Recession planning: moving strategy to the top of the list
Chief Executive Officer Oliver Shaw discusses three key behaviors organizations can adopt to help plan for recession and thrive in the future.
Published by Oliver Shaw
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The UK economy has defied the forecasters and narrowly avoided confirmation that it’s in recession. But let’s not get ahead of ourselves.
The worst effects the cost-of-living crisis are still to come and we’re experiencing new waves of global disruption from the war in Ukraine and China’s zero-Covid policy reversal. Earlier this month, the World Bank made it clear that the developed world can still expect to see a sharp and long-lasting slowdown.
On top of that, while economic uncertainty and geo-political turbulence are not comfortable conditions to operate in, most leadership teams are dealing with the fourth existential risk to their business model in three years. Still, organizations have been navigating tough economic terrain and black swan events since 2008.
What’s certain is that uncertainty is not going away.
So, the onus is on business leaders to plan and make room for strategic review and adjustments, so they can appropriately manage such turbulence, including recession.
To do this, management teams need to make sure three things are front of mind: clarity on what matters to the success of the business, data-driven decision making, and agile modeling and taking action.
But first, let’s be clear on what recession planning is, what the benefits are and how to prepare your business for a recession.
The Definition of Recession Planning
Recession planning is a comprehensive strategy employed by businesses and governments to anticipate, navigate and mitigate the impacts of an economic recession.
This strategic approach involves meticulous analysis of economic indicators, market trends and financial vulnerabilities to proactively prepare for potential downturns.
It encompasses a range of measures, from optimizing operational efficiency and cost-cutting to diversifying revenue streams and bolstering financial reserves. The goal is to enhance resilience, ensuring that organizations can weather economic storms, maintain financial stability and continue to provide value even in challenging economic climates.
Effective recession planning is a proactive and dynamic process, recognizing that economic landscapes evolve, and preparation is key to sustaining business continuity and minimizing adverse effects on stakeholders.
The Key Benefits of Recession Planning
Recession-proofing is a strategic imperative for businesses aiming to withstand economic downturns and maintain stability in volatile markets. By proactively planning for economic uncertainties, businesses not only enhance their chances of survival but also fortify the foundations for sustained growth.
In the face of economic challenges, recession proof businesses exhibit a remarkable ability to retain customer loyalty, demonstrating business stability and adaptability that instills confidence in their clientele. Through careful preparation and strategic decision-making, these businesses position themselves not merely as survivors but as entities poised for continued growth even in the most challenging economic climates.
In times of uncertainty, analyzing cash flow becomes paramount for effective business management. Understanding and projecting cash flow enables businesses to navigate challenges, anticipate needs and maintain financial resilience.
Actionable steps for effective cash flow management include:
- Meticulous tracking of unpaid invoices.
- Aligning production with demand.
- Maintaining flexibility in debt obligations.
- Thorough review of spending patterns.
Maintaining robust relationships with existing customers is a cornerstone of navigating recessions successfully.
Consistent communication is key; staying in touch with clients, addressing their concerns promptly, and providing excellent customer support fosters trust and loyalty. During uncertain economic times, businesses should prioritize understanding the evolving needs of their customer base.
Conducting primary research through surveys or focus groups proves invaluable in gaining insights into shifting preferences, pain points, and expectations. By actively engaging with customers and adapting strategies based on their feedback, businesses:
- Demonstrate a commitment to customer satisfaction.
- Position themselves to meet changing demands effectively.
- Ensure long-term loyalty and resilience in challenging economic climates.
In a business’s supply chain, several key elements and steps contribute to the seamless flow of goods and services.
It begins with sourcing raw materials from trusted suppliers, followed by manufacturing or production processes. The next step involves logistics and transportation to distribution centers, and ultimately, delivering products to customers.
Assessing the reliability and stability of suppliers is crucial. Prioritize establishing strong relationships to ensure a consistent and timely supply of materials. Identifying potential risks and vulnerabilities in the supply chain, such as geopolitical, economic or environmental factors, is paramount.
This risk assessment enables the implementation of mitigation strategies, ensuring continuity even in challenging circumstances. By maintaining a resilient supply chain, an organization can enhance efficiency, reduce disruptions and deliver high-quality products to customers consistently.
Understanding market share helps businesses aiming to adapt their strategies during a recession. During economic turbulence, consumer behavior and preferences often undergo significant shifts.
