Recession is an inevitable part of the economic cycle. But, this time it’s different. The next recession will arrive at a time when decision makers are still struggling to deal with multiple major disruptions like supply chain constraints, geopolitical tensions, labor shortage, pandemic uncertainty, and the possibility of stagflation.
To prepare for the downturn, companies need to transition their approach from preparing for inflation. Our recent Bear Atlantic client brief “Accelerating Performance Despite Inflation” outlines how successful companies are adapting to inflation. Now, companies need to use these strategies and add some critical nuances to prepare for the recession and come out stronger than before.
What can companies do to prepare?
Past recessions have shown us what doesn’t work. Companies that cut costs dramatically across the board, strayed from their core business, or waited too long to act, struggled during the downturn. The right approach is to surgically restructure costs, manage liquidity and the balance sheet, play offense by selectively reinvesting, and aggressively pursue M&A opportunities.
But this time, companies need to consider the complexities of the current scenario, including rising cost of capital, ESG commitments, and material shortages. To navigate the recession successfully, companies need to change their approach and adapt to the new reality.
Here are some key strategies for the new recession playbook:
- Pre-recession scenario planning: Envision different futures, assess your starting position, and prepare signposts and triggers to monitor emerging scenarios.
- Improve cash management: Strengthen balance sheet management, increase working capital, and track the impact of commercial and supply chain decisions on working capital and free cash flow.
- Sophisticated pricing and portfolio management: Replace broad-based price increases with strategic increases informed by cost to serve and customer perception. Offer value exchanges, pass on surcharges, or adjust service levels to protect margins.
The next recession will be different, and companies need to be prepared. By following these strategies and adapting to the new reality, companies can emerge from the recession stronger and more successful than before.
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