The Recession Playbook for a Digital World

So here we go again. Inflation, recession and uncertainty. While these things happen every decade or so, noone likes a downturn. The last short downturn in 2020 actually accelerated digital transformation, investments and value creation. It can happen again if companies use the right digital playbooks.

Transcript

So here we go again. Inflation, recession and uncertainty. While these things happen every decade or so, noone likes a downturn. In fact, we’ve already had a mini-recession at the beginning of Covid that we’ve already recovered from. And that short downturn actually accelerated digital transformation, investments and value creation.

Recessions tend to be transitions for more digital transformation and value creation. If history is any guide, great things will be born in the months ahead. And great companies will deploy their digital playbooks again.
Here’s how

Let’s put things in perspective. We’re at the tail end of the longest economic expansion in recent history. Almost 12.5 years of growth. Staggering. Think about it. An average 5-6 years of economic growth was usually followed by 1-2 years of recessions. Like clockwork. Since 1980s expansions are getting longer and longer and recession shorter and shorter. So much so, that many people can’t even remember the great recession of 2001 or even 2008.

In the last 12 years great companies grew from scratch like AirBnb, Uber and WhatsApp. Real estate values multiplied. These created great corporate valuations that exceeded even the exuberance of the 1990s.
In fact, I got into private equity value creation at the bottom of the last crisis in 2009. I saw first hand the value creation revolution. Investors deployed more and more digital technologies to drive business growth.

They proved out the digital playbooks. Business model innovation became the norm in the last economic boom. Companies also created better digital experiences. They transformed their business models as much as they innovated their products. Digital businesses like social media and cloud software started and scaled within months. The number of unicorns exploded. Not because products were more innovative but because business models were scalable.

The same economic expansion or rather explosion will happen after the current recession. We have the technology to stay close to customers. Technology to pivot with changing demands and evolve our business model.

But not every company will succeed. Some will go back to playbooks that are outdated for a digital first era.

A few months ago I had a video about the Digital First Mindset. During the pandemic, companies were facing the same uncertainty as today. They had to consider how to respond to disruptions they had not seen before.

The biggest benefit of the digital first mindset is this. The recognition that in disruptions there are great opportunities. Opportunity to change business models, get closer to customers and realign with suppliers.  Companies in past crises often threw away old playbooks and invented new ones.

This is what’s needed now. The combination of high inflation, talent shortage, energy crisis is new. We have not seen that since the 1970s. Think about it. No-one in position of power has direct experience with that environment.  It’s new for all of us. In the 1970s there was no internet and no digital processes.

The winning playbooks for this crisis and future disruptions is being invented today. Many companies working on them learned from the Covid response. Companies used technology reconnect with employees, suppliers and customers. And kept the business going.  That experience is fresh for many and will take digital transformation to the next level.

The greatest digital companies were born in the 2009 recession like Airbnb, Uber and Groupon. Netflix changed to their digital streaming business model in that crisis. I predict the same digital innovation is happening now.

So let’s go back to the question of playbooks. In every boardroom right now a playbook gets called.  I love this because they are visible from the outside. If you want decipher a company’s crisis strategy, you can observe how they behave. Are they hiring talent? Are they expanding their digital programs? Are they cutting costs? Are they reducing service quality?

Companies are dusting off one of 4 crisis playbooks right now. See if you recognize your companies, your customers or your suppliers in them. Which one do you think will win with a digital native generation?

Speed up growth and market share

A common playbook is to take advantage of any crisis to gain market share. Hire the best talent and poach customers. This is a customer facing strategy. You reallocate your resources to customers from sales to service to support. Crises make clients anxious. Customer focus almost always pays off as a playbook. Customer churn from competitors can be your gain.

Thinking digital first

Some companies will always throw people at problems. This may neglect secondary processes and actually increase operational costs. A better playbook is to free up capacity in the organization by automating and digitizing processes.
In normal times digital transformation actually takes too long. Companies want perfection and end up doing too little. A crisis can speed up transformation, lower the desire for perfection and solve real burning issues.
In this playbook you keep asking the question: Can we digitize or automate this.

Shift business model

We saw many businesses shift their business model from analog to digital. We have a generational shift to digital native customers. A more digital business model will more likely to succeed. Changing business models seems easier in private companies away from public scrutiny.

Cut capacity and costs

This is the old standby. Some companies will fall back to the 1000 year old playbook of cutting costs and capacity. This will reduce growth, cash flow and valuation. As we are shifting from high valuation to a low one, this strategy can cause long term damage. 

Some companies will have no choice. They have not built up digital execution capability and can’t borrow their way to do that now. This playbook will lose out to the growth and digital first strategies. Customer attrition will be higher. They won’t be able to attract talent and this playbook tends to be slowest in recovery.

While we live in a digital first era, I hope even analog companies will come out stronger from what’s ahead. 

Digitized processes that keep you connected to your customers,  your suppliers and operate faster at the lowest cost will win. It’s physics in the world of digital native customers. That’s the playbook I believe in.

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