Tuesday, November 15, 2011

Agility as a Cushion Against an Economic Downturn

I came across an article in McKinsey Quarterly from April 2007 entitled "Preparing for the Next Downturn" Richard Dobbs, Tomas Karakolev, and Rishi Raj that discusses readying companies for the next recession. The basis for such thinking was that economists are usually unable to accurately predict bear markets or recessionary conditions. A quote I particularly enjoy is from economist Paul Samuelson who says, "Economists have correctly predicted nine out of the last five recessions." Such unpredictability in long term economic projections can scare any executive. This is no more true than during the last decade when the United States became engulfed in two recessions--one of which the country is still struggling to recover from. It becomes apparent that effective strategy comes in prevention and planning as well as reactionary decision making.

The importance of planning can also be seen in Donald Sull's article entitled "Competing through Organizational Agility" which argues for the capacity of firms to "identify and capture opportunities more quickly than rivals do". This seems to be even more important when navigating the times before and during an economic recession. With agility, a firm can be better equipped to come out on top of its competition. For example, the companies surveyed by Dobbs, Karakolev, and Raj who adjusted their line of thinking during recessionary times (like more emphasis on mergers, acquisitions, alliances, and joint ventures) had 13 percent higher revenues than those who focused on more organic forms of development.

I also subscribe to Sull's points about portfolio agility following a bottom-up trajectory. This aligns with Dobbs, Karakolev, and Raj's idea of balance sheet flexibility. Sull argues that executives and managers should follow thoughtful ideas from frontline employees. Furthermore, executives should avoid making decisions based on politics and emotions. Rather, data and logic should rule the decision-making process. Keeping a project based on prior positive experiences with it could surely sink a company in the future as the economy evolves beyond a project's shelf life.

A question to consider, though is can these decisions completely protect a firm from a recession? Or, rather, are the steps listed in the aforementioned articles more for the purpose of providing a cushion against the full brunt of a recession. For example, is it evident that Lehman Brothers, Goldman Sachs, or any of the other banks that were "too big to fail" did not have a strategic direction that was agile enough to prepare for the downturn of 2008? Or was the fall of these firms simply the result of enormous losses that were too difficult to overcome in any circumstance? These are questions that companies can ask themselves and learn from when navigating through the recovery and subsequent preparation for the global economy's next downturn.

Sources:

Dobbs, R., Karakolev, T., & Raj, R, "Preparing for the Next Downturn", McKinsey Quarterly (April 2007), https://www.mckinseyquarterly.com/Operations/Performance/Preparing_for_the_next_downturn_1982

Sull, D., "Competing through Organizational Agility", McKinsey Quarterly (December 2009), https://www.mckinseyquarterly.com/search.aspx?q=Competing%20through%20Organizational%20Agility

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