic changes.  The UK is a good case in point as I have observed earlier with its near 22% of employment in financial services.  These macro economic changes should produce new opportunities and needs to meet as new employment champions appear – just as financial services did in the early 1980s when manufacturing went into decline, at least here in the UK.  This phase, as new employment sectors appear, will be more permanent in its impact.

The first 4 waves of change are all shown with a subjective view of their period of influence in the illustration below:

Phase 5:  New Influencers

Here we go out into the medium to long-term, beyond the illustration above.  And I have in mind 3 to 10 years out from now.  During this period the winning BRICs (the emerging economies of Brazil, Russia, India and China – if any of them do make it) will really have the position to reshape both the business world and capitalism itself.  The mechanism to do this (G20) is already being put in place and remember that by 2019 China could control 13% of the world’s banking system and 16% of the global stock markets[2].

Conclusion

So now is not a time to sit back and wait – it is a time to sense, inter-act with customers and learn.  I propose that our customers will go through 4 – 5 waves or phases of change.  Of these 2 will probably have a permanent impact.  The first of these is the “Generation Y” effect within  Phase 2:  Acceptance. Here, attitudes and behaviours could be shaped for a lifetime.  Finally, the second phase to have a permanent impact is Phase 4: Restructuring when new (as yet unidentified) employment sectors emerge.

So now is the time to sense and explore these proposed waves of change.  Before your competitors do.

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[1] The Daily Stat. Harvard Business Publishing. April 1, 2009

[2] DB Research (2009) China’s financial markets: A future global force? March 16

Tags: business strategy, capitalism, customer strategy, economic recession, lehman brothers, marketing strategy, recession, scenarios

11 Feb 09 Davos 2009, Recession and Business Strategy: Quo Vadis?

Davos: Are the muddied waters clearer? [Updated 25 February 2009]

I thought that I would save my next blog entry on the strategy implications of economic recession until the conclusions of the World Economic Forum meeting in Davos emerged.

I wanted to use the output from Davos to review my trajectory of change, introduced in the 23rd January blog entry.  Regular readers will know that I have produced four scenarios that, I feel, encompass the broad range of futures that lie ahead of us in the current financial crisis. These scenarios were introduced in my Executive Briefing 2009: Signposts to where? and you can download the full working paper here, after registering, which is incidentally regularly updated as we progress along the bumpy road that is the future.  I have released the latest version on 25th February which includes more implications in respect of recession and business strategy that should, I feel, be debated at senior management and board levels.

The scenarios are reproduced again below:

The scenarios are driven by two forces that act along a continuum. Running from north to south we have the degree of global co-operation that actually appears to solve the current crisis, and running west to east we have industry contagion, broadly how far the crisis creeps out from the banking sector to infect other industries.  The fate of GM and particularly Chrysler is a good example of “industry contagion”.

My last trajectory of change proposition (published on 23rd  January) is shown below:

Looking at Davos and associated events (including the latest losses in the UK banking sector), it is clear that we are now standing at the edge of, or starting to wade into, the River Rubicon. The Rubicon is the divide between the two left hand scenarios (Focused Change and Globalization Ahead) which imply a relatively quick economic recovery and the two on the right Capitalism II and The Jigsaw – that imply a deeper, longer economic recession. We currently have two views on how wide the Rubicon really is. The IMF has scaled down its 2009 forecast for world economic growth from 2.2% to 0.5%. However the IMF is in the (relatively) optimistic camp, forecasting a significant turnaround in 2010 with even the UK moving into positive growth[1]. In the other camp, we have the view that we are in for a longer slump[2], [3] supported by the prospect of more bad news from the banking sector[4]. There is growing evidence that this may be the case, with some arguing that the UK is positioned to experience the great depression[5]. The view, that we are in for a long-term recession, has received some support with the Bank of England’s 11th February announcement that the UK’s economy will probably shrink by 4% year on year in quarter 2 2009.

Possibly the bad news is being fed to us in reasonably digestible doses?

We can also see the first troublesome shoots of protectionism from workers’ protests in the UK to the Buy American content of the American Recovery and Reinvestment Act[6], [7], [8].

