Strategy for Uncertain Times

Published November 17, 2008

Strategy for Uncertain Times

To download this artice with tables and figures, click here
To download the compiled tables of economic forecasts, click here

Economic Forecasts
Economists release forecasts to provide some guidance on how things might look over the next period. Like everyone else, they lack a crystal ball so they cannot make predictions with 100% accuracy, so they strive to get into the ballpark. However, when their forecasts and outlooks vary by such a wide degree as they do now, you know there remains a lot of uncertainty in what the future holds.

Fortytwo Consulting has just compiled the latest forecasts and outlooks from Canada’s major banks and found the following:

• Canada’s Real GDP expectations for 2009 range from -0.2% to 2.0% growth
• Unemployment for 2009 is expected to range between 6.7% to 7.0%
• Canada’s CPI in 2009 could fall between 1.0% and 2.4%
• The CAD$ is expected to be worth between USD$0.775 and USD$0.869 in Q1, 2009.

With the exception of the unemployment expectations, the other key indicators are showing a broad range, making the average business owner wonder if they are all looking at the same economy. Alberta’s GDP estimate ranges from a low of 0.3% growth to a high of 3.0% growth in 2009. That’s a big difference.

Averaging all the results to find some kind of middle ground, we came up with this:

• Canada’s Real GDP for 2009 will be around 0.6% growth, while Alberta will average around 1.5% growth
• The nation’s unemployment for 2009 will be around 6.8%, and Alberta will feel just a slight increase to 3.9% unemployment
• Canada’s CPI in 2009 is expected to be about 1.7%; Alberta’s cooling economy will see inflation return to a manageable 2.8%
• The CAD$ will probably be worth around USD$0.821 in Q1, 2009 and about USD$0.847 in Q2, 2009.

Uncertainty
To say there is uncertainty would be an understatement. The TD Bank took the unprecedented step of releasing a base-case forecast and a worst-case forecast. No-one seems to have a handle on whether Canada will drop into a deep recession or avoid one altogether, nor do they seem to know if it will be a prolonged downturn or just a brief blip. 2008 has certainly had its ups and downs but managed to avoid a technical recession. Will that be the situation in 2009?

The problem with uncertainty is how much discomfort it creates for those with the money – the consumers, buyers, investors, lenders, and company managers. Uncertainty means risk, and risk means no-one spends or lends.

So what is the business operator to do when there is so much uncertainty? How should they adjust to these unpredictable times?

‘Do’s and Don’ts’
In the economic downturn following the World Trade Centre attacks of 2001, the Harvard Business Review published a research article by Darrell Rigby entitled ‘Moving Up in a Downturn’. The article described three stages of a downturn:

1. The Gathering Storm
2. The Hurricane Hits
3. Clear Skies on the Horizon

Each stage has its own characteristics, and requires different responses in order to survive and prosper through treacherous economic times.

The Gathering Storm is when business confidence is high, analysts report slowing economic growth, and company divisions start reporting that they might not meet budget. Rigby found that the best way to handle this situation is to prepare for the worst, but focus on what it is your business does best. Running planning sessions to create responses to potential bad-case scenarios can prepare a team to cope with most situations that are likely to arise. Waiting until the storm hits will only result in knee-jerk reactions that are doomed to fail, or worse, cause permanent damage to the company.

When the hurricane hits, Rigby believes it is best to keep an open eye on the good times that are surely on their way. Cost management is an important part of business management, but it must be consistently practised regardless of the state of the economy. Cutting and slashing during a rough period is not necessarily the best answer. Rigby states:

“Consider that voluntary employee turnover averages 15% to 20% per year in the United States, that sales volume was depressed by less than 10% in 85% of all industry downturns from 1977 to 1999, and that the average recession during that period lasted only 11 months… you have to wonder why there is such a scramble to fire – and then rehire and retrain – so many employees.”

