by HPA Senior Project Lead Stephen Ashford
The past year has been one of mixed messages: Early 2023 saw the specter of a looming recession dominate economic discussions, leading many to brace for a hard landing. But by the end of the year, a sense of cautious optimism emerged, with some suggesting we might have avoided a recession altogether and orchestrated the elusive soft landing. Now, deep into 2024, one thing is clear: nothing is clear. Hard or soft landing? Long and shallow recession or short and deep? Pick your expert. Or, better yet, plan for different outcomes.
With inflation, high interest rates, and controlling costs still front of mind, some HighPoint clients are wondering: How should my businesses navigate such an uncertain economic landscape? Should the focus continue to be on shoring up profitability, or is there a wiser approach?
While prioritizing profitability is always a good idea, solely focusing on cost productivity in the face of an unknown future may not be the right move in the long run. Here are two common pitfalls we see as a result of cutting too much:
Ready, fire, aim: This approach can damage long-term prospects in the pursuit of short-term gains. Why? The urge to act swiftly can lead to rash decisions. Companies might slash expenses that could undermine core functions or eliminate strategic investments critical to future growth.
Missing the rebound: Weathering the storm is critical, but not necessarily at the expense of capitalizing on a swift recovery. By cutting too deep or neglecting innovation, an organization might be ill-equipped to seize opportunities for growth once the economic climate improves. All too often, we have seen companies aggressively cut going into a recession, only to be caught flat-footed by competitors coming out of it.
The key lies in embracing agility and flexibility. And that’s where scenario planning and option value come in.
Scenario planning: a powerful and proven approach
Scenario planning involves envisioning a range of possible future competitive and economic scenarios, from mild recessions to deeper downturns. This allows businesses to develop flexible strategies that can be adapted as situations unfold.
Here’s what to keep top of mind when implementing scenario planning:
- Planning for the best and worst-case: How bad is bad? Only your team can answer this question. Consider the potential severity and duration of a recession. How much cost-cutting would be necessary under different scenarios? Can the company weather a short, mild recession with minor adjustments, or would a deeper and longer downturn lead to more drastic measures? Have plans in place that can be executed as events unfold. These plans, developed thoughtfully in advance, will be better than reacting on the spot.
- Balancing cost productivity with growth readiness: But of course, the goal isn’t simply to weather the storm, rather to come out on the other side of it a stronger sailor. We’ve all heard the analogy of the race car driver, who needs to slow going into a severe curve, but accelerate coming out of the curve, rather than waiting for the curve to end. When implementing cost-saving measures, zero in on efficiency improvements and strategic streamlining. Are certain strategic employee reductions unavoidable? Perhaps develop a plan that allows you to rehire quickly if the recession is short-lived.
- Laying the groundwork for different recovery and acceleration types: No two plans are the same. They can vary in speed and ultimate outcome. Some may include a quick rebound; others might be slower with a more gradual recovery. Scenario planning should account for these variations, ensuring the company is positioned to capitalize on whatever form the future takes.
A critical element of scenario planning is creating option value. This means developing strategies that offer flexibility depending on the evolving situation. Option value allows you to navigate whichever path unfolds with minimal disruption.
Consider a company reducing a given budget. They could simply cut spending across the board. However, a more strategic approach might involve scaling back on certain functions or tasks while preserving investments in areas with proven ROI and maintaining small investments in promising areas with uncertain ROI. This way, the company retains the ability to ramp up functional efforts quickly as the economic picture improves.
It’s about keeping key growth projects moving, ready to accelerate fast as conditions improve; and keeping key talent energized. You can’t possibly know when and how conditions will change, it’s about readiness for what comes.
Remember, there is no crystal ball
While scenario planning is a valuable tool, it’s important to recognize its limitations. Predicting the future with absolute certainty is simply not possible. That’s why building overall resilience within your organization is crucial. How?
Invest in your people. Having a skilled and adaptable workforce is a company’s greatest asset. Prioritize training and development to ensure your employees possess the skills needed to navigate changing circumstances.
And don’t forget about innovation. It will ensure you maintain a competitive edge regardless of economic conditions. Keep the flame alive to rekindle quickly. The idea is to come out of a mixed period faster than your competitors.
While the economic future remains uncertain, this doesn’t mean businesses are powerless. By embracing scenario planning, prioritizing option value, and building overall resilience, companies can navigate the murky waters ahead and emerge stronger on the other side. Agility and flexibility are key. Navigate the short term and keep your eyes on the long-term prize with preparation to adjust course as needed.
Stephen Ashford is a Senior Project Leader with over 20 years of strategy and operations experience driving large scale programs in transformation, post-merger integration, M&A, and change management across industry sectors. His more recent roles include VP of Program Management at CSC Service Works, a private equity owned consumer service business, and Chief Transformation Officer at Club Corp, a private equity-owned private clubs and lifestyle business.
