Positioning an organization to survive and thrive during an economic downturn
Dominic Iannazzo, CPA | April 2020 Footnote
Editor's note: Updated April 1, 2020
The COVID-19 outbreak has brought increased disruption and uncertainty to businesses and economies globally. In times of economic uncertainty, it’s imperative for businesses to know how and where to play it safe and double down in order to not only survive, but grow.
Lessons from the Great Recession taught businesses to take a balanced approach to cost savings and investment in order to have the best chance of finding both stability and success during a downturn. Businesses must not compromise on fundamentals that keep their companies safe and secure, and they also cannot hesitate to take advantage of the opportunities uncertain economic times can present. Over-indexing on one aspect, such as cost saving, can place an organization in a dangerous position where it’s unable to keep pace with the demands of consumers and emergence of new technologies. However, a singular focus on investment could completely drain a business of capital.
To find the right balance between playing it safe and doubling down, companies must have the strongest talent within their organization, make purposeful investments in technology and establish the right strategy to accommodate the future. Companies cannot slow down due to economic uncertainty and mixed signals in the market, but rather must accelerate due to the need to transform.
Maintaining a strong team with the right capabilities is one of the best ways to simultaneously weather and grow during a recession. However, limiting an organization to talent that can fulfill the current needs of the business will not be enough. Organizations must bring in employees who can handle the future needs of the business as well. As technology becomes increasingly vital to every aspect of an organization, future-focused employees will need to embrace technology advancements, from analytics to AI, coding to cloud, and everything in between. By investing in talent before or even during a recession, businesses will be better prepared for what comes after the recession ends and won’t be competing to find the employees they need, who may have already found positions with competitors.
This is particularly critical now as professions are already being disrupted. A prominent banking and financial services company predicts that robots will hold 200,000 banking jobs within 10 years. At EY, we believe that advanced technologies and automation are best used to support human talent, not replace.
In a recent EY study, most executives surveyed suggested that, as more jobs are automated in routine tasks, companies are finding it more difficult to attract and retain talent with the right technical and digital skills to benefit from these efficiencies. Many are reskilling their existing workforce in response. Forbes cites 45% of U.S. consumers want their physician to use AI for better diagnosis. Cutting edge AI can create better machine-learning code than the researchers who made it. Although technology is changing every professional landscape and may displace certain jobs, a 2018 BBC report suggested AI will create as many jobs as it displaces. To thrive in a world of disruption: be curious — tech savvy, seek diverse views, learn and unlearn; be adaptable — build your flexibility, humanity and resilience (Adaptive Quotient (AQ)); and be bold — experiment, be more creative and encourage healthy conflict.
Technology has dramatically altered the way businesses operate. It is a tool that can lead one company into the future while simultaneously upending the business model of another. As businesses prepare for a potential recession, they must look at how the acceleration of technology can disrupt daily operations and identify ways technology can take advantage of those disruptions.
For consumer product businesses, that could mean recognizing automation’s and digitalization’s ability to provide a more curated experience for customers both online and in stores. For financial institutions, disruption could come from new advancements in digital currencies, especially when governments direct those efforts. The pace of technology adoption is accelerating, opening up new business models enabled by tech, making it easier for new market entrants.
Additionally, much of this acceleration is fueled by declining marginal costs of production. For example, the cost of solar power has experienced a drastic decline the past several years from around $77 per watt in 1977 to just north of 20 cents today. According to the National Human Genome Research Institute, the cost of sequencing one million bases of DNA — just the raw data from a sequencer — dropped from roughly $1,000 in 2004 to about 10 cents in 2011 and is now closer to 1 cent. The cost of a lidar, the sensor on top of autonomous vehicles, declined from approximately $75,000 in 2012 to around $10 today.
Recognizing and planning for these disruptions can help businesses grow and lead the way in determining how new technologies will not only affect their day-to-day operations but also their industry. However, if businesses choose not to adapt, there’s a good chance a new player in the market will lead the charge for disruption (as we saw when rideshare companies upended the taxi industry) and leave the existing organization with an obsolete business model.
When looking at long-term strategic planning, it’s important for organizations to take a two-pronged approach: reinvesting — or doubling down — in what they do best while simultaneously looking to the future to plan against potential roadblocks. Not only will this dual approach help an organization weather the effects of a recession, it will also place them in the best position for growth during and after the recession.
To understand which pieces of the business should be prioritized during a recession, organizations should examine their operating model and focus on transforming its costs and portfolio to leverage the most profitable, highest growth segments. This could mean improving supply chain visibility to help balance risks and better deliver on customer expectations. Or, it could mean gaining a better understanding of available data to help grow profits sustainably despite uncertain times. It also means making an unbiased, objective assessment of the organization’s portfolio and determining which pieces may be better suited in the hands of another owner and be divested.
A great example of this is one of Minnesota’s larger, diverse and global manufacturing businesses, which works in several disparate industries, including health care, worker safety and consumer goods. The company is constantly reshaping its portfolio through acquisitions and divestments to align its offerings with its core competencies and long-range strategy, all the while maintaining the strength of its most profitable, future-ready segments.
An external evaluation is just as important for an organization as the internal evaluation. A business must look to its industry, customers and available technology to gain an understanding of where everything is moving and to prepare for additional disruption. While smaller organizations or startup businesses historically had the upper hand due to their ability to shift directions quickly, that doesn’t mean larger organizations can’t be just as nimble to accommodate the future.
In the book “Exponential Transformation: The ExO Sprint Playbook to Evolve Your Organization to Navigate Industry Disruption and Change the World for the Better,” Salim Ismail, Francisco Palao and Michelle Lapierre describe the need to build and retain innovation capacity within an organization, which involves setting up smaller, more nimble organizations at the edges of a business separate from the core. These agile institutions develop the ability to grow 10 times faster than the established organization by harnessing what traditional companies find chaotic. Many mature companies have found success by embracing this transformative thinking.
Beyond providing innovative capacity, an organization must update the mindset and knowledge set of those that work for it, focusing less on efficiency and more on disruptive innovation and identifying the right business model. The team can work with speed with transformation as a priority. After all, a traditional organization tends to focus on running its existing business rather than transforming itself. This means it must have leadership independent from the larger organization who are empowered to make innovative decisions. The goal is for this organization operating at the edges to succeed and exponentially grow until it is the same size (or even bigger) than the core business due to it innovating and advancing with the pace of external change.
A natural tendency for companies facing difficult times is to focus solely on defensive measures. However, research shows this is not an effective strategy. Defense must always be paired with offense, and simply waiting for difficult times to pass is not an option. Instead, companies should leverage available resources to double down on growth and prioritize the future of the organization or risk being disrupted by new players in the market. Companies should take advantage of the opportunities uncertain times can bring to continue growing and creating shareholder value.
Dominic Iannazzo is a partner at Ernst & Young LLP (EY), leading its transaction advisory services practice in Minneapolis. He also serves as the growth markets leader for the Upper Midwest region at EY and co-directs the entrepreneur of the year program for the Heartland region. Prior to joining EY, Dominic spent time in strategy and business development roles at a Fortune 100 company.