Leaders should build resilience, local agility, and portfolio agility to prepare for the next recession.
How to manage uncertainty
- Resilience and agility are effective in isolation, but in combination, their impact is turbocharged
- In the midst of a downturn, resilient companies can weather the storm to wait for opportunities to arise
- Having a high level of resilience provides an organization with the wherewithal to fund emerging opportunities, but only if it is agile enough to seize those opportunities
- Agile companies without resilience often lack the resources to exploit the opportunities they spot
Use Simple Rules to Enhance Portfolio Agility
- When cash is constrained and markets are in turmoil, companies need portfolio agility to move resources (including cash, talent, and managerial attention) from the least promising uses and reinvest them in the most attractive opportunities
- This is easier said than done.
- Simple rules are an evidence-based tool that can improve resource reallocation, particularly in volatile markets. They counterbalance the tendency to spread resources evenly or take historical allocations as a given and tweak them at the margin
Assess and Build Organizational Resilience
- A strong balance sheet allows leaders to avoid short-term choices that impair their organization’s long-term performance
- Secure access to external financing enables companies to invest for the future while competitors tighten their belts
- Diversification generates diverse growth options and the resources to fund them
- Low fixed costs enable companies to scale back operations in the face of declining demand and to remain profitable, even if prices drop
- General cost discipline contributes to lower fixed costs, and so does making costs variable through outsourcing activities, hiring freelancers on a project basis, or moving IT infrastructure to pay-as-you-go platforms
- Recession-resistant customers generate reliable sales through the business cycle
Decentralize Decision-Making While Providing a Clear Strategic Context
- When faced with market turbulence, many managers reflexively centralize decision-making to drive tough choices from the top down
- This is understandable but misguided
- Clearly communicating strategy is particularly important in turbulent times
- Top management teams should commit to a handful of strategic priorities that provide clear guidance for navigating through the coming storm