Utilizing market research techniques and data analysis becomes instrumental in identifying these changes. By closely examining market share data, businesses can discern evolving trends, customer needs and emerging opportunities. This knowledge empowers strategic decision-making, allowing for the adjustment of product offerings, pricing strategies and marketing approaches to align with the current market landscape.
In essence, a thorough understanding of market share equips businesses with the insights needed to proactively respond to fluctuations in consumer behavior, fostering resilience and ensuring continued relevance in a dynamic and uncertain time.
The concept of identifying relevant complimentary businesses to recession-proof your own is known as building a synergistic network.
For example, if you own a baby product store, relevant complementary businesses may include maternity clothing store, toy stores or children’s clothing stores. Or, if you run a technology consulting firm, your relevant complementary businesses might be cybersecurity services, software development companies, IT hardware suppliers or data analytics firms.
Building partnerships or referral networks with these complimentary businesses can enhance your resilience during economic challenges, allowing cross-promotion and shared clientele.
- Ensure a healthy cash flow by closely monitoring accounts receivable, managing payment terms and negotiating favorable terms with suppliers. Timely invoicing, incentivizing early payments and adopting efficient billing practices contribute to maintaining a steady cash flow during economic uncertainties.
- Prudent debt management involves strategically evaluating and restructuring existing debt, negotiating lower interest rates and focusing on paying down high-interest loans. Prioritize essential expenditures, avoiding unnecessary debt accumulation and explore financing options that align with your business’s long-term financial health.
- Efficient inventory management prevents overstocking or shortages, optimizing working capital. Regularly assess demand patterns, negotiate favorable terms with suppliers and consider lean inventory strategies. Implementing technology-driven solutions can enhance accuracy and streamline inventory processes, minimizing the risk of tying up capital in excess stock.
- Focusing on core competencies allows businesses to allocate resources efficiently and deliver exceptional value to customers. Streamline operations, invest in employee training and concentrate on products or services that align with your strengths. This strategic focus enhances resilience by ensuring your business remains agile and competitive in its niche.
- Leverage existing customer relationships by providing exceptional service, personalized offerings and loyalty programs. Engage with customers for feedback, anticipate their evolving needs and explore opportunities for upselling or cross-selling. Satisfied and loyal customers become advocates, contributing to a stable revenue stream during economic challenges.
- Stay ahead by continuously monitoring market trends, embracing innovation and adapting to changing consumer preferences. Evaluate competitors’ weaknesses and capitalize on your strengths to differentiate your business. Invest in research and development, technology, or strategic partnerships that position your business as an industry leader, gaining a competitive edge.
- In challenging times, maintaining a visible and engaging presence is crucial. Adjust marketing strategies to focus on cost-effective channels, utilize social media and emphasize value propositions. Keeping your brand at the forefront of customers’ minds ensures sustained awareness and customer loyalty..
- Personal credit health is integral to securing favorable terms for business loans and maintaining financial stability. Regularly monitor your personal credit report, address any discrepancies and manage personal debts responsibly. A strong personal credit history enhances your ability to access credit when needed, providing a safety net for business financial requirements.
The value of creating an action plan before business slows down cannot be overstated. Proactive planning positions a business to navigate challenges with resilience, agility and a strategic focus. Scenario planning, a crucial component of this process, involves anticipating various potential scenarios and developing corresponding action plans. This methodology allows businesses to explore different outcomes, identify potential pitfalls and establish strategies to minimize errors made under stress. By envisioning a range of possibilities, businesses can tailor their responses, making them more adaptable and less prone to reactive decision-making when faced with unexpected downturns.
To ensure the success of an action plan, it is important to engage employees in the planning process. Soliciting their ideas not only harnesses the collective intelligence of the workforce but also fosters a sense of ownership and commitment to the plan’s success. The steps to solicit employee ideas include creating open forums for discussion, utilizing surveys to gather anonymous feedback and establishing cross-functional teams to represent diverse perspectives. Effective communication channels should be maintained throughout, encouraging a transparent dialogue where employees feel valued and heard. This buy-in from employees enhances the likelihood of successful plan implementation, as their insights contribute to a more comprehensive and realistic strategy.
Implementing a well-structured action plan involves clear communication of roles, responsibilities and timelines. Regular check-ins and progress updates should be scheduled to monitor the plan’s effectiveness and make necessary adjustments. By involving employees in the planning and execution phases, businesses not only tap into valuable insights but also foster a collaborative culture that is vital for overcoming challenges and sustaining success in times of slowdown.
