Corrections and recessions impact us in our personal and business lives and we respond to these outside events with what we perceive to be rational reactions.
Corrections are by definition short-lived events to which we can only respond tactically – quick, typically short-lived responses to unexpected events, which are outside our control.
An economy can be considered in recession when the growth rate of its GDP (gross domestic product) is less than zero.
Economists, with their 20/20 hindsight, categorise recessions as ‘V’-shaped or ‘U’-shaped. ‘V’-shaped recessions being those where economic activity consistently slows until some nadir is reached, after which the activity steadily speeds up again. ‘U’-shaped recessions are those where, after a steady decrease in economic activity, the rate of decrease slows and then plateaus at a low level before slowly, and later more rapidly increasing.
In a recently published paper by Paul Ormerod1, the economies of 17 (capitalist) Western countries were studied for the period 1871–2006. Over the period there were 255 instances of recessions with the distribution as shown in the chart. The data shows that there have been times when recessions have lasted for up to seven years.
As a result of a building boom in the earlier part of this decade, the sub-prime crisis, and the yet-to-occur resetting of other similar mortgages like Alt-A, the US housing market has a growing surplus – from 2,2 million units in 2005 to 4,5 million in 2008. Property specialists expect that it will take between three and five years to work through this surplus.
This is one of the reasons that many forecasters are expecting the current recession to be a ‘U’-shaped recession spanning several years.
If this analysis is correct and we are one year into a five or six year recession (or even depression) then business owners and managers need to implement strategies that are appropriate.
Like swimming under water: you may be able to take a deep breath and swim a length or two of your pool before coming up for air – but you need a different strategy if you want to swim the Atlantic under water. If you try the latter by holding your breath you will not survive.
Similarly, businesses whose sole response is freezing expenditure across the board will not endure a long duration recession. Those whose strategic responses take the longer timeframe into account will last the course and come out far ahead of the competition when the upturn comes, as it inevitably will.
The implications are that organisations need to:
* Keep their clients aware of their continued presence and product offering.
* Maintain the impetus of their R&D programmes.
* Improve operational efficiencies through development of staff systems and investment in technology.
And some additional thoughts from the Dilenschneider Group²:
* If you have a cash surplus, look to increase market share by buying distressed competitors, but only at bargain basement prices.
* Encourage innovation at all levels.
* Rededicate your organisation to achieving two essential goals: Superior customer service and flawless execution of the basics.
I plan to survive this downturn and to prosper in its wake. Will you be around to celebrate the upturn with me?
1. Paul Ormerod, Volterra Consulting, London and Institute of Advanced Study, University of Durham, UK – www.volterra.co.uk/publications/08/internationalrecessionsapr08.pdf
2. A World in Crisis Looks to a New Era: The Dilenschneider Group 38th Trend/Forecasting Report January, 2009 – www.dilenschneider.com
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