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
My 2004 article “Principles of the Master Cyclist”2 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?
- 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. Federal Reserve System’s role in formulating the economic policies that helped trigger the crash.
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.