Managing Customers Through Economic Cycles E-Book

John McKean

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 286

Veröffentlichungsjahr: 2010

Beschreibung

Whether you are a global Fortune 500 organization or a small business Managing Customers Through Economic Cycles show you how to optimize your business's sales and marketing approaches specific to survive and thrive in each economic cycle and transition.

"The business case for continuing to invest in service and innovation can be compromised by an economic downturn. McKean clearly lays out the case for weathering the economic storm by achieving a careful balance of investment in the areas that truly matter – and continually using data to reinforce the idea that business can be more science than art, after all."
—Barbara Higgins, Vice-President, Worldwide Contact Centers, United Airlines

"John McKean's work has served as practical guide for me and my teammates. I have seen countless examples of businesses managing their customers’ experience with a short term economic view. If the right principles are employed consistently, as John teaches us, we can create the right emotional experience that delivers growth and loyalty – as well as the improved operating leverage – that are needed in good times and in tough times. Consistency of values and experiences keeps companies from having to be reactionary and short sighted in a down economy. Thanks, John, for another practical lesson."
—John Quinn, former Customer Service and Support Executive, Bank of America

"In good times and bad, forecasting where business is headed is both art and science. As John McKean so eloquently states, marrying data driven analytics with consumer insight is critical for managing through tough economic cycles. This book is a must read for anyone intent on driving greater profitability and consistently out-behaving the competition."
—Joni Newkirk, CEO, Integrated Insight, Inc., former SVP, Business Insight & Improvement, Walt Disney Parks & Resorts

"John McKean continues his pursuit of the profitable customer through the turbulent world of boom and bust. His book provides valuable insights into how businesses survive and thrive in a volatile economic climate."
—Trevor Dukes, Business Systems, WH Smith

"The rise of customer power coupled with challenging economic conditions demand that organizations leverage the power of the Internet and related technologies to stay relevant to their customers. As John McKean points out in his compelling new book, successful firms have built a core competency in leveraging information technology not only to survive economic transitions but thrive in an ever-changing economy."
—Erik Brynjolfsson, Professor, MIT Sloan School and co-author of Wired for Innovation: How Information Technology is Reshaping the Economy

"It would be hard to name a more relevant or timely topic for sales and marketing today than that of how to cope with economic downturns and upturns, and this is exactly the subject John McKean has insightfully tackled head-on in Managing Customers Through Economic Cycles."
—Don Peppers and Martha Rogers, Ph.D., Peppers & Rogers Group

Leseprobe

Table of Contents

Title Page

Copyright Page

Acknowledgements

Chapter 1 - Introduction

Research methodology

Key findings

Summary

Chapter 2 - Predicting/Preparing for Economic Transitions

Historical examples

Emotional anchors from economic cycles

Economic forecasting

Use consumer confidence data in context

Scenario planning

Plan future economic cycles with risk probabilities

Direct marketing to how economic cycles shift regional consumer spending

Strategic lessons learned

Chapter 3 - Science of How Consumers’ Buying Changes over Cycles

Low and high-order consumer needs

The value tradeoff

Consumer behavior in economic cycle context

Communicating a value proposition

Chapter 4 - Consumer Loyalty Strengths/Vulnerabilities in Cycles

Four central types of loyalty

The business case for loyalty

Case study: Suncorp Metway

Chapter 5 - B2C Approaches for Dynamic Consumer Needs/Value Tradeoff

Approaches for downturn economic cycles

Strategies for transition periods

A strategy specific to boom periods

References

Chapter 6 - B2B Approaches for Different Economic Cycles

Create pay-for-performance market initiatives

Make it embarrassing NOT to buy from your business

Create good products in good times and great products in tough times

Address the social spending stigma

Business transformation

Chapter 7 - Mastering Information across Economic Cycles

On the road to information mastery

Information mastery and sales

Information mastery and profitability

Mastery and risk

Information mastery and marketing

Information mastery and customer retention

Information mastery and distribution channel effectiveness

Information mastery and productivity

Chapter 8 - Managing the Employee Factor through Cycles

Understanding the objectives

Having support in accomplishing the objectives

Having the ability to accomplish the objectives

Healthy, interpersonal relationships at work

Chapter 9 - Leveraging the Power of the Community (Physical and Online)

The physical community

The web community

Succeeding in the social marketplace

Link analysis of influence ranking

The opinion process

Building a business case for the Web

Summary

Chapter 10 - Summary

Index

This edition first published 2010

© 2010 John McKean

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Library of Congress Cataloging-in-Publication Data

McKean, John, 1956-

Managing customers through economic cycles / John McKean.

p. cm.

