How well is a company positioned for future adverse business conditions? Even for those companies with a successful long-term history, they may be (highly) vulnerable to the complex pressures inherent in ongoing economic weakness. This vulnerability is a major corporate risk factor that largely lacks recognition, perhaps largely because of the recent record (aggregate) corporate profitability as well as consensus economic forecasts that show ongoing high levels of profitability.
However, businesses currently face many challenges stemming from the uniqueness of today’s economic situation, and recent widely-publicized corporate results showing pressures on revenue and profits among a broad range of companies are worrisome.
How well companies are positioned for the possibility of continued economic weakness is a complex subject and varies by company. Of note, most companies were caught “off guard” by the sudden severity of economic weakness experienced during the financial crisis of 2008-2009, and scrambled to adapt to the situation by implementing a variety of commonly accepted measures such as cost cutting, price cutting, cash conservation, etc.
If one assumes that the current ongoing economic environment will be one of (at best) low economic growth – and possibly (much) more adverse – businesses that fail to envision and plan for such economic adversity will likely find themselves in a very disadvantageous position.
Should such further significant economic weakening occur, a major business concern will be the ability to successfully manage through adverse business conditions, which may be prolonged. Most businesses have not been exposed to the severity, both in length and extent, of such prolonged economic weakness. This lack of operating experience could pose significant challenges and hurdles to businesses, especially to those that have already been adversely impacted.
While the various cost cutting, price cutting, and cash conservation measures taken by companies in response to the economic weakness of 2008-2009 seemed to be appropriate, the longer-term impacts of such actions has largely escaped scrutiny. Can companies continue to rely upon such measures to appropriately weather future adverse business conditions? While the answer can of course vary among firms, it appears as if all of the “fat” – and likely a significant amount of “muscle” – has already been trimmed from many corporations due to previous cost cutting measures. As such, benefits derived from such further cuts may prove rather short-lived, and from a longer-term, fundamental perspective may well prove detrimental.
Are there measures that can be successfully implemented in a rapid fashion to prepare and effectively deal with adverse economic conditions in an optimal manner? While there are, the source of such solutions are often lesser-apparent, if not completely obscured. Determining such solutions may likely require a sophisticated understanding of the corporation’s operations and financial levers, which likely requires a complex and granular analysis and innovative strategies.