Recession Survival: Look again at the outside world

Every once in a while a piece of academic research lands on my desk just at the right time.

Just last week I read a research article from two academics in the US focusing upon strategy and the way that managers see the business environment (please see References [1] at the end of this article).  In short, the way that managers and business leaders see and interpret the outside world shapes their decisions and of course the strategies of their organisations.  All very commonsense stuff.  But we are facing a period of environmental turbulence and one of those infrequent tipping points where the business world could change dramatically and forever.  So what can this piece of research contribute?

In summary, we have four pointers:

Pointer #1: Question your mental model. Now is the time to question some of the assumptions that we have taken for granted when we think about and formulate strategy.  An example would be what our customers want.

Pointer #2: Don’t just look at the usual indicators. There is a temptation to look at the world outside our organisations from an industry perspective.  But now the forces for change won’t emanate from inside our industries but outside.

Pointer #3: Change the way you plan. The danger of “battening down the hatches”.

I will now take a closer look at each of these three pointers.

Pointer #1: Question your mental model.

Arguably, there is just too much information coming in on changes both in the markets that your organisation operates in and the broader global environment for one person to digest.  During the last six months of 2008 I attempted to track the strategic implications of the financial sector ‘meltdown’ on a daily basis.  Apart from taking up time, it left me with a permanent headache!

But in all seriousness, we develop mental models to simplify this complexity to make sense of it all.  That is human nature – and we all do it.  The problem is that we tend to assume when using these mental models that the business world operates in a certain way and that certain strategies and approaches will always work.  In other words, we take predefined ’cause and effect’ relationships for granted. The temptation, as we enter recession, is to do exactly the same as we did during the last recession.  But this time the world may be starting to work in a different way.

So the message is to take a broad minded view of how changes in the outside world could hit your industry.  Don’t just assume that your sector will survive a recession relatively unscathed because it survived the 1990s downturn.  The general insurance sector is probably a good example.  This has its own strong industry cycle so some may think that in relative terms organisations in this sector will do quite well.  Perhaps they will if we extrapolate from the past. But perhaps they won’t – especially if we look at regulatory perspective emerging from the G20’s first meeting.

And here are some other established assumptions that must be revisited.

  • Globalisation will continue. Well, it just might not.  Some point to a divided Europe emerging as we progress through a recession [2], others question if globalisation has and will deliver prosperity [3].  This brings the whole issue of BRICs based strategies back onto the drawing board.
  • We know what our customers want and who they are. Well we might have done but we don’t now.  As food retailers at the luxury end of the UK food market are discovering, customers are rapidly changing their buying criteria.  And as I have argued before, this recession will deliver major change in the structure of the so-called advanced economies – and therefore major changes in who your target customers really are.

Pointer #2:  Don’t just look at the usual indicators.

Organisations, particularly those in fast moving environments, tend to focus on tracking changes and developments that happen within their industry.  New entrants, changes in distribution channels, changes in supply chains would be examples.  In times of major upheaval look further afield.  My argument is that the shape of your market place over the coming years won’t be shaped primarily by industry forces but by global forces (such as regulation) emanating from outside the industry.

Pointer #3: Change the way you plan

I hear the phrase ‘we’re going to batten down the hatches’ quite a lot at the moment. Now, this gives me the picture in my mind of an old sailing ship about to enter a storm.  The hatches are nailed down and the crew goes below decks and waits for the calm after the storm.  The only problems with this approach are that:

  1. You can’t see where you’re going during the storm and
  2. The world, I propose, will have changed quite fundamentally when the hatches are opened.

Research [1] tells us that those organisations that sense changes first and move the quickest change the way they plan.  They don’t rely totally on conventional business plans where we construct a plan in concrete for say a year ahead. They rely more on experimentation, deliberately going outside to test what’s changing and what new approaches might work and then bringing this learning back into the organisation to further develop strategy.

Paradoxically therefore recession isn’t a time to batten down the hatches, but to go out and experiment to sense emerging changes especially amongst your organisation’s customers.  If you stay under the hatches you might just lose your customers.

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[1] S. Nadkarni and P. Barr, Environmental Context, Managerial Cognition and Strategic Action: An Integrated View, Strategic Management Journal, vol. 29, 2008, pp. 1395-1427.

[2] J. Pisany-Ferry and Z. Darvas, Policy Brief 2008/10 Avoiding a new European divide, Bruegel, 2008.

[3] J. Bivens, “Everybody wins, except for most of us, Economic Policy Institute, Nov. 2008.