And there is little to be gained from pressuring suppliers to reduce their prices because when the good times sweep back in, those same important suppliers will be focusing their loyalties elsewhere, to those clients who stuck by them and helped them through. If there is a pressing need to reduce the costs of inputs, work with your suppliers. Use them as consultants to advise how you might reduce your costs through more streamlined order processing, improved deliveries, or improved product design, for example.

Then, as the clear skies appear on the horizon, start to ramp up in a controlled, managed way. Having avoided mass firings, the company should be well-situated to move towards maximum capacity output without having to pump large amounts of cash into the operation. Your suppliers, customers, and employees will recognise the company for having maintained close relationships and remained loyal (Rigby, 2001).

In short, Rigby’s findings for enduring a downturn were:

• Place a big bet on the core business and spend to gain market share
• Manage costs during good times and bad times
• Maintain a long-term view
• Strive to earn the loyalty of employees, suppliers, and customers

Scenario Analysis
Scenario analysis considers several potential ‘stories’ that might impact the company. It can be tempting to work with a change in one factor at a time, but the reality is that when one changes, many or all will change (Grant, 2008). The factors to consider include:

• The political landscape
• Economic conditions
• Socio-cultural aspects
• Technological changes
• Environmental issues
• Legal concerns

For example, the Government of Alberta’s decision to adjust the royalty program for oilsands miners stemmed from a combination of an overheated economy taking its toll on a burned-out worker population, and growing concern for the (perceived) environmental damage done, which is of itself a socio-cultural factor of the present times. The net flow-on effects will be seen when the new royalty program kicks-in. What have you done to prepare for those effects?

For an Alberta business operator looking forward over the next six months, consider scenarios that include the following aspects:

• Worsening credit conditions – Do you have enough cash to make it through? What kind of order backlog do you have?
• A worsening of the geo-political situation – Recently, there have been odd reports popping up of a future synchronised attack on western nations by Al Qaida. What would this do a fragile global economy? What impact would flow to your company?
• A sudden change in business confidence when the US Presidency changes – Will you be prepared for a sudden upswing?
• If the federal government introduced ‘green’ legislation, what impact would it have on your business? Would it be an opportunity or a detriment for you?
• If you have the resources to improve your production technology or processes, will this gain you extra market share, more clients or profits, effectively fending off a downturn’s impact?

You probably have many others that you can come up that have more specific bearing on your business, but mix them in with some of these suggestion and see what your managers and staff come back with as potential solutions.

Finally
In closing, Fortytwo Consulting suggest keeping Rigby’s key points in mind, and take the time now to develop some scenario analyses with your team. It could help you come out a winner when the dust settles.

References:
Economist.com, T. (2008, November 14). economist.com , p. http://www.economist.com/.
Grant, R. M. (2008). Contemporary Strategy Analysis. Oxford: Blackwell Publishing.
Rigby, D. (2001). Moving Upward in a Downturn. Harvard Business Review , 99 – 105.

Sources of economic forecast data:
RBC Economic Financial Markets Forecasts, November 4, 2008
RBC Economic Forecast Detail, November 4, 2008
RBC Provincial Outlook, October 2008
Bank of Canada Monetary Policy Report, October 23, 2008
BMO Capital Markets Economics Provincial Economic Outlook, November 6, 2008
BMO Capital Markets Economics North American Outlook, November 4, 2008
TD Economics Revised Economic Forecasts, October 31, 2008
TD Economics Provincial Economic Outlook, October 16, 2008
Scotiabank Group Global Economic Research Forecast Update, October 31, 2008
Scotiabank Group Global Economic Research Foreign Exchange Outlook, November, 2008
Scotiabank Group Global Economic Research Provincial Forecast Update, October 31, 2008
CIBC World Markets StrategEcon Economic Update, October 31, 2008
CIBC World Markets StrategEcon Interest & Foreign Exchange Rates, October 31, 2008

© Fortytwo Consulting Ltd.
To download this artice with tables and figures, click here

To download the compiled tables of economic forecasts, click here

— Michael Hogan