This briefing takes the view that recessions are times of change, or, to use the words of the economist Joseph Schumpeter, creative destruction. If recession brings creative destruction, or the search for new solutions, then established organisations might well be vulnerable to competitors, new entrants and upstarts who spot emerging opportunities first.
The message here is therefore that to win through – at least from the perspective of client management – we need to:
(a) Understand what the process of change during a recession might look like and
(b) Identify which of our clients are going to win through.
To look at these issues, this briefing is structured as follows:
(I) What will the downturn look like for us?
(II) Phases of Change. If recession brings creative destruction, will change come in one huge wave or multiple waves?
(III) Identifying the Winners. Which of your clients are, probably, more likely to win through and who are the potential failures?
To answer these questions I am going to take the position of looking at commercial as opposed to consumer clients. so this is really aimed at a B2B audience.
(I) What will the downturn look like for us?
The first point to make is that nobody knows for sure what the outlook is. This is the interconnected world’s first recession and we don’t know with certainty whether or not we face an “L”, “U”, “V” or “W” shaped future. As observers have recently noted, we do not even know if we are at the bottom yet.
However, a look at the April forecast conducted by the IMF and subsequently analysed by the Brookings Institution, can give us an interesting insight into what might be ahead. The most interesting part of the analysis conducted by Brookings relates to the length of time that it will take countries to get back the wealth they enjoyed before the recession started. As you can see from Illustration 1, we face a very much mixed bag which has obvious implications for strategy making. The bars indicate when it is estimated we will regain our wealth in GDP per capita terms:
Illustration 1: Regaining Lost Wealth
Source: L. Chandy, G. Gertz, and J. Linn, Tracking the Global Financial Crisis: An Analysis of the IMF’s World Economic Outlook, Washington: Wolfenson Center for Development at Brookings, 2009.
We can see that whilst the current turmoil is described as a “global” recession, there are material country variances. These variances even exist, as we can see, within the emerging economies with Brazil lagging behind China and India. Central and Eastern European economies (CEE) are not expected to regain their wealth position until 2012 and are therefore even further behind. We can also see that certain advanced economies (most notably the UK, Italy and Spain) have been hit particularly hard. These economies are not expected to regain their wealth position until beyond 2015.
For some this is going to appear to be a long period of stagnation and slow growth. And I would argue that the longer this period is, the deeper the pressures for creative destruction will be (which as an aside should not be viewed in the long-term as a negative outcome – creative destruction brings innovation and therefore opportunities for those with their eyes open).
What is also very obvious is that we are going to have to take a country specific approach to recession management. Indeed, there is evidence that notable within country industrial and geographic differences are emerging.
But if, particularly from the perspective of the advanced economies, recovery and therefore creative destruction is going to be a long and deep process, we need to understand what the process itself might look like. Will there be one wave of change or multiple periods of change with different characteristics?
(II) The Phases of Change
It is my proposition that the recovery or creative destruction period can be broken down into a series of phases each with distinct characteristics. I have introduced this proposition in an earlier posting but to recap, these phases are:
#1: Shock and Horror. Nobody expected a downturn as sharp and severe as the one that hit us from September last year. As this came “out of the blue” we all reacted with shock and took immediate, short-term steps to protect our businesses and our livelihoods. These steps included, typically, cutting back on entertainment, travel and training budgets. These were understandable, but reactive changes. Changes in needs and buying behaviour in this phase are, by definition, short-term. We should not base any long-term strategy decisions on behavioural changes in this first phase I suggest. I would argue that now we are coming to the end of this phase and another, far more important phase awaits us.
#2: Acceptance. If recovery takes a long time then this will be the most important phase. Consumer behaviour may be reshaped permanently and businesses will have to radically rethink their strategies to cope with a period of change and low economic growth.
#3: Emergence. In time recovery will take place. Unlike some observers, I don not believe that capitalism is fatally wounded. It has to change, but it will still be a permanent part of our lives. So, the steps that are now being taken to stimulate confidence and growth will bear fruit. A sustained recovery will appear.
#4: Restructuring. New industries will appear to fill the gaps left by the dying sectors. Energy and bio-technology are just two examples.
For an economy such as the UK’s, my subjective view of when these phases will appear is shown in Illustration 2 below:
Illustration 2: The phases of creative destruction
The vertical axis shows the impact on behaviour. Importantly, note the the effect of phase 1 is, I feel temporary, and we are coming to the end of this first phase now. Even more importantly, phase 2 is dawning on us and its behavioural effect will be permanent – hence the red line rising and then running parallel to the timeline.
