Crisis revisited - update of our scenarios and recommendations
In November 2008, we were bold enough to present three scenarios for the economic crisis and offer our assessment of how developments would unfold. We argued that the duration and intensity of the crisis depends on getting financial markets working again and on governments making effective interventions. Back in winter, it was not yet clear how hard individual industries would be hit by the downturn and how the BRIC states would react to the crisis.
Since then, the uncertainty has, if anything, grown. The economic analysts are coming up with widely different forecasts. So we have decided to revisit our three scenarios from last year and bring them up to date.
WE ADDRESS THREE CENTRAL QUESTIONS:
1) How deep will the downturn ultimately go?
2) How long will the crisis last?
3) How strongly will the upturn kick in?
To offer some guidance here, we have again distinguished three possible scenarios:
1) THE V-CURVE: Our first scenario describes a steep downturn followed directly by rapid recovery.
2) THE U-CURVE: The second scenario assumes a deeper recession, with the economy bottoming out only after a protracted period in the doldrums.
3) THE L-CURVE: Our third scenario presents an extreme recession (quasi-depression), followed by a long phase of stagnation.
It is not at all clear how economic developments will unfold, so scenarios can provide some important guidance in a confusing situation. To make them more applicable as tools, we have tried to identify the key turning points and indicators. These offer clues
as to whether one scenario can be expected or whether we are already looking at a worse scenario.
OUR ASSESSMENT OF ECONOMIC DEVELOPMENTS
At the beginning of a crisis, economists tend to view the economic trend too positively, whereas in midst of the crisis they often do the opposite. They then significantly overestimate the depth and duration of a slump. To help you find your way in this confusing situation, we have defined some key turning points that will indicate the future course of the crisis.
Critical for 2009 are the developments in the US and China. Even though hitting the lowest point and seeing signs of a tentative recovery may be primarily of psychological importance,
the mood shift will revive confidence in the markets. The brighter prospects will quickly be expressed in the usual early indicators.
If there is no sign of a turnaround and no optimism, the economy will fall into a U-curve or L-curve scenario. Which of the two alternatives – severe recession or full-blown depression – is more realistic will become apparent in the course of 2010. The actual scenario will come down largely to a combination of economic developments and political actions or reactions.
Will inflation take off dramatically? Will the euro zone be pushed to breaking point? Will protectionism make a comeback? All these questions depend on economic conditions and political decisions.
Deflation, stagnation and protectionism, accompanied by a wave of political unrest, could lead to the worst case – the L-curve. It will quickly become clear that this is the real scenario even without looking at the early indicators, which will worsen spectacularly. Here, nations turn their backs on coordinated multinational action. Governments pursue only narrow national interests, often acting against one another. From today's perspective, this scenario does not look likely and is certainly avoidable if governments and companies respond firmly and swiftly by taking countermeasures.
WHAT SHOULD BE DONE NOW?
We don't know exactly what's coming. So we have to be ready for anything – for a deepening of the crisis as well as for an upturn in the short run.
Rigorous cost-cutting is now important, but it must not be allowed to endanger a company's future potential. The old V-curve for companies – first downsize, return to health, then grow
again – no longer applies. Today's businesses must also pursue higher productivity and invest in growth precisely in a crisis. Otherwise they will soon find themselves lagging behind their
competitors.
Strategic planning must therefore aim at maximum flexibility. This is why we place the formation of scenarios at the center of our strategy projects. They don't assume a static, one-dimensional picture of the future, but supply alternative perspectives on a bundle of developments. This allows us to define the indicators for the occurrence of a scenario and prepare the necessary steps.
One thing is clear: A crisis offers big opportunities for a well-prepared business. Larger shifts in market share take place during recessions. Managers who now respond quickly and aggressively to the changing market environment will put their company at an advantage.
This means, for instance, systematically tapping promising growth fields, like green tech. It also means seizing the great potential offered by the infrastructure programs driven by government stimulus spending.
Business leaders now face a double challenge: to make their companies crisis-proof AND to put them in shape for long-term success. A holistic approach is needed, one that goes beyond
cost control to aim at securing growth potential. Restructuring – but in a new way.
Successful restructuring means far more than just cutting costs. It encompasses all the dimensions of a business – not only securing profitability but also laying the foundations for future sales growth. While short-term outcomes are important, the focus is also on the
company's long-term, sustainable success.
