Warning signs of a potential slowdown in the global economy are multiplying. These include the sustained inversion of the US Treasury yield curve and declines in manufacturing in Germany, Japan, and the United States, among others. Even in China, which has been a reliable driver of growth, output has slowed. And concerns over the impact of tariffs and uncertainty from geopolitical tensions loom everywhere, as reflected in the recent correction in global equity prices.
As we saw with the latest rate cut by the Federal Reserve, central banks are taking steps to help insulate the global economy against these worrying trends.
But from where I sit, the downturn is already here. Based on my conversations with CEOs and other executives, the pinch of slowing growth is being felt by businesses across industries and will likely begin to become evident over the next couple of quarters.
Whether this will turn into a technical recession, I will leave to the professional economists. But as an adviser to businesses, and as a business leader myself, the time has come to examine what the downturn means for us and what we, as leaders, must do to prepare.
A friend, who spent his career in the Royal Air Force, once told me that pilots are taught to invert their aircraft when needing to descend quickly, to avoid radar detection, enemy jets, and the like. Because of the physics of flight and the way airplanes are constructed (to get them aloft), they can’t descend quickly enough without turning the plane upside-down.
This struck me as an apt metaphor for what business leaders must do to their organizations when faced with the need to transform because of falling demand for their products or services. Businesses have enjoyed 10 consecutive years of global economic growth. While many have struggled with the disrupting effects of technological innovation, changing consumer behaviours, and new business models and entrants in their industries, overall demand has been growing, leading to higher revenues and profits for many, as well as intense competition for the most skilled workers. As a result, expenses in some instances may have been allowed to expand beyond sustainable rates.
Leaders must take steps today to rein in those costs and prepare for a somewhat reduced future, at least in the near term. Waiting for one or two quarters of underperformance can lead to disaster, particularly in this age of accelerating disruption and shortened corporate life cycles.
Effective transformation must be designed and implemented before performance turns downward and enterprise value declines. This does not necessarily mean demoralizing headcount reductions or asset divestitures. It could mean business model adjustments and operational and cost efficiency initiatives, a process we’re currently undertaking at our firm.
But have a bias for action. Recognise that some decisions may be made without total information, and be prepared to course-correct if necessary down the line.
The cost of catching up in today’s world is appreciating dramatically. Turn the plane upside down now before it’s too late.
But this is only half the story. The future of any company is not in cost-cutting, but in revenue generation. A delicate balance is required to ensure that a cost reduction effort does not impair future growth. Indeed, investments into those areas of the business that will drive its future – be that new technologies, products, or markets – are essential and should continue.
A failure to transform in the short-term may mean there is no future in which to invest. But failing to invest may also lead to long-term decline or loss of control over that future.
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This is obviously easier said than done. That’s one reason why many companies change CEOs between periods of retrenchment and growth. Many leaders tend to be good at one, but not the other. The best excel at both.
How severe the current downturn will be, I cannot predict, and will depend on factors outside of our control. What we as business leaders can do is prepare as best we can by realigning ourselves today, but also investing for the future that we know is on the other side.