One of the biggest questions hovering over the recent Steel Success Strategies meeting in New York was whether the economy is moving toward another recession. There is no consensus on the subject.
On the one hand, unemployment continues to be virtually non-existent, wage growth has taken place and the consumer is feeling frisky. These are all great signs in an economy that is 2/3 consumer piloted.
The flip side is the ongoing sluggishness in the industrial market. Many of the leading indicators have entered worrying territory, such as the Institute for Supply Management’s manufacturing PMI, which has showed slowing growth for seven straight months.
The Boston Consulting Group falls on the pessimist side of the equation. Karthik Valluru, partner and managing director for the firm, said his company expects a downturn is coming. “All projections point to a slowdown. We believe there will be a mild slowdown, with declines in GDP growth not as significant as we’ve seen in big downtowns.”
The one threat a larger recession is if all the world’s regions begin to contract, “which accelerates the downward trajectory a bit,” he said.
Regardless whether the downturn is impending or still somewhere on the horizon, the economy will undoubtedly sour again. And when that happens, “there will be winners in the downturn,” he said.
Research from BCG suggests that while 44 percent of companies experience declining sales and margins in a recession, some 14 percent of firms are able to increase sales and margins while the rest of the economy is foundering.
So how do you position yourself to be part of the 14 percent? BCG sees three things companies do to succeed in a downturn: act quickly and act early, recognizing that a downturn is coming; build resilience, preparing for a number of scenarios; and increase vitality over the long term by acting aggressively during the softer conditions. M&A activity is a smart strategy during contractions.
Of course, just as a recession is inevitable, so too is the recovery. And BCG has thoughts on how companies can position themselves to “win the ‘20s.” Valluru, citing a report prepared by the firm, outlined five strategies to help companies succeed in the decade to come.
Master the New Logic of Competition
Companies will no longer be operating in physical supply chains, but digital ones. The emerging wave of technology, including sensors, Internet of Things and artificial intelligence, will turn every company into an information business.
Instead of the economies of scale that have been a hallmark of supply chains, companies will pursue “economies of learning,” whereby they leverage and apply data and technology to identify and fulfill each customer’s changing needs.
“The nature of competition will change. Unless you change with it, you may not be successful,” Valluru said.
Design the organization of the future
History says applying new technologies to existing processes and structures yields only incremental gains. To unlock the potential of these technologies, companies must reinvent the enterprise as a “next generation learning organization.”
For example, when dealing with AI, increasing the ability of the organizations to learn request companies build “integrated learning loops” that gather information from data ecosystems, continuously deriving insights through machine learning.
Moreover, companies must incorporate the slower moving social and political changes that also transform business operations into their models.
Apply the science of organizational change
“We believe change is here to stay. We believe that especially in industries that are volatile. The best thing to do is expect change and plan for that,” said Valluru.
But that is easier said than done. Most organizational efforts to enact change ultimately fail. The keys are to initiate the change early, create a sense of urgency within the organization and to conduct an evidence-based transformation, “understanding empirically what works and why, rather than relying on plausible assertions and rules of thumb.”
Achieve change through diversity
Studies by BCG of more than 1,700 companies show that diversity is not just a moral imperative, but a business one. Diversity increases the capacity for innovation by expanding the range of ideas and options.
Diversity is not limited to the obvious definitions, such as gender, ethnicity and sexual orientation, which are indeed important in driving innovation and resilience. It also includes embracing a variety of work experiences and educational backgrounds in its employee base. “These factors are additive, so companies that are diverse on multiple dimensions are even more innovative,” BCG said.
But structural diversity is insufficient, the firm argued. Companies must be open to diversity of thought to unlock its potential. Organizations need an environment conducive to embracing new ideas.
Optimize for both social and business value
Multiple trends are fueling resentment toward business, including climate change, automation and more. These concerns are unlikely to be solved by political institutions.
“All stakeholders increasingly expect companies to play a more prominent role in addressing social challenges. Leaders need to focus on their companies’ total social impact. In other words, they need to make sure their companies create social as well as economic value.”