The forecast, while varied on its timing and depth of impact, is calling for an economic contraction. And while it is always a fools errand to try and time both tops and bottoms of economic expansion it appears that we’re a tad overdue. Record breaking lengths of expansion, aided by incredibly liberal lending and stimulus, has left many of our newer industries entirely unaware of what an economic contraction can look, and feel like.
This is especially true of the digital economy. The incredible rates of growth seen in digitally oriented industries have staggered even the most optimistic predictions. While the revenue models have hardly been innovative, the growth and size of the entire technology (and digital) sector is enormous. What it means to continue to grow in an economic contraction is entirely different from that of an economic expansion. It can be done, but the work is harder, longer and not without greater degrees of accountability. Businesses without positive unit economics will hardly be able to sustain operations let alone the ridiculous valuations they’ve commanded for some time.
The technology and digital industry’s aside, growing through economic contractions is old hat for many of the world’s largest companies. Industry by industry, the playbook for absorbing economic contractions is well understood and well implemented. In short, rationalize discretionary expenditures, moderate investment in R&D, focus on core operations, squeeze financing and payables terms, contract the workforce and hope for accommodations from state actors.
That being said, this time may be different. Beyond the realities of our genuine lack of financial tools to help us navigate an economic contraction (I.e. record low interest rates, liquidity already pouring into markets, tax cuts already made) we have a very strong deflationary force coming out of the digital economy which may further exacerbate the situation. The analogue dollars to digital problem has not gone away. Our lamented friend called scarcity continues to be eroded as our digital vanguards show little care and understanding of how it creates real growth. But that’s a fight for another day.
With all this in mind there is a path forward to growing in recessionary times. It’s not pretty but it takes preparation, stomach and a dynamism that many companies struggle with. It starts with an aggressive cash position. If you, as a leader, aren’t currently aggressively pushing a cash position ahead of this next economic contraction times will be tough. While overnight lending facilities may fund ongoing operations it will hardly position you well to do what you need to do next which is aggressively pursue digital acquisitions across your value chain. As the economic contraction takes shape, you’ll need to have a good line of sight to all the players in your value chain that have novel, disruptive technologies, but have yet to establish more than a toe hold in your value chain. Buy them. Worry about integration later but scooping up the likely limping technology companies that have novelty in disrupting how you do business can drive yield and new revenues. Avoid data-focused companies for now as the defined value of that data, even in the best of economic times, hasn’t likely been established. Avoid anything that’s discretionary to the value chain as well. If it’s not driving yield it’s not going to be absorbed by the end customer.
This value-chain acquisition approach will also allow you to develop a better picture of what a progressive, digitally oriented value chain can look like. This will necessitate a clean data path from start to finish which is an investment that’s worth the time and effort. You will need to take this on and clean this up. Outsource if necessary but a clean line of data from start to finish is critical. If you can do this now, ahead of a contraction, great. In parallel, the time is now to redevelop your value chain as a digital ecosystem. Look for byproduct industries that you can spin out, specifically looking for different uses of your technology and data. Partner where necessary and drive strong incentive alignment in those agreements. Growth can be had here even in an economic contraction.
In terms of the existing operations, do as you’ve done with a lens on digitizing as much as you can. Computation and algorithmic advances will continue at least through academia in these tough times which will further enable discovery. Research partnerships are possible, especially where government subsidies exist. Know them, take advantage of them.
Finally, reinvent. Business as usual is the corporate equivalent of the banality of evil. If you’re smart, you’ll see this for what it is and resist the temptation to buckle down to it. Any digital disruption will come online with ten times the force it did during the downturn, especially as predatory VCs re-emerge with their coffers to find those disruptors in industry.
There is a whole other subset of operational activities one can take in an effort to grow in recessionary times. The yield’s tend to be margin compressions of what used to be available operationally with some exceptions (see above). One thing worth noting is that along with any prolonged economic contraction there will no doubt be a political one, both at the grass roots and state level. Seize the opportunity to influence the discourse remembering that ecosystem growth comes from incentive alignment both inside and outside of your organization. Exploitation economics will have no place here and given the sensitive nature of our times one should engage with good intentions. Good luck!