The stock market continues to break records with consecutive highs while the unemployment rate breaks the records of historical lows; these economic successes correlate with feelings of growth and opportunity among most business owners in the U.S. But every economic upswing is eventually met with its polar opposite – a recession. There are many predictions reported in the media as economists and politicians attempt to forecast how much growth can be sustained and for how long before these positive trends start to shift in the opposite direction. In the meantime, the positive news of today influences decisions that business owners make in the context of these trends. Unfortunately, the trouble with riding the wave of economic success is that many business leaders lose track of the alternative scenario and fail to take substantial preemptive steps to address the full business cycle plan.
For some business leaders, the climate and challenges surrounding the Great Recession of 2008 will forever be embedded in their memories. Others will also look back to their experiences during the recessions in 2001, 1990, and 1981, or perhaps even 1973. But the vast majority of these leaders have likely already lost track of lessons learned during those times, as they seize the opportunities of today’s record-breaking numbers. It is expected, however, that by 2019, the current economic expansion will be the longest in U.S. history; so anticipating the end of this historical run and planning to address the forthcoming downturn are prudent strategies.
Caterpillar (CAT) is one example of a success story of incorporating planning for an economic downturn even during times of economic highs. In Caterpillar’s 2009 “Year in Review,” the CEO, Jim Owens, stated, “Despite a 37 percent decrease in sales and revenues, we delivered a profit, improved our balance sheet, upheld our mid ‘A’ credit rating, maintained a dividend and contributed to employee pension plans.” CAT not only persevered through significant loss of business following the recession of 2008, but the company actually managed to improve its overall financial standing during one of the economic low points in the nation’s history. Owens pointed to “having a solid business model” and “executing some of their basic business principles” as factors contributing to their victorious outcome, but, more specifically, he explained that actively planning for the inevitable recession was key in that outcome, which he referred to as nothing short of miraculous.
As part of CAT’s 2005 strategic plan, the company included an initiative that they called trough planning. Every business unit and leadership team in the company was tasked with the development of a specific and detailed plan that could be initiated and executed on a moment’s notice during an impending economic shift. CAT’s formal trough (or recession-proofing process) allowed the company to take aggressive, decisive and swift action while engaging a preplanned strategy that immediately aligned the lower volumes and revenues with the appropriate cost and overhead structure.
One of the challenges many business leaders face is that the impact of a recession on themselves or their company doesn’t always align with federal, industry or media reporting and may not necessarily occur at a time when the masses are experiencing the effects of recession. For example, a major event or loss can lead to a recession-like scenario on a more personal level at any point during the business’s life cycle and even at a time when others in the same industry are flourishing. This precise situation was experienced in the fall of 2007 by a company owned by the author of this article, when CAT, the company’s largest customer, made the decision to exit the over-the-road truck engine business. Most manufacturers hadn’t begun to experience any impact from the impending 2008 recession, but that company fell into the recession even before it officially started – it was already in a true economic depression because of its dependence on one major customer, one business unit and one product group.
While the risks of limited diversification of customer base should be continuously assessed, this flaw should have been highlighted and addressed in a formal and well-documented recession-proofing plan, if one was established.
Most business leaders should be aware that some of their direct competitors are actually, paradoxically, looking forward to the next recession. Companies with this approach have already learned that by preparing ahead, they can seize the market while others in the same business struggle during the downturn due to their lack of planning. These high-performing organizations have already established the core competencies necessary to identify and anticipate directional shifts in the business cycle. The leadership in those companies, as well as their associates, use customized internal and external forecasting tools to alert them of the appropriate time to contract or expand their dealings. These organizations have armed their functional teams with the training and the tools to act strategically with conventional and countercyclical decisions. By being able to prosper before, during and after a downturn, they not only develop the ability to mitigate downside risk but, in essence, they construct their own unfair advantage.
Every business owner or leader should consider the potential of withstanding a 20 percent drop today (or a 37 percent drop like CAT did, or an even more extreme drop). Having detailed documentation and the supporting evidence to recession-proof should be critical to developing an appropriate strategic plan for every business. Nowadays, it is common knowledge that this world, this country and its industries all function within economic cycles, and although recession anticipation may not be top priority for most in the current climate, the next slowdown or trough is inevitable.
The lessons learned from CAT, as well as from other companies who either have or have not embraced a formal recession-planning process, should encourage all business owners and leaders to reevaluate their company’s strategy. The tools and resources are readily accessible to help with business cycle planning, and this investment is minimal when compared to the significant risks and ramifications of not having a plan. Great companies don’t fear recessions because, like CAT, their proactive planning allows them to flourish during downturns by capitalizing on their competitors’ lack of preparedness.