Includes bibliographical references and index.

eISBN : 978-0-470-66238-0

1. Customer relations. 2. Consumer behavior. 3. Business cycles. 4. Recessions. I. Title.

HF5415.5.M3853 2010

658.8’12-dc22 2009049241

Set in 12/15 pt Garamond by Toppan Best-set Premedia Limited

Acknowledgements

I am honored by and appreciative of the following friends, colleagues, and advisors whose time and insight shaped the ideas contained in this book.

Thanks to Patti Wilson, Rick Schaefer, Val Swisher, Mike Lofton, Ben Marbury, Tom Pencek, Bob Karr, Mitchell Levy, Daniel Chow, Ilmar Taimre, George Zdanowicz, Paul Bowers, Paul Dickson, Wendy Eggleton, Ann Nolan, Ryan MacNeil, Debbi Bowes, Joni Newkirk, Barbara Higgins, Ed Baklor, Priscilla Trumbull, Chris Holling, Behravesh Nariman, John Quinn, Iain Henderson, Donna Knoop, Trevor Dukes, Erik Koik, and Dave Schardt.

Several people listed above helped shape my thinking, but corporate sensitivities required their organization names and specific references be withheld. Special thanks to Ilmar Taimre for his and his team’s support in this book. Also a special acknowledgement of Ray Kordupleski’s ground-breaking work. Special thanks to my long-time colleague and advisor, Wendy Eggleton, whose insight, clear thinking, and editing helped immeasurably in structuring this book’s ideas and delivery.

1

Introduction

Business’s greatest customer opportunities and risks are determined by how well customers are managed through economic cycles. Despite the fact that 65% of a business’s existence is managing customers in hyper-competitive economic transitions, it is predominated by reactionary approaches and guesswork.

Whether it is how consumers change their buying behaviors or how businesses change their spending behavior through economic cycles and transitions, they both are predictable and addressable.

This book focuses on the unique business knowledge, skills, and underlying disciplines to enable any business to optimally address these distinct customer opportunities, challenges, and risks created as customers’ transition through economic cycles.

For the past decade, many industrialized nations have experienced strong growth with an unprecedented availability of financial resources. This fueled excess expenditures bordering on decadence. It was a sharp contrast to the Great Depression, the biggest crisis experienced by the world economy. Boom and bust are extremes in the continuum of economic cycles and each generates specific consumer behaviors.

If we hearken back to previous generations especially “depression babies” spending was characteristically stoic with patience and endurance toward one’s lifestyle, i.e. if they didn’t have it, they didn’t spend it.

This is in direct contrast to behaviors during these recent boom times. Consumers conspicuously consumed. They were able to leverage homes and other assets to gain access to extra money and so have been able to purchase more. However, they were also able to go further into debt. Credit cards have enabled us to spend more money than we actually earn. From a behavioral perspective, this has created an expectation of material entitlement beyond that which most generations could typically afford.

During 2008, the economy tanked. Real estate plummeted. People’s life savings were shattered, i.e. cut in half. Jobless claims reached a 26-year high. Consumers’ behaviors changed, and changed quickly.

What happened to businesses? What happened to their customers? Those businesses that were prepared and able to proactively use the economic turn as an opportunity flourished. Those that weren’t struggled to survive and in some cases, disappeared.

What was the difference?

That was the question we asked ourselves. So following the 2008 melt-down, we at the Centre for Information Based Competition started tracking:

• Consumer behavioral changes

• Business behavioral changes

• Businesses’ response to behavioral changes

• How business changed buying behavior.

