The economy is slowing -- here's what Australian companies need to do to win the next downturn

Source: Getty

  • Australia’s run of uninterrupted economic growth without a recession has stretched to almost 3 decades. But the headwinds are growing in both the global and local economic outlook.
  • Research that reviewed 5,000 US companies over the past 5 downturns shows firms have to prepare early, and be active and proactive in their decision making, to get the best outcome and actually grow during the downturn.
  • We’ve summarised it into 5 ways leaders can take advantage of the next downturn.

It doesn’t matter where you look right now, the signs show the global economy is slowing.

We’ve seen that, in the data over the past few months, the stock market funk and oil price collapse of October to December was partly because of worries about global growth, and just this week both the IMF and UN have downgraded their outlook for growth across the planet for 2019.

Here at home we have clear signs the growth rate of China – Australia’s biggest trading partner – is slowing. And we also have elevated risks the fall in housing prices is threatening consumption and thus the domestic economy.

Risks seem to be growing.

But just this week, PWC reported Australia’s CEOs are especially worried about the trade wars — but they are doing nothing about it.

This lack of reaction is entirely consistent with many business practices across the globe during downturns, says BCG Henderson authors Martin Reeves, David Rhodes, Christian Ketels, and Kevin Whitaker in their paper “Advantage in Adversity; Winning the Next Downturn”.

Whether the slowdown becomes a downturn is still open to debate. The US central bank, The Federal Reserve, has signaled a pause in rate hikes, the RBA is always pragmatic and will likely ease if the local economy needs it, and the authorities in China are injecting cash in an effort to stimulate the economy to try to arrest it from the current slowdown. And of course the end to the trade war would be a positive.

But, if there is one key finding that emerges from Reeves’ and his colleagues work, it is that companies who react proactively, rather than reactively to weakening conditions come out on top in the sales and profitability stakes.

“The competitive stakes in downturns are high,” the authors say.

“In the last four downturns, an average of 14% of companies increased both their sales growth rate and EBIT margin despite the challenging circumstances. During downturns, those companies grew revenue by 14pp more and improved EBIT margin by 7pp more than the 44% of companies that declined in both metrics.”

Reeves and his colleagues say having studied 5,000 U.S. Companies across the last five downturns, “the evidence reveals some general rules that apply more broadly — giving leaders a starting point to tailor plans for their own companies.”

They’ve identified “ten ways leaders can take advantage of the next downturn”, here’s a snapshot:

1. Prepare for the next downturn, not past ones

It’s 10 years since the Financial Crisis and close to 3 decades since the Australian economy went into recession. So the authors stress the economy is very different now. Globally the “most probable scenarios point to a less severe downturn” so “for many fundamentally healthy companies, the constraint to successfully navigate a downturn may be not cash, but the wisdom to invest it against the right opportunities.”

Technological change is also disrupting industries and the authors say, “the next economic downturn will likely increase the potential risks and rewards even more — but it will still be only one dimension of disruption among several. Therefore, companies will need to continue pursuing their long-term digital agenda to keep up with the accelerating pace of technology.

“The political and social environment is also less stable,” the authors note.

That means, “leaders need to ensure that their businesses create social as well as economic value, as well as playing a proactive role in shaping key social and political issues, to keep the game of business going” they say.

2. Anticipate a wide range of scenarios

Stay away from point forecasts and faux precision in “circumstances where many plausible outcomes exist,” the authors say.

That doesn’t mean do away with economic scenario planning, rather these should be prepared as a “baseline” projection, which are then stress tested for impact on the firm and its industry. The point is to “measure if your company is robust to different outcomes — allowing you to identify the biggest potential risks and create rapid response options where necessary.”

A similar approach can be taken to the chances and reality of disruption and its impacts.

3. Act early – be preemptive

Be active, make decisions, because “the history of company responses to downturns shows that the out-performers tend to anticipate the impact and make the first moves, such as reducing their cost base,” Reeves and his colleagues say. But they also highlight that “companies are also well-advised to act preemptively when making the fundamental changes that will enable them to thrive in the long run.”

Crucially they stress that the research “shows that the most important observable success factor in corporate transformation is how early the program was initiated.”

So get busy – early.

4. Tailor your reactions to specific parts of the business

When faced with a downturn its easy to make cuts and changes across the board in order to economise. But Reeves and his colleagues say firms should not be indiscriminate in the way they cuts costs.

Rather, “leaders should also have an eye on renewal, understanding what their future growth engines will be.” That means favouring the growth engines of the future, protecting the “budgets of businesses or geographies that still have attractive growth opportunities, while making the necessary cuts elsewhere.”

Reeves calls this “strategic ambidexterity”.

5. Structure your response so the firm can ‘Survive, Perform, Thrive’

Naturally during a downturn, leaders can be focused on protective strategies for their business. But the authors say the response should be considered “across three layers ranging from defensive to offensive moves” while taking into account the specific situation the firm finds itself in.

Source: BCG Henderson Institute

Maintaining viability, the effort to survive includes “reducing inventory and managing receivables and payables more aggressively to protect cashflow; streamlining the core business to increase efficiency and flexibility; and reassessing the long-term viability of businesses, divesting or closing some if necessary,” the authors say.

Companies that build resilience will perform best during the next downturn. Leaders do this “by keeping financial buffers to be able to respond to unanticipated opportunities or threats; shrinking planning cycles to increase adaptiveness; and hiring talent with a range of backgrounds and implementing enabling factors to promote a diversity of ideas,” Reeves and his colleagues say.

Finally they also say a company can thrive by increasing vitality which they say means, “the ability to explore new options and grow sustainably in the long run — for example, by assessing competitors’ vulnerability and capitalising on weaknesses by investing in new capacity or M&A; implementing metrics to measure the company’s capacity for future growth; and adopting a forward-looking, long-term agenda.”

As difficult as it will be when the next downturn comes, being proactive, protecting a companies better performing businesses, and investing for future growth is a strategy that can empower growth – even in a slowing economy.

You can take a deeper dive into the full report which also highlights some of the other approaches companies should take in the next downturn here.

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