Future Uncertainty and How Business Leaders Can Adapt
2022 was a year that brought countless challenges to the forefront of the global economy, including rising inflation, supply shocks, and overall macroeconomic stagnation. The volatility in the market has thus enabled analysts to draw comparisons to both the stagflation of the early 1970s and to a lesser degree, the calamitous mortgage crisis of 2007 and 2008, pointing to parallels in the relative increase in price levels and accompanying supply shocks that negatively impacted the global economy. While most economists agree that a recession is looming, it is not at all clear yet its degree of severity and timeline. In any case, business leaders are now being forced as they were during the 2008 recession to innovate and adapt to the precarious economic environment that the world now finds itself in. Leaders of businesses therefore will need to equip themselves with the proper tools and skills necessary to overcome the upcoming hardships that their respective firms will face. The purpose of this article is to examine some of the main consequences of the downturn and how the leaders of firms will need to respond accordingly.
Negative Impacts on the Global Balance Sheet
The exact nature of the volatility itself is crucial to understanding the extent of the crisis and how business leaders should thereby respond to it. For instance, it is becoming increasingly clear that after three decades of continuous growth, the global balance sheet may be in the early stages of decline. This is exhibited by rising inflation and interest rates, paired with the declining amounts of bond and global equity prices. The relative outpacing of growth in real estate prices by inflation levels likewise demonstrates the decrease in the global balance sheet. In addition, debt is now rising at a higher rate than GDP itself.[1] Similarities abound particularly to the 1970s oil shock which created substantial stagflation. With current inflation at a 40-year high due to similar shocks in the energy market, higher prices as well as lingering effects from the pandemic will have a sustained impact on global growth forecasts.
Global Effects of Uncertainty
Current civil and economic strife has impacted different global regions unevenly. In Europe, monetary tightening by the European Central Bank combined with drastic energy shortages caused by the sanctions placed on Russian energy imports has resulted in high inflation rates. In Asia, GDP growth has been hampered by China’s (now abandoned) zero-COVID-19 policy as well as Japan’s ever-increasing debt-GDP ratio, leading to decreasing consumer spending. This has been further exacerbated by rising inflation trends. In the US, consumers have been forced to curb their spending and rely on savings accumulated by many households during the Covid pandemic. While the job market in the US has been so far been resilient, consumer spending cannot be relied upon to drive near term growth in light of the current macroeconomic environment.
Viable Responses from Business Leaders
How should businesses and consumers respond to the challenging dynamics of the oncoming crisis? At this point in time, learning from previous periods of tumult is essential for market participants to avoid the potential risks and adapt accordingly. Firms will thus need to revisit and reimagine their relationships with consumers and clients to better drive engagement, utilizing digital solutions and other viable avenues to create a competitive edge. Inflation pressures will require firms to optimize their investments and improve productivity. In addition, business leaders will be challenged with higher input costs and consumers’ changed spending behaviors. Successful companies will need to find ways to offer profitable products that add value to their clients. In many instances business leaders may find that eliminating products and services that are not aligned with consumer demand trends will drive the required focus to maintain profitability.[2]
Business leaders should also prioritize capabilities and inputs that are resilient during periods of crisis. This may involve paying specific attention to bolster financial planning, improve supply chains, and invest in talent. Business leaders need to better understand and articulate the fundamental drivers of their businesses via scenario testing and leveraging newer technologies. This will improve forecasting and result in overall improvements in the financial planning framework. Incorporating more granular market, operational, and financial data should also improve a firm’s ability to reduce risks resulting from market uncertainties, assisting executive decision-making capabilities.[3] Improving the efficiency of supply chains relies on the successful deployment of digital solutions and specialized resiliency applications. Retaining and attracting talent specialized in the supply chain data analysis will be a key success factor on this particular front. Revisiting former downturn cycles to learn how firms navigated prior economic shocks will provide important “lessons-learned”. Firms should carefully analyze both prior business successes and failures and incorporate those into their enterprise risk management framework. Focus on resiliency during downturns can significantly improve a company’s ability to remain flexible and adapt to further challenges.[4]
Investing in Employee Development
Developing accurate and relevant business plans in the midst of economic turmoil is a challenging task. It is crucial for business executives to prioritize talent retention and recruiting. During times of market turbulence, employers may find it increasingly difficult to fill open positions due to staffing restrictions. To deal with this issue, businesses should prioritize cultivating and training talent internally to further their current skillsets. Improving internal mobility for employees should be a major goal of business leadership in the coming years to ensure continuing stability. Studies have shown that 60% of people who leave firms do so because of the inability to find internal career advancements. Currently only 10% of new hires in the US are internal candidates. Utilizing independent contractors can also help firms to execute key initiatives without permanently increasing staffing costs and headcounts. Utilizing on-demand workers allows firms to free up internal resources to address strategic initiatives that are core to a firm’s long-term success.[5] Listening closely to employees and their main concerns is of key importance and clearly demonstrates that company culture remains intact during difficult times. Successful executives will often learn how to become better leaders during down-cycles and encourage their teams to focus on long-term objectives.[6]
About BIP.Monticello
BIP.Monticello, a member of the BIP Group, is a management consulting firm supporting the financial services industry with its expertise in digital transformation, change management, and financial services advisory. Our understanding of the competitive forces reshaping business models in capital markets and digital banking are proven enablers that help our clients drive innovative change programs to be more competitive and gain market share in new and existing businesses.
Sources
2. https://www.ey.com/en_gl/consumer-products-retail/innovate-in-a-recession-to-emerge-stronger
3. https://www.bcg.com/capabilities/corporate-finance-strategy/expert-insights/juliet-grabowski
4. https://www.bcg.com/capabilities/corporate-finance-strategy/expert-insights/dustin-burke
5. https://www.bcg.com/capabilities/corporate-finance-strategy/expert-insights/nithya-vaduganathan