And using that data determined which core business competencies were critical to sustained success during changing economic times.

Research methodology

The research was global in its nature. It crossed numerous industries including but not limited to: financial services, telco’s, retailers, travel, manufacturing, and consumer goods. Both small businesses and Fortune 100 companies were tracked. To that mix we added insights from consumers, business leaders, and economic forecasters.

Key findings

The research showed that there are three areas where successful and disappearing businesses differ:

• The first is in understanding the science of their customers’ buying behaviors. This includes knowing who their customers are and how they’ re feeling. It also includes how the drivers of a buying decision changes as economic factors change.

• Second is leveraging loyalty within their consumer base. This requires a thorough understanding of the different kinds of loyalty and the financial benefits of each.

• And third is maximizing the core business competencies to not only proactively adapt but to use the changes that occur within the economy.

Beyond these three key areas of difference, the research also illustrated how “community” is playing an ever-increasing role in the success of businesses. This includes the physical communities. It also includes the virtual community. It’s the latter that is having significant impact on how customers and businesses interact, particularly during these changing economic times.

Summary

Economic cycles have both boom and bust periods. Businesses seeking long-term success need to thrive in all economic environments. Those companies who continue to achieve this have done so by having their core business competencies focused on meeting the predictable customer changes in a way that continues to leverage loyalty.

Simple - but how do they do it?

We have split the book into 10 chapters (Chapter 1 being the Introduction, and Chapter 10 a Summary) to answer that question.

Chapter 2 - Predicting/Preparing for Economic Transitions: How businesses can best predict and then prepare for any economic transition or cycle.

Chapter 3 - Science of How Consumers’ Buying Changes over Cycles: How consumers’ buying changes relative to (a) reprioritization of needs, (b) changes in how they perceive value, (c) in the context of how economic conditions influence (a) and (b).

Chapter 4 - Consumer Loyalty Strengths/Vulnerabilities in Cycles: How different loyalty types endure varying economic conditions.

Chapter 5 - B2C Approaches for Dynamic Consumer Needs/Value Tradeoff: Proven consumer tactics optimized for different economic cycles.

Chapter 6 - B2B Approaches for Different Economic Cycles: Proven approaches, transformation strategies, and business case methodologies for economic conditions.

Chapter 7 - Mastering Information across Economic Cycles: Strategies and tactics for leveraging information to optimize business through economic transitions.

Chapter 8 - Managing the Employee Factor through Cycles: Strategies on managing employees through economic transitions and cycles.

Chapter 9 - Leveraging the Power of the Community (Physical and Online): Strategies and tactics for leveraging the physical business community as well as online communities.

By sharing our research learnings, we hope to help businesses get and keep customers through periods of boom and of bust.

2

Predicting/Preparing for Economic Transitions

Understanding the macroeconomics which drive business cycles is key to developing a relevant strategy to manage through economic cycles. This last economic contraction, while not totally unique, followed an understandable pattern over past economic history. In this last economic downturn, some equated the business dynamics to a “hangover after a binge”, i.e. economic contraction after a global liquidity binge.

Many parts of the world had experienced a long global liquidity bubble that was fueled in large part not only by home prices in the US but also in places like the UK, Spain, and Ireland. As well, factors of equity markets in places like China drove a big run-up in commodity prices not limited to oil (which may have represented the last hurrah of the liquidity bubble). Investors were looking for the next best place to put their funds as the housing market came crashing down.

We also saw a rise in oil prices from 2002 to 2007 driven via strong economic fundamentals. The end of that run was largely due to speculative commodity trading. This significant factor was intensified by the strong growth in China. As China came off a blistering run of expansion, investors started moving into commodities as the global economic conditions began to unravel.

Simultaneously, the binge on liquidity driven by greed came unraveled when the US financial markets began to fall apart. The US banks have had so many toxic securitized loans themselves that in itself would have been bad. But they had also sold such loans overseas to UK and European banks - e.g. in Austria, Sweden, and Spain. These banks in turn made loans to private sector borrowers in emerging Europe. Homeowners in places like Hungary started buying euro denominated mortgages, which added to the huge exposure of European banks and their subsidiaries. All these available funds for both lenders and borrowers encouraged everyone to take on risks - risks that they perceived to be very low.

