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. In the other camp, we have the view that we are in for a longer slump,  supported by the prospect of more bad news from the banking sector. There is growing evidence that this may be the case, with some arguing that the UK is positioned to experience the great depression. 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, , .
These observations, coupled with continued ambiguity of the level of global co-operation emerging from Davos,, 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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 IMF World Economic Outlook (WEO) Update — Global Economic Slump Challenges Policies, January 2009, International Monetary Fund, Jan. 2009.
 M. Wolf, Why Obama’s new Tarp will fail to rescue the banks, FT.com, Feb. 2009.
 P. Boone and S. Johnson, â€œSpeeches, Testimony, Papers: Baseline Scenario, February 2009, Peterson Institute, Feb. 2009.
 Roubini: Anglo-Saxon model has failed, FT.com, Feb. 2009.
 N. Walayat, UK Recession Watch- Britain’s Great Depression?, Global Research.ca, Feb. 2009.
 G. Rachman, When globalisation goes into reverse., Financial Times, Feb. 2009, p. 13.
 G.C. Hufbauer and J. Schott, POLICY BRIEF 09-2: Buy American: Bad for Jobs, Worse for Reputation, Peterson Institute, Feb. 2009.
 E. Prasad, Buy American?: Global Considerations for the Proposed Stimulus Plan Clause, Brookings, Feb. 2009.
 C. Giles, P. Larsen, and G. Tett, Lack of inspiration unites Davos delegates, FT.com, Feb. 2009.
 A. Edgecliffe-Johnson, No consensus on restoring trust in business, FT.com, Feb. 2009.