(III) Identifying the Winners
From the perspective of client management and selection, phase 2 is obviously critical. We need to identify who we think will win and who we think will lose. We also need to identify how we should change our offerings to meet the changing needs and behaviours of clients as they journey through phase 2.
Looking at geographical locations and industry sectors are obvious first steps in selecting the winners and the losers. Unemployment rates in the US are nearly three times higher in construction than they are in healthcare for example. But geographic and industry segmentation alone will not answer our question – who will survive and win?
In times of crisis and change we have to look at behaviours as well. Even within geographic and industry segments there will be significantly different responses. We therefore have to analyse behaviours at the organisational level.
John Quelch of Harvard Business School has published a very useful approach to segmenting customers by behaviour during this recession. His proposals are summarised in Illustration 3:
Illustration 3: Behaviours in a Recession
Source: J. Quelch and K. Jocz, “How to Market in a Downturn,” Harvard Business Review, 2009, pp. 52-62.
This provides us with a good start to thinking about behavioural segmentation but I would make two observations:
(1) These behaviours, I feel, are very much geared to phase 1 Shock and Horror of the creative destruction process. We need to consider a different behavioural set if we are in this for the long-term.
(2) This approach is particularly suited to the analysis of consumers, not business clients.
We do however have a framework to understand and classify the strategic behaviours of organisations that we can use to judge how they react during phase 2. This classification is shown in Illustration 4:
Illustration 4: Strategic Responses to the Crisis
Source: Miles, R E and Snow, C C (1978) Organizational Structure Strategy and Process. McGraw Hill
Each of these four types have different issues for you to consider:
- Reactors are really looking at corporate death but they cannot see it. These are organisations in denial. They firmly believe that the “old ways will win through” and plan to sit the recession out focusing on typically across the board cost cutting. Reactors are not very good at picking up trends in the real outside world and will firmly believe that when the recession is over life will be as it was before. You may choose to bring changes in the competitive environment that you can see to the attention of Reactors. But you will need hard evidence and face an uphill struggle. Reactors are destined to be the real casualties of the coming shake up. I give reactors therefore a red light.
- Prospectors are driven by the desire to be the first in with an innovation. “Newness” is, and has always been, important to these organisations. They take great pride in being the sector innovation leaders. If you have a good relationship, Prospectors should be easy to identify. But they have problems. They can rush in to a new opportunity without sufficient research and can forget about established clients and sectors. These characteristics are both potential opportunities for you to reconfigure your offerings. But remember that entering new sectors is a risky process. For this reason I give Prospectors an amber light.
- Analysers as a category have the best hopes of winning through. They will actively look for opportunities like Prospectors but will do it in a more considered way. Being second in is not a problem. But they will need help with research and managing the tensions between entering new sectors and getting the most out of their traditional business areas. Like Prospectors, Analysers will be wide awake to changes in the outside world. I will give Analysers a green light.
- Defenders. Defenders can be a problem. They can win through or they can fail catastrophically. Defenders do just what their title suggests. They will focus 100% of their effort on defending their current markets. If Defenders think things through properly and are sure that their sectors will be there for the long-term and they have an enduring source of competitive advantage that is difficult to emulate – Defenders can emerge as winners and get therefore a green light. But many businesses take the option to defend because it is a convenient decision. Taking this route, without thorough analysis, can bring them closer to corporate death. If you have the right relationship you should be able to tell which of your “Defender” clients will win through and which won’t. As a rule, Defenders tend to focus on internal cost cutting to stay competitive – can you help them do this and help them to stay on top of change in their chosen sectors?
If the country(ies) that you operate in face the potential of a long slow recovery then you need to consider which of your clients are capable of making it through and what help they may need from you. Understanding your clients’ responses to the crisis will help you to identify the potential winners and losers. But it will also help you to understand their challenges and how your offerings and relationships must change.
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 “Creative destruction,” Wikipedia, Jul. 2009.
 A. Rivlin, “Does the U.S. Economy Need More Stimulus?”
 L. Chandy, G. Gertz, and J. Linn, Tracking the Global Financial Crisis: An Analysis of the IMF’s World Economic Outlook, Washington: Wolfenson Center for Development at Brookings, 2009.
 L. McPheters, “Unemployment’s Uneven Impact,” Knowledge at W P Carey, Jul. 2009.
 Miles, R E and Snow, C C (1978) Organizational Structure Strategy and Process. McGraw Hill