Is Your Strategy Ready For A Recession?
Unless you’ve been living on Mars, you’re probably aware that lots of people and indicators suggest we’re aiming for a recession. That may or may not be true, But regardless of whether a recession comes, change is afoot. Whether inflation, interest rates, supply chains, lower valuations, fuel prices or geopolitical unrest,the assumptions that may underlie your current strategy are being called into question.
Whenever assumptions become questionable it’s essential to revisit the entire strategy.
With that in mind, you and I should both look at our organizations and our strategies and assess our readiness for the changes that are coming.
Preparing for A Downturn
What does it mean to get ready? Are you meant to just plan for the worst?
Planning for the worst does have advantages. At the very least you can ensure that you have sufficient cash reserves to weather an economic downturn.
That kind of preparation isn’t so different from getting ready for storm or fire season. In Florida, as hurricane season approaches, we fill water bottles, stock up on canned goods, buy lots of batteries, lanterns, headlamps and fill propane tanks for the gas grill. Some people invest in back-up generators so that they can run their homes for days or weeks despite outages (they inspire untold neighborhood envy when the lights go out!).
But none of that prep is strategic. If we want to be strategic as we confront storm season, then something beyond stashing batteries and propane is needed. With some quick second-order thinking, maybe you would decide to invest in a piece of property that you can operate as an Airbnb in the winter but use for evacuation in storm season. That’s strategic.
Disaster Preparedness Plus
In business, one component of planning for a recession should be disaster preparedness. That includes intentionally building cash reserves. It also likely means reducing inefficiencies and strengthening customer relationships so well that your customers would do whatever they could to avoid leaving.
Minimizing the downside is a good defense. It fits the bill for a survival strategy. But the goal isn’t just to survive.
For most business leaders –and certainly for my clients—they are aiming to grow by orders of magnitude over the next few years, with or without a recession.
Maintaining or even multiplying growth in periods of great uncertainty is a formidable challenge. If you are hoping to do that, then this is a time for a rigorous assessment of the conditions with which you may contend.
Before you dismiss this paragraph, let me commiserate. Usually these tools are grossly under-optimized. In my consulting work –and many of my peers report the same–we often discover that snapshot tools have been applied superficially and uncovered nothing of value. But, like all tools, in the hands of someone who is masterful and conscientious, they can produce extraordinary insights.
A SWOT analysis asks you to inventory and analyze the Strengths, Weaknesses, Opportunities and Threats with respect to your current goals, or strategy. In a PESTEL analysis, you further consider the political, economic, sociocultural, technological, environmental, or legal conditions and how they may affect your enterprise’s fulfillment of its goals.
In reality, every business leader I know is always scanning the horizon for change. I think of that ongoing observation as a kind of private and perpetual SWOT inventory.
But, because that scanning is so continuous and unconscious, it’s easy to think that you have already done a real analysis. Odds are, you haven’t.
To really derive novel and illuminating information from any of the “snapshot” tools, you not only have to do them with rigor, but also apply second order thinking to them. That is where insights are likely to emerge.
Most students of business are familiar with Southwest Airlines’ historic strategies. One of the most well-known is their hedging against rising fuel costs by buying options.
Southwest Airlines Attacks Uncertainty
In 1990, the Gulf War had precipitated a short-term peak in fuel prices. But prices settled. Plus, hedging was passe in the airline world by the 1990s. But in 1994, Gary Kelly, Southwest’s CFO, was looking to save money. One of the areas he returned to time and again was fuel costs. Not because he necessarily expected them to rise again, but because it was a variable cost.
Variable costs have the potential to create disasters. Gary was thinking about Southwest founder Herb Kelleher’s favorite motto, At Southwest, we manage in good times so that all of us will be protected from bad times. Fuel prices dogged Gary. They were like a land mine, lying in wait, ready to explode and kill profitability.
So, at Gary’s urging, Southwest built a sophisticated hedging program, and continued to purchase almost 100% of their fuel as futures –locking in prices. In the third quarter of 2000, it saved them $43.1b.
Flash- forward to the present moment. Fuel prices are surging thanks to the war in Ukraine. In the first half of 2022, Southwest once again went a different way than their competitors. They have saved $1.2b through fuel hedges in the first 6 months of this year.
Reducing Uncertainty Pays Off
Lest you think that this was just an emergency preparedness exercise, consider what this second-order thinking has done for Southwest’s strategy. Because they have virtually eliminated uncertainty around fuel costs, Southwest built the war chest to continue to have fixed ticket prices and few additional fees. Every other airline chose not to hedge their fuel and are now contending with higher costs and passing that on to their customers.
With those cash reserves and their stellar credit, Southwest has the resources to do big stuff. During the pandemic they launched a massive service expansion, anticipating new travel patterns and the demand that would ultimately surge (as it has). That is exactly what most of my clients hope to accomplish over the next few years –with or without a recession. Grow during bad times.
But, even the best SWOT analyses won’t anticipate everything. They didn’t know that following the pandemic, supply chains and the labor market would kneecap their ability to deliver on the expanded service. But the strategy’s not dead yet. So, I will be watching to see how Southwest’s bold new initiatives fare.
What to Do Tomorrow
The point here is that you should be doing a significant reassessment of your snapshot inventories.
The following steps will take you from the collection of snapshot inventories, through the consideration of potential new scenarios. Instead of crafting the scenarios from a future vision –here, you are cobbling scenarios together as you encounter second order possible conditions. Each new condition produces a decision node. Those nodes represent potential choices. And every series of choices is a scenario.
Collect all the data –including all your own internal data. Use the SWOT and PESTEL frameworks to organize it. But that is only the very beginning. Organize each dimension against time. Assess its implication now, next quarter, next year, in 18 months and so forth. Go out at least 2 years.
- Prioritize the items that are significantly threatening or opportunistic.
For every salient element, pursue second-order thinking.
Ask the following questions:
- Then what?
- And after that, then what? (Repeat this until you get to a root cause or a clear insight)
- How will the market respond?
- How will our customers respond?
- How will our vendors respond?
- How will our employees respond?
- What will the implications be for our future?
Only after this process will you be in a position to formulate a cohesive strategy for the turbulent times to come. But, if you do this exercise, you will have a plan that positions you to not only survive, but to seize opportunities while your competitors bail water.