“You never want a serious crisis to go to waste.” – Paul Romer, Stanford Economist
We’re experiencing an unprecedented period of uncertainty, change and disruption. While the longest-running bull market in history continues, many believe that the positive economic trajectory won’t continue indefinitely and that warning signs are already here. The Wall Street Journal’s latest Economic Forecasting Survey reported a probability of nearly 50% of a 2020 recession. PwC’s recent Global CEO Survey reported that pessimism about global economic growth is at an all-time high with 53% of CEOs surveyed predicting a decline in the rate of economic growth in 2020, up from 29% in 2019.
With Canadian household debt at a record high, consumer insolvencies are also now reaching eight-year peaks while the US Federal Reserve continues to lower interest rates. This is all unfolding amidst a backdrop of geopolitical tensions, precarious global trade rules, and increasing focus on topics such as climate and the environment.
The proliferation of technology in business in everyday life is accelerating as well. Competition is shifting rapidly where emerging entrants are changing the competitive landscape. The landscape of the largest US companies by market capitalization has also shifted dramatically – today the top 5 companies by market capitalization are all technology based and represent 20% of the overall S&P 500.
With the rate of disruption and change only accelerating over time, how then do companies succeed in this uncertainty? Focusing on the core business while keeping an eye on the rapidly evolving landscape may seem like diligent practice today, but if history has taught us anything, it is that no industry has deep enough moats to fend off the siege of disruption.
Ignoring uncertainty is not a favorable strategy.
“Neither RedBox nor Netflix are even on the radar screen in terms of competition”– Blockbuster CEO Jim Keyes in 2008
Understand Your Business
Succeeding in uncertainty requires preparation and being proactive. Businesses should objectively assess critical areas such as Customer and Markets, their Business Model and Capital Structure to better understand key opportunities and threats.
Manage costs today
To put the company in the best possible position to succeed in uncertainty and prepare for the future, management should be managing costs today. Management needs to focus on immediate cash and profitability improvements while simultaneously addressing the core business to stabilize for the long term. Analysis of significant downturn scenarios (eg. loss of major customers, increase in input costs, etc.) will help identify the impact and financial risks. Companies should start on surgical cost restructuring (Do Without, Do Better, Do Less, Do Different) and look to working capital as a lever to improve cash flow and liquidity.
Shape your future M&A strategy
As companies, private equity firms and other investors reassess portfolios and strategies, opportunities to buy – as others decide to sell – start to grow. Historically, valuations or EBITDA multiples are lower during a downtown, which can create opportunities for acquirers. Within this cycle it is important to consider how your divisions or businesses will perform in a downturn. How can you maximize value by considering opportunistic sales before a potential downturn while multiples are high? Are there companies that you can proactively target now for potential acquisitions during a downturn?
The range of possible futures confronting businesses are increasingly vast. Companies that face uncertainty head on, rapidly adapt, and start planning today are more likely to sustain a crisis and prosper in the face of uncertainty.