Logistics Quarterly Magazine - Volume 15, Issue 3, 2009 - How to Think, Lead, and Operate in a Volatile Market - LQ Archives
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How to Think, Lead, and Operate in a Volatile Market

By Dr. David Closs

In these times of global financial downturn and uncertainty, it is useful to review the history of past recessions and depressions to determine whether there are any lessons that can be found. These comments briefly review the history of recessions and depressions since 1890 from a macro-economic perspective, identify reported corporate responses, and summarize the lessons learned.

Illustration of ocean

Prior to the current recession/depression, there have been six major recessions since 1890. These include:

  1. 1890s Panic
  2. Great Depression (1929–1939)
  3. Recession of 1953 (1953–1954)
  4. 1973 Oil Crisis (1973–1975)
  5. Recession of 1980 (1980–1982)
  6. The 21st Century Recession (2001–2003)

The root of many of these events was a collapse in some sector of the financial industry, including banking, equity, currency, or global trading. Another factor contributing to many of the depressions/recessions was government deficits.

Tables 1, 2, and 3 present an interesting historical perspective of the U.S. economy. 1 Table 1 provides a historic look at U.S. expansions between 1900 and 2007. The blue bars designate times when the economy was in expansion mode, while the red bars indicate when it was in contraction mode. The obvious conclusion is that expansions are increasing in length, and recessions are becoming less frequent and shorter.

The bars in Tables 2 and 3 illustrate specifically that the duration of recessions is trending down, while the duration of expansions is increasing.

These trends suggest that there are long-term macroeconomic patterns regarding the duration of depressions/ recessions and expansions, and that there may be useful lessons for firms trying to decide what to do to survive, or even thrive, in the current economic environment.

We reviewed the history of previous depressions/recessions identified above to determine whether there were any common themes describing the practices that firms used to survive previous recessions. There were six common themes that could be identified.

Graph of economic crashes

First, firms use recessions to redesign their processes. During the time when there is reduced demand on their processes and systems, the best firms identified short-term process improvements that could reduce costs and assets. They also initiated longer-term redesign efforts to enhance future competitive advantage. When reviewing their current processes, the best firms also critically assessed features and capabilities to determine which were “musts” versus “nice to have” in the current environment. As the processes were redesigned, the “nice to have” characteristics were designed out.

Second, firms develop more formalized risk management strategies. The best firms expanded their risk perspective to include supply chain uncertainty, sourcing, sustainability, financial, and political. In addition to extending the dimensions of risk, the top firms formalize assessments regarding the likelihood, consequence, and possible mitigation strategies for the most critical risks.

Third, firms place a strong focus on managing asset utilization. The specific focus dimensions include the fixed and variable assets related to inventory, cash flow, collections, equipment and space leases, and capital spending. The top firms reviewed the primary drivers related to resource investments in each of these areas, and attempted to change the process characteristics to reduce the required assets. Typical examples include reducing inventory through postponement of value-added activities, and shifting of facilities from owned to leased.

Fourth, firms enhance their competitive positioning to steal market share. A review of the historical literature regarding depressions/recessions suggests that the best firms used these environments to identify and attack underserved or weakly served channels or competitors and explored payment terms (accounts receivable/accounts payable) that might attract or lock in critical customers and suppliers. For example, in 1930, Procter & Gamble ramped up its marketing investments to dominate the share of voice on the relatively new medium of radio. This positioned the company to become the leader in a number of categories of consumer products when the Depression ended.

Fifth, firms look to expand their portfolio of value-added services. Examples of extensions include the addition of more value-added features, the integration of products and services to develop solutions, and the development and application of new technologies. For example, the entertainment business has used recent depressions/recessions to add value through improved sound, higher-quality video, and increased miniaturization. Other examples are the various technologies, including nylon, Teflon, and Plexiglas, that were introduced during the Great Depression.

Sixth, firms use recessions and the corresponding reduction in activity volume to develop employee skills and capabilities through education and training. The best firms applied research that indicates that those that don’t invest in education are more than twice as likely to fail. History suggests that the specific focus of education activities is to demonstrate how each employee can impact on customer satisfaction.

In summary, the U.S. and global economies have weathered similar storms in the past, and there are lessons that can be learned and applied. In fact, there are many major firms that were founded during times of economic recession and have grown to be global leaders today. Some of these firms include General Electric, Hewlett-Packard, Hyatt, FedEx, and Microsoft. A review of the actions that firms have taken in previous downturns demonstrates that the principles are the same. To emerge from the recession in a stronger position, firms should focus on:
1) process redesign;
2) formalizing risk management;
3) minding their critical assets;
4) stealing market share;
5) expanding their portfolio of value-added services; and
6) enhancing employee capability through education. Just as in the case with the political environment, it is important to look back to identify what allowed the most successful firms to survive, and thrive, in previous recessionary environments, and apply some of these lessons.

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