Even though the Great Recession officially is over, the near-term future of the economy continues to show signs of an L-shaped, prolonged downturn with little growth. This trend has left most companies around the world with reduced organizational resources, scaled-down processes and reduced demand for output.
Although periods of economic contraction and expansion are germane to modern economies, the strategy that firms choose to cope with downturns may dictate how adversely they are affected. It is important for modern firms to approach economic downturns with more sophistication than traditionally has been the case.
First, firms must recognize that as opposed to the reactive practices of the past they can develop in-house economic-cycle management capabilities using some of the emerging research from the business field. To do so, firms must first focus on developing and deploying forecasting capabilities, rather than leaving business-cycle forecasting to outside economists. Specifically, tools such as the GDP-forecasting equation, stock market trends, the shape of the bond-market yield curve, the Economic Cycle Research Institute's Weekly Leading Index and the Conference Board's Composite Index of Leading Indicators have predicted previous recessions with reasonable accuracy. Firms must focus on developing their employees' financial literacy and understanding of macro-
economic issues to promote a culture of economic-cycle orientation. The stronger a firm's in-house economic-cycle orientation, the more likely the firm will be able to take proactive measures in responding to economic cycles.
Once economies are hit by a recession, a vast majority of firms choose defensive moves such as reducing their number of employees or increasing operational efficiencies. Others opt for aggressive options such as exploring new markets and investing in acquiring new assets. Research suggests that a special combination of these defensive and aggressive moves provides the best results for firms. For example, a study based on past recessions concluded that firms that focused on increasing operational efficiency while simultaneously developing new markets and enlarging assets fared better than firms that pursued alternative combinations.
Economic downturn brings mixed blessings for different companies and sectors. Some get highly distressed; others suffer less; and still others actually do better.
Although patterns of which sectors suffer distress and which experience prosperity are somewhat predictable, some consumer behavior changes are hard to decipher. For example, the indulgence sector, specifically chocolates and plastic surgery, showed upward trends during the current recession. It is therefore very important for firms to engage in market sensing both during and after recessions. I am not recommending traditional marketing research involving data collection and report writing. Instead, my call is for firms to develop processes that enable them to better understand consumers and how their buying behaviors change during periods of economic downturn. For a quicker response to such changes, it is important that firms develop flexibility and agility in their strategic plans, organizational structures and operations.
Developing innovative ways to add value for customers is a key component of an effective response to changes in customers' buying patterns. During the recent recession, for example, several companies succeeded in mitigating recessionary pressure because of their innovative product financing plans. In my opinion, smaller companies, because of their in-built flexibility and agility, have significant leverage over larger ones to quickly develop and deliver superior value to customers. However, the lack of proactive, business-cycle orientation usually lends them in a crisis situation during an economic downturn, and thus their strengths -- flexibility and agility -- remain largely untapped. Developing a business-cycle orientation is an area smaller companies must prioritize.
Rajat Panwar holds the Chapple Chair of Business and Social Responsibility at Northland College in Ashland.