If you parse through headlines from the last several weeks, you’ll see titles including, “Over 90% of CEOs Expect a Recession and Only a Third of Those Expect it to be Mild,” or “WTO Sees Sharp Slowdown in Global Trade, Pointing to Possible Recession, Lower Inflation” or “’Worse damage than the financial crisis in 2008.’ Wealthy countries could trigger a global recession, UN says.”
What becomes obvious is most economists and business leaders are expecting a global recession in the next year. There is, however, far less consensus on what form this recession will take. Will the interest rate hikes drive down inflation in the short term, or are we headed for stagflation? Is the recession likely to be mild and short or deep and long? How will consumer demand hold up? How quickly will the tight job market swing on the pendulum? This lack of consensus and clarity highlights the many unknown variables in the world around us – the war in Ukraine, the supply chain disruptions, the lingering Pandemics effects, – all contributing to increasing uncertainty and complexity.
Business leaders who are looking to map out their downturn response strategy are looking for answers to these questions. How can you develop your plans without knowing whether demand will fall or if commodity prices will continue to increase? At the heart of it, this is the biggest challenge leaders face – how to make decisions in situations that are so uncertain and where the economic environment is so volatile. And with high levels of burnout in organizations, leaders don’t have a lot of room to make moves without further taxing their employees.
What can leaders do differently to prepare their organizations for economic volatility:
1. Resist the urge to try to add certainty in an inherently uncertain environment: Adding clarity and direction is a critical part of a leader’s role. However, when grappling with situations where there is not sufficient information to add clarity, it’s important for leaders to acknowledge a lack of information and not fall into the trap of being certain but wrong. Too often, leaders feel the need to confidently commit themselves to a viewpoint, even without enough data. The view of leadership as a steady, confident hand doesn’t leave room for nuance or acknowledging not knowing. In uncertain situations though, this is exactly what is needed – to speak with nuance to clarify what is known and what is not and to provide multiple potential paths instead of just one.
2. Focus on scenario planning and articulating assumptions: The practice of developing 5- year strategic plans is increasingly outdate. What is needed today is not detailed, long-term planning but rather a focus on the scenarios that might come to pass and shorter-term plans that can pivot and change when underlying assumptions change. A long-term view of business success is still critical, but leaders should recognize the path to business goals will not be a straight line and will need resets and adjustments.
3. Cultivate an opportunity seeking mindset: During times of high uncertainty, our instinct is to try to ride out the storm. This leads to a reactive approach, and organizations fail to make necessary changes until well after they should. To combat this natural response to a state of feeling overwhelmed, leaders should help their teams focus on forward-looking opportunities. The opportunity seeking mindset allows organizations to identify the appropriate investments, adapt quickly to a changing context, and be proactive.
4. Encourage autonomous and disperse decision-making: Traditional management systems are effective at handling situations where information is complete or, at least, the process for collecting information is known. A small, elite group of senior managers can then analyze this information, make good decisions, and communicate these decisions to the rest of the organization. In rapidly evolving and highly uncertain situations, this reliance on a small group is no longer feasible. No leadership team, no matter how sophisticated, well connected, or intelligent, will be able to gather information and insights quickly without a significant group of engaged bodies, brains and alert eyeballs. Without this broad engagement it simply is not possible to see how customers are responding, market demand is evolving, supply chains are adapting, or local/regional government policy is changing. Participation does not end there, however. Particularly given the level of volatility, agility in execution is necessary to respond to the evolving needs. Without enough sufficiently engaged people, it is not possible to make rapid decisions and overcome all the barriers to execution in a timely manner.
As central banks and governments continue to tweak monetary and fiscal policy and businesses start to make proactive changes, economic uncertainty is unlikely to decrease in the coming months. In these situations, there is a tendency to move in a herd because clarity is hard to find. Leaders can position their organizations for success by identifying what is certain and clarifying the implications of movement in the uncertain variables, creating early and obvious triggers for when pivots are needed. By having many more people looking for these triggers and acting on them, organizations can position themselves for long-term success and leap ahead of their competitors.