Once the bottom started falling out of the real estate markets, the bottom fell out of the lending frenzy. Within regional markets, areas such as emerging Europe were spinning their own web of liquidity bubbles, e.g. Hungarian households were borrowing in euros and Swiss francs in hopes that they would hedge against exchange rate differentials.

This all may appear to be a unique perfect storm of economics … but it is not. History is full of financial and market calamities, which coincide with each other. It is a fact of business life. Bad economic and business cycles happen. Good economic and business cycles happen. All businesses can count on both in varying degrees of severity.

Historical examples

1620-1637 Tulip Mania1

Tulip Mania (or Tulipomania) is an extraordinary event in the history of cut flowers. It refers to a period in the Netherlands, in the early 1600s, where speculation on tulip bulbs reached fever pitch resulting in extremely high prices being paid for single bulbs and the inevitable crash. People won or lost massive amounts of money gambling on the color of the flower produced by tulip bulbs, which in those days was unpredictable.

News of the massive profits speculators were making quickly spread, and by 1634 even tradespeople were becoming involved. One current day view on why this happened is that it was not caused by irrational speculation or greed, but rather by a Dutch parliamentary decree (originally sponsored by Dutch investors made wary by the Thirty Years War in progress) that made the purchase of tulip bulb “futures contracts” a fairly risk-free proposition.

Either way, this flood of new money caused prices to escalate rapidly in 1635, with many people buying on credit. By 1636 sales were structured by unofficial “colleges” or stock exchanges that held auctions at local inns. Speculation had also started on futures - in other words on the accessibility and price of bulbs at a specified future time.

It is problematical to convert seventeenth century tulip prices to modern currencies, as many were sold for livestock and houses. As an estimate, the average annual income in 1620 was about 150 Dutch florins. If we assume that this is comparable to $50,000, then in 1620, at the start of the tulip mania, a single bulb changed hands for about $330,000. Fifteen years later, in 1635, 40 bulbs were sold for 100 times this sum i.e. $33 million, or $825,000 per bulb. The record sale was in 1636 when a single bulb of “Semper Augustus”, a striped carmine and white variety, sold for between 5000 and 6000 florins (depending on the report you read), which equates to between $1.67 and $2 million. The actual price for this small bulb, thought not to be of flowering size, was 4600 florins plus a coach and two dapple-grey horses.

The bubble ruptured in February 1637 when the soaring prices could no longer be sustained and there was a huge sell-off. Prices plummeted and many people were financially destroyed. While official attempts were made to resolve the situation to the satisfaction of all parties, their efforts were in vain. In the end individuals were stuck with the bulbs they held at the end of the crash - no court would impose payment of a contract, since the debts were judged to be sustained through gambling, and therefore not enforceable by law.

This was not the only time in history when flowers became the object of frantic market speculation. Smaller booms followed with tulip bulbs in Istanbul in the early 1700s, and in the Netherlands with hyacinth bulbs in 1734, and gladioli in 1912.

1720 South Sea Bubble2

The South Sea Company was a British joint stock company that traded in South America during the eighteenth century. Founded in 1711, the company was granted a monopoly to do business in Spain’s South American colonies as part of a treaty during the War of Spanish Succession. In return, the company assumed the national debt England had built up during the war. Speculation in the company’s stock in 1720 led to a tremendous financial bubble known as the South Sea Bubble, which financially destroyed many. In spite of this it was restructured and continued to operate for more than a century following the Bubble.

