By Kevin Lee
The problems of the world economy have grown since 2008, and we see a significant risk lying ahead of us is a new recession with deeper implications than the one we just left behind.
Politicians are trying to solve the problem of too much debt by playing for time. This will fail. Financial repression would have to be significant and requires close political coordination.
In addition, it does not address the pressing issues of global imbalances and the adjustments required within the euro zone. The failure to act significantly increases the risk of increased protectionism and an unconstrained financial and economic crisis, which could lead to a drop back into recession.
It seems that some politicians and central banks ― in spite of protestations to the contrary ― have been trying to solve the crisis by creating sizable inflation, largely because the alternatives are either not attractive or not feasible. Inflation will be the preferred option ― in spite of the potential for social unrest and the difficult consequences for middle-class savers should it really take hold.
However, boosting inflation has not worked so far because of the pressure to deleverage and because of the low demand for new credit. Moreover, the inflation “solution,” while becoming more tempting, may come to be seen as having economic and social implications that are too unpalatable.
Politicians shy away from telling the public the bald truth. They will be loath to acknowledge that default and restructuring are inevitable. So they will continue kicking the can. Either the politicians need to organize a systematic debt restructuring for the Western world and/or generate inflation fast, or we run the risk of the situation spinning out of control.
In which case, there will be no place to hide. Therefore, businesses need to be prepared for such an environment. According to several interviews BCG had with executives at companies that had dealt successfully with the downturn of 2009. All these winners in the crisis had set similar priorities which are as follows.
“Innovation” is the first priority. Without exception, the interviewees emphasized how innovation would play a decisive role in enabling them to exploit the opportunities arising over the next few years, particularly with less savvy competitors cutting back. One characteristic shared by all the companies surveyed is that none reduced spending on research and development. On the contrary, some even increased it sharply. The winners are making the most of the opportunities arising from modified investor perspectives.
“Regional Mix” is another matter of importance. The potential winners in the coming years are taking their cue from the growth markets of tomorrow, with some relocating entire activities to those regions. One company has divided up its entire business portfolio: highly innovative operations that will continue to have an attractive market in industrialized countries for the foreseeable future are remaining in Europe and the U.S. All other activities, primarily those for which more growth is expected in emerging economies, are being relocated in full and managed from within those markets.
“Pricing Policy” also matters. Even relatively successful companies were affected by the downturn. Most had to make concessions in terms of prices, in part to help out long-standing customers. Returning to former price levels and improving the ability to respond quickly and intelligently to pricing challenges are consequently at the top of the agenda. In addition, some companies prepared for an unforeseen lift in inflation—for example, by including an inflation clause in their contracts.
“Investment Strategy” needs to be kept in mind. Companies with strong balance sheets preempted competitors by making aggressive investments in new capacity. In doing so, they not only secured new clients for the additional supply early on ― notably in the fast-growing Asian markets ― but also rendered similar investments by competitors less attractive. Such actions can help achieve a significant gain in defendable market share.
Last but not least, M&A is also on the horizon. All the executives we surveyed had a “wish list” of companies to be considered for acquisition. These lists were constantly updated and the very latest information collected about the companies concerned. Today, many of these executives regret not taking action at the height of the crisis ― despite their companies’ solid financial positions, they all shied away from the perceived risk given the turmoil in the capital market.
The winners have been doing more than simply following the positive signals and translating the opportunities of the post-crisis era into competitive advantage. They are also preparing for the possibility that there could be another downturn in the coming months. Winning companies prepare themselves for greater volatility and shorter cycles. This implies a constant focus on strong balance sheets, stable cash flows, and lower breakeven points. This is a precondition to “riding the waves.” As one executive put it, “We all need to be good surfers from now on.”