The New Recession
At a Glance
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While companies race to adapt their strategies to deal with persisting inflation, they will also need to revise their playbooks for the anticipated recession, considering a host of complexities that will make this recession different.
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Research has found that companies make more dramatic gains or losses during downturns than during stable periods.
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Among the moves that will help companies emerge stronger: surgically restructuring costs before the downturn, diligently managing liquidity and the balance sheet, staying focused on customers, and aggressively pursuing M&A opportunities.
This recession will be different.
It will arrive at a time when decision makers will still be struggling to manage through the onslaught of major disruptions that didn’t all exist simultaneously during previous recessionary periods: supply chain constraints, geopolitical tensions in key markets, a historic labor shortage, the uncertain path of a global pandemic, and the looming possibility that inflation will persist even amid recession.
How to Adapt
Practice pre-recession scenario planning. Scenario planning is as critical to pre-recession planning as it is to inflation preparation. It’s about envisioning different futures and clearly articulating the decisions you would need to make should each occur.
The best companies begin with a realistic assessment of the company’s starting position—namely, how it compares with its competitors in strategic position and financial strength. That guides the sequencing and emphasis of recessionary levers. It helps dictate whether the company is better suited to play defense by paring back noncore products and focusing on core strengths, for example, or to play offense by pushing the envelope on market share leadership and growth. In the pre-recession context, companies should develop recession signposts and triggers to monitor emerging scenarios, drawing up ready-to-follow steps when those triggers occur.
Solidify new pricing and portfolio management capabilities. When inflation hit, most companies correctly increased prices to address rising supply costs. By now, many find they have reached their limit on price increases. Should a stagflation scenario occur, in which inflation persists well into the recession, companies would need to get a lot more sophisticated regarding how they approach pricing.
That means replacing broad-based price increases with strategic increases to protect margins that are informed by cost to serve and within the bounds of customer perception. There are a host of potential moves: Exchange price for value, offering other benefits such as volume guarantees, bundled products, or adjusted service levels, for example, or pass on surcharges for customer behavior that causes profits to leak away.
Double down on operational resiliency and traceability.Procurement and supply chain teams will continue to face mounting challenges as inflation leads to a downturn. With a recession in the headlights, a major challenge now is to proactively balance investments in supply chain resilience in a low-growth/high-cost environment, developing mitigation strategies that simultaneously address today’s needs while building flexibility and agility for the future.
That could involve pressure testing input price increases for market alignment and selectively absorbing some cost inflation to bolster demand with loyal, price-sensitive customers, for example. Other moves include recalibrating product specifications to allow for input substitution and creating end-to-end value chain traceability to more accurately forecast input price changes and mitigate supply availability issues. Companies can build more segmented supply chains based on changes in the customer value proposition, too.