These observations, coupled with continued ambiguity of the level of global co-operation emerging from Davos[9],[10], has led me to the rather unfortunate conclusion that we may be heading broadly towards The Jigsaw as an outcome scenario. I have updated my trajectory of change as shown below and you can see that I have added a broad landing zone:

So what does this mean for strategy?
It is still too soon to judge with any certainty what the outcome will be. As described in my working paper, we need to experience the world’s reaction to one or more shaping events to know where our ultimate destination will be. This means that we have to consider seriously what life will be like in both Capitalism II and The Jigsaw.

However, at least one action is on the immediate agenda and that is to consider the impact of a prolonged economic downturn and I’m talking about a period of negative or very low levels of economic growth over a 3 to 5 year period within the developed economies. Just going back 12 to 18 months, many organisations had formed their strategies on the assumption that the developed economies would suffer a brief, 12 month period of shallow growth or stagnation. Pinning one’s hopes on such an outlook now looks surprisingly shaky.

We now have to look at how watertight our boat is to cross the Rubicon, a journey that could take 3 to 5 years.

This means that you should consider stress testing your business strategy.

To start, consider these questions:

Issue #1: Core Customer Resilience: In a prolonged recession how resilient will your core, most profitable customers be? Will geographic differences emerge? What leading indicators of resilience can you put in place? Will you have to consider a new, more resilient customer group to focus on?

Issue #2: Customer Needs: Do you anticipate that your customers’ needs will change as we progress through an extended downturn? What are the implications for your products and services? Remember that currently most consumers and organisations too are just entering the initial shock phase. Their medium to longer-term buying behaviours will not yet have emerged. So you will have to be particularly adept at tracking changes. It could be that your customers’ needs will move through four cycles of change:

(a) Shock as customers face the reality of a protracted period of contraction, an experience that many will not have experienced before. Expect short-term, knee jerk decisions.

(b) Adjustment as customers change, after a period of reflection, both their businesses and lives to the new reality.

(c) Recovery as national stimulus programmes start to bite and

(d) Emergence as customers adjust to the new employment and economic landscape (to use my scenarios – life in The Jigsaw or Capitalism II). This observation, especially for the UK,  is based on the view that ultimately a new employment white knight will appear to fill that gap left by a reduced financial services sector.

Issue #3: Distributors: If there are others in the supply chain between you and the customer the final user of your product or service how well positioned are they to survive the onslaught? Do they need additional help from you? Should you consider other channels? Will, for example, Internet based distribution enjoy a further boost if customers look for a cheaper alternative?

Issue #4: Suppliers: Again, how resilient are your suppliers? Can they help you to keep up with changing demands from your current customers? Can they support you if you focus upon a new sector?

These are just four introductory questions to start the process of recession testing your strategy or seeing how watertight the boat is for a long distance river crossing.

But this only covers how we get across waters of the Rubicon. I will explore what the land looks like on the other side in later postings.

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References:
[1] IMF World Economic Outlook (WEO) Update — Global Economic Slump Challenges Policies, January 2009, International Monetary Fund, Jan. 2009.
[2] M. Wolf, Why Obama’s new Tarp will fail to rescue the banks, FT.com, Feb. 2009.
[3] P. Boone and S. Johnson, “Speeches, Testimony, Papers: Baseline Scenario, February 2009, Peterson Institute, Feb. 2009.
[4] Roubini: Anglo-Saxon model has failed, FT.com, Feb. 2009.
[5] N. Walayat, UK Recession Watch- Britain’s Great Depression?, Global Research.ca, Feb. 2009.
[6] G. Rachman, When globalisation goes into reverse., Financial Times, Feb. 2009, p. 13.
[7] G.C. Hufbauer and J. Schott, POLICY BRIEF 09-2: Buy American: Bad for Jobs, Worse for Reputation, Peterson Institute, Feb. 2009.
[8] E. Prasad, Buy American?: Global Considerations for the Proposed Stimulus Plan Clause, Brookings, Feb. 2009.
[9] C. Giles, P. Larsen, and G. Tett, Lack of inspiration unites Davos delegates, FT.com, Feb. 2009.
[10] A. Edgecliffe-Johnson, No consensus on restoring trust in business, FT.com, Feb. 2009.

Tags: business strategy, economic recession, economic recovery, marketing strategy, recession, scenarios, slump, world economic forum