Recession-Proofing Your Organization

Put aside the myth of the ‘tamed’ business cycle. In the wake of the current economic downturn, managers must learn how to use the business cycle for competitive advantage.

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Until the 1980s, many economists, finance professionals and strategists believed the business cycle, like the stock market, was a “random walk” that couldn’t be predicted—and couldn’t be managed. In recent years, however, numerous studies have demonstrated the power of such forecasting variables as the Economic Cycle Research Institute’s Weekly Leading Index, stock prices and the bond market’s “yield curve.”1 If the business cycle can indeed be forecast in an accurate and timely enough manner, then shouldn’t managers who cultivate economic and financial market literacy and learn how to apply forecasting models manage the business cycle better than their competitors?

THE DOWNTURN MANIFESTO

A manager’s guide to surviving—and thriving—in recessionary times

Read more in this special report »

My 2004 article “Principles of the Master Cyclist2 made the case for why companies need to learn how to integrate strategic business-cycle management into their tool kits. It presented a set of principles that savvy managers can use in making tactical decisions (involving, say, inventory management, marketing and pricing) and strategic decisions (involving such things as capital expansion and mergers and acquisitions), and it offered case studies supporting the argument. 2004 was not a particularly good time to be promoting business-cycle awareness to management. The global economy had recently recovered from the relatively mild 2001 recession. The expansion, in turn, had fueled a widespread perception that the business cycle had largely been “tamed” by the sophisticated application of discretionary fiscal and monetary policies. For many business executives, the future seemed bright. Thoughts of managing the business cycle for strategic advantage were on the back burner.

The leading question

What can managers and organizations do to anticipate downturns and mitigate the worst effects of a recession?

Findings
  • Managers can forecast the business cycle using data culled from a daily reading of the financial press.
  • Executive teams must learn to implement a set of business-cycle management strategies in response to the forecasting data.
  • Organizations that “master the cycle” can outperform their rivals and become recession-proof.

Today, the myth that business cycles don’t matter has been completely shattered—not just by the current recession but also by the U.S.

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References

1. Representative studies include A. Estrella and F.S. Mishkin, “Predicting U.S. Recessions: Financial Variables as Leading Indicators,” Review of Economics and Statistics 80, no. 1 (February 1998): 45-61; C.R. Harvey, “Forecasts of Economic Growth from the Bond and Stock Markets,” Financial Analysts Journal (September-October, 1989): 38-45; R.D. Laurent, “An Interest Rate-Based Indicator of Monetary Policy,” Economic Perspectives 12 (January 1988): 3-14; and M. Chauvet and J. Piger, “Identifying Business Cycle Turning Points in Real Time,” Review 85, no. 2 (March-April 2003): 47-61.

2. P. Navarro, “Principles of the Master Cyclist,” MIT Sloan Management Review 45, no. 2 (winter 2004): 20-24.

3. For sample studies, see Note 1 above.

4. Navarro, “Principles,” 22.

5. J.G. March and H.A. Simon, “Organizations” (New York: Wiley & Sons, 1958).

6. Navarro, “Principles,” 22.

7. Representative studies include J. Kypriotakis, “Marketing in Tough Times,” 2002, www.lysisintl.com; and R.G. Picard, “Effects of Recessions on Advertising Expenditures: An Exploratory Study of Economic Downturns in Nine Developed Nations,” Journal of Media Economics 14, no. 1 (2001): 1-14.

8. Details may be found in P. Navarro, “The Well-Timed Strategy: Managing the Business Cycle for Competitive Advantage” (Upper Saddle River, New Jersey: Wharton School Publishing, 2006), 102-104.

9. R.F. Harrod, “Imperfect Competition and the Trade Cycle,” Review of Economic Statistics 18, no. 2 (May 1936): 84-88.

10. Navarro, “Principles,” 23.

11. See Navarro, “Well-Timed Strategy,” 28-30.

12. A. Chandler, “Strategy and Structure: Chapters in the History of the Industrial Enterprise” (Cambridge: MIT Press, 1969).

13. See P. Bromiley, P. Navarro and P. Sottile, “Strategic Business Cycle Management and Organizational Performance: A Great Unexplored Research Stream,” Strategic Organization 6, no. 2 (May 2008): 207-219.

14. Such compartmentalized behavior appears to fit the pattern of localized learning described in R.M. Cyert and J.G. March, “A Behavioral Theory of the Firm” (Englewood Cliffs, New Jersey: Prentice Hall, 1963). In “local neighborhood search,” companies respond to problems identified in a particular area by searching for solutions in that area.

15. Navarro, “Well-Timed Strategy,” 79-81.

16. Ibid, 69-71.

17. Ibid, 134-136.

2 Comments On: Recession-Proofing Your Organization

  • navindu | April 3, 2009

    The approach suggested in this article may be useful and practical for Very Large corporations. It is complex, academic and very labor intensive.

    All issues and sulutions described in the above article could be covered by following a very simple process …. I call it “Innovationeering” – Continuously Engineering Innovations by Design!

    All businesses – small, medium, large & very large – should get into “The Business of Innovations”. “The Business of Innovations” is driven by continuously creating “Knowledge Advantage” for your company. Knowledge created is made productive by discovering, evaluating and selecting Product, Process and Management Innovations.

    It is not necessary to describe what Product and Process Innovations are. As for the Management Innovations, they include:
    1. People side of the equation i.e. Compensation, Incentives, Rewards, Awards, Organization, Performance Definition and Evaluation, Education / Training, HR Policies, etc.
    2. Clearly defining Vision and Strategies and creating buy-in through out the organization.
    3. Having strategic thinking capabilities and capability to identify emerging “market waves and technology waves”.
    4. Doing smart mergers, acquisitions, partnerships and alliances.
    5. Creating substantial and sustainable competitive advantage.
    6. Ability to identify and implement innovations.
    7. Promoting and supporting “Innovation Culture”.

    Being continuously in “The Business of Innovations” produces three major types of benefits:
    1. Substantial and Sustainable Cost Advantage (no need to do cost cutting in a reactive mode).
    2. Substantial and Sustainable RPM (Revenue, Profit and Market share) Growth in timely fashion.
    3. Create “Strategic Security” for the business.

    This process requires to instill “Innovation Culture” in the Enterprise by Senior Management including themselves! Continuously being in the “The Business of Innovations” – regard less of what products you make, what services you offer or what size business you are – produces substantial and sustainable RPM (Revenue, Profit, Market share) Growth. It will enable CEO’s and business owners create “Tactical Comfort and Strategic Security” for their businesses. Tactical comfort means achieving desired quarterly and annual objectives. Strategic Security means making sure the business remains in profitable business 5 to 10 years from now.

    Simply put, this is what “Recession Proof” management cycle is all about. CEO’s, Business Owners, any lower level manager and all employees could understand this simple straight forward approach and the best of all, they will implement it and continuously practice it!! Please refer to our website http://www.innovationeering.com for more details.

    Thank you.

    Pradip (Peter) I. Bhatt
    CEO, BGCi, Inc.
    702-845-5462
    bgciinc@yahoo.com

  • Greg Wallace | April 19, 2011

    These are innovative ideas that businesses would do well to follow. To get ahead of the economic curve could strengthen companies in every aspect not only in recessions but growth cycles. Thanks for all the information.

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