The crisis does offer an opportunity to think ahead and pursue fundamental strategic change. And only those who will take comprehensive and determined action will emerge stronger from the crisis.
Since then, the uncertainty has, if anything, grown. The economic analysts are coming up with widely different forecasts. So we have decided to revisit our three scenarios from last year and bring them up to date.
WE ADDRESS THREE CENTRAL QUESTIONS:
1) How deep will the downturn ultimately go?
2) How long will the crisis last?
3) How strongly will the upturn kick in?
To offer some guidance here, we have again distinguished three possible scenarios:
1) THE V-CURVE: Our first scenario describes a steep downturn followed directly by rapid recovery.
2) THE U-CURVE: The second scenario assumes a deeper recession, with the economy bottoming out only after a protracted period in the doldrums.
3) THE L-CURVE: Our third scenario presents an extreme recession (quasi-depression), followed by a long phase of stagnation.
It is not at all clear how economic developments will unfold, so scenarios can provide some important guidance in a confusing situation. To make them more applicable as tools, we have tried to identify the key turning points and indicators. These offer clues
as to whether one scenario can be expected or whether we are already looking at a worse scenario.
OUR ASSESSMENT OF ECONOMIC DEVELOPMENTS
At the beginning of a crisis, economists tend to view the economic trend too positively, whereas in midst of the crisis they often do the opposite. They then significantly overestimate the depth and duration of a slump. To help you find your way in this confusing situation, we have defined some key turning points that will indicate the future course of the crisis.
Critical for 2009 are the developments in the US and China. Even though hitting the lowest point and seeing signs of a tentative recovery may be primarily of psychological importance,
the mood shift will revive confidence in the markets. The brighter prospects will quickly be expressed in the usual early indicators.
If there is no sign of a turnaround and no optimism, the economy will fall into a U-curve or L-curve scenario. Which of the two alternatives – severe recession or full-blown depression – is more realistic will become apparent in the course of 2010. The actual scenario will come down largely to a combination of economic developments and political actions or reactions.
Will inflation take off dramatically? Will the euro zone be pushed to breaking point? Will protectionism make a comeback? All these questions depend on economic conditions and political decisions.
Deflation, stagnation and protectionism, accompanied by a wave of political unrest, could lead to the worst case – the L-curve. It will quickly become clear that this is the real scenario even without looking at the early indicators, which will worsen spectacularly. Here, nations turn their backs on coordinated multinational action. Governments pursue only narrow national interests, often acting against one another. From today's perspective, this scenario does not look likely and is certainly avoidable if governments and companies respond firmly and swiftly by taking countermeasures.
WHAT SHOULD BE DONE NOW?
We don't know exactly what's coming. So we have to be ready for anything – for a deepening of the crisis as well as for an upturn in the short run.
Rigorous cost-cutting is now important, but it must not be allowed to endanger a company's future potential. The old V-curve for companies – first downsize, return to health, then grow
again – no longer applies. Today's businesses must also pursue higher productivity and invest in growth precisely in a crisis. Otherwise they will soon find themselves lagging behind their
competitors.
Strategic planning must therefore aim at maximum flexibility. This is why we place the formation of scenarios at the center of our strategy projects. They don't assume a static, one-dimensional picture of the future, but supply alternative perspectives on a bundle of developments. This allows us to define the indicators for the occurrence of a scenario and prepare the necessary steps.
One thing is clear: A crisis offers big opportunities for a well-prepared business. Larger shifts in market share take place during recessions. Managers who now respond quickly and aggressively to the changing market environment will put their company at an advantage.
This means, for instance, systematically tapping promising growth fields, like green tech. It also means seizing the great potential offered by the infrastructure programs driven by government stimulus spending.
Business leaders now face a double challenge: to make their companies crisis-proof AND to put them in shape for long-term success. A holistic approach is needed, one that goes beyond
cost control to aim at securing growth potential. Restructuring – but in a new way.
Successful restructuring means far more than just cutting costs. It encompasses all the dimensions of a business – not only securing profitability but also laying the foundations for future sales growth. While short-term outcomes are important, the focus is also on the
company's long-term, sustainable success.
The crisis does offer an opportunity to think ahead and pursue fundamental strategic change. And only those who will take comprehensive and determined action will emerge stronger from the crisis.