Business leaders are under great pressure to innovate, adapt and act as advocates for change. In fact, this McKinsey report on rethinking strategy for the post-pandemic era shows that nine in 10 businesses believe their business model needs to change, or has indeed already changed in 2023, demonstrating how this pressure is playing out in real terms.
What’s crucial is that business leaders pause, just for a moment, and consider a very important question: What matters most to the success of this business? It sounds like a simple question, but you’ll be amazed at the number of conversations I have with CEOs and MDs where their main frustration is around not knowing what to prioritize and whether their business offering still works.
A simple but essential sense-check on the critical success factors for the organization will reveal whether environmental issues (such as politics or the economy) significantly impact the core business offering. If the effect is great, they’ll need a sharp intake of breath and to review the business model. But more often than not, the foundations of the business remain strong and a good idea, flawlessly executed, can deliver on its original ambitions.
Leaders can then move on, with confidence and clarity, to determine what changes they need to make to support business priorities. This is where having the right data at the right time is critical.
Before too long, and especially in times of recession, human capital will come into focus. During periods of uncertainty, it’s all too easy to rely on financial data and forecasting to inform any changes that might need to take place.
This may answer the question as to how you deliver on a set of targets. But, equipped with a refreshed sense of what sits at the heart of the business, it’s less about arbitrary target setting and instead a question of whether or not the business has the right people, doing the right work in the right place, to deliver on what matters most to its success.
The challenge is that most organizations don’t have a unified, integrated dataset that provides them with a single version of the truth, especially when it comes to people. How do you know you have the right people in the right place to execute your strategy?
Here’s where curiosity meets certainty. Leaders need to be curious about the provenance and reliability of their, so they can act with greater confidence. This means people data can’t just be the usual headcount and HR figures, but needs to delve deeper. Merging clean datasets from Finance and HR will give a more detailed view of whether the business has the right structure and organizational design in place to deliver on its goals and contribute to the core business offering.
Also, business leaders and management teams shouldn’t be afraid to ask for more, especially when it’s intrinsically linked to the success of the organization.
Do I have the right skills in the right volume? Are my people in the right place? Do they deliver the right work? These are all important questions that provide clear insight into the workforce. Asking for this data will help you see your workforce as it is and, coupled with that sense-check on what matters most to the business, can assist in making critical workforce design decisions.
Visualizing your workforce in this way, and getting to grips with the data, will ensure that you always make changes with the heart of the business model in mind and with long-term consideration.
That said, while this is a crucial part of managing an organization through troubled times, it can’t be a phase that you linger on for too long. Speed is still critical.
Making decisions during times of transformation should be grounded in data and backed by the stories behind that data. Our previous research shows that in 2020 as many as 79% of businesses resorted to making important decisions based on gut feel alone, when they had no relevant experience or data to draw on.
This knee-jerk response to disruption is a gamble and could lead to missing significant risks and opportunities. That said, once the data is there and the business has mapped out different strategic decisions, it’s critical that leaders test strategies and take action quickly and effectively.
Every management book will tell leaders to put a strategic plan in place with enough contingency to deal with uncertain times. The trouble is, they deliver this advice in a way that suggests these plans are etched in stone and should only be revisited once a year, perhaps longer.
That won’t cut it in this era of immediacy.
Management teams should revisit their strategy at least every few months. Each time, they should review the core business priorities and deep dive into the data. From there, it’s about creating hypotheses and scenarios, testing the decisions they make, and taking action.
Creating a culture of rapid modeling and testing ideas and hypotheses will give leaders options and insight into the potential impact of their decisions. This is particularly critical when looking at the workforce to determine the effect of each decision or potential scenario.
Having the data and the modeling environment to hand will bring greater agility. From there, it’s about execution and measurement. Moving swiftly into well-informed action will bring about more opportunities and a genuinely adaptive and agile culture.
Measuring the performance of actions you take and regularly checking in on strategy will allow you to make tweaks and for strategic planning to become a regular discipline, rather than something you leave to the last board meeting of the year.
Not every decision will be the right one. But getting back in tune with the heart of the business, getting to grips with the right data, and enriching the management culture with a dedication to agile, strategic planning and modeling will give any organization the best possible chance of coming through from turbulent times in a stronger position.
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