In 1720, in return for a loan of £7 million to finance the war against France, the House of Lords passed the South Sea Bill, which permitted the South Sea Company a monopoly to do business with South America. The company underwrote the English national debt, which stood at £30 million, on a commitment of 5% interest from the government. Shares instantaneously rose to 10 times their value, speculation was rampant and a host of new companies, some fraudulent or just unrealistic, were launched. For example, one company was created to buy the Irish Bogs, another to manufacture a firearm to shoot square cannon balls and the most absurd of all “For carrying-on an undertaking of great advantage but no-one to know what it is!!” Incredibly £2000 was invested in this one! The country went crazy - stocks increased in all these new companies and other “questionable” schemes, and huge amounts of money were made. Then the “bubble” in London burst. The stocks crashed and people throughout the country lost their fortunes. Porters and ladies’ maids who had purchased their own expensive carriages became destitute almost overnight. The Clergy, Bishops and the gentry lost their life savings; the whole country suffered a shattering loss of money and property. Daily suicides were common. The naive mob, whose inherent greed had lain behind this mass hysteria for wealth, demanded revenge. The Postmaster General poisoned himself and his son, who was the Secretary of State, avoided blame by unexpectedly contracting smallpox and dying. The South Sea Company Directors were incarcerated and their acquired wealth forfeited. There were 462 members of the House of Commons and 112 Peers in the South Sea Company who participated in the crash. Frenzied bankers crowded Parliament and the Riot Act was read to return order. As a result of a Parliamentary inquiry, John Aislabie, Chancellor of the Exchequer, and several members of Parliament were barred in 1721.

As these two examples illustrate, going from boom to bust wasn’t necessarily about a lack of regulation or securitization. It wasn’t about some bizarre form of derivatives. It wasn’t caused by credit default swaps (CDS - credit derivative contract between two counterparties). It is easy to blame twenty-fi rst century capitalism or modern finance but when businesses look to the longer historical context of what happened, economic cycles are almost a guarantee for every generation or couple of generations. Whether the discussion falls to Japan’s crisis, the horrific South Korean financial crisis, Sweden (GDP dropped over 11% over three years), or Finland’s financial crisis, modern history is also littered with examples of financial boom and bust. We have a tendency to believe that these are exceptional economic times when economies go horribly south but in fact it is just the natural evolution of human beings and society. It was about human nature, greed, and “follow the herd” instincts.

Emotional anchors from economic cycles

As well as stimulating the greed and herd instinct behaviors, economic cycles create emotional anchors. Recognizing these emotional anchors (or legacies) of economic cycles is necessary in understanding how consumers as human beings will react to current and future economic cycles.

The economic downturn that is most indelibly marked on the older population of consumers is the Great Depression. This economic cycle has indelibly shaped their lives and how they purchase. Even though they have lived through many eras of prosperity, these consumers’ lives and how they stand was forever changed. For the over-30 population, most have experienced multiple years of prosperity and recessionary economies. The degree to which consumers’ buying patterns are changed by previous economies is dependent on the severity of the economic cycle as well as the spacing between the economic cycles.

As one can see from the sequence beginning in early 70s, the US recessions have been relatively short in duration, which has minimized the emotional anchors caused by the constricted economy. While the recessions below are designated as US recessions, most of them have worldwide economic effects because of how closely many countries are tied to the US economy and the US consumer.

• 1973-1975 - oil crisis, stock market crash:

• Recession Duration: 2 years

• Years of previous prosperity: 13 years

• Causes: A quadrupling of oil prices by OPEC coupled with high government spending due to the Vietnam War led to stagflation in the United States.

• 1980-1982

• Recession Duration: 2 years

• Years of previous prosperity: 7 years

• Causes: The Iranian Revolution sharply increased the price of oil around the world in 1979 resulting in the 1979 energy crisis. This was caused by the new regime in power in Iran, which exported oil at inconsistent intervals and at a lower volume, forcing prices to go up. Tight monetary policy in the United States to control inflation led to another recession. The changes were made largely because of inflation that was carried over from the previous decade due to the 1973 oil crisis and the 1979 energy crisis.

• 1990-1991

• Recession Duration: 1 year

• Years of previous prosperity: 10 years

• Causes: Industrial production and manufacturing trade sales increased in early 1991.

• 2001

• Recession Duration: 6 months

• Years of previous prosperity: 11 years

• Causes: The collapse of the dot-com bubble, the September 11th attacks, and accounting scandals contributed to a relatively mild contraction in the North American economy.

• 2007 (Dec)-current

• Recession Duration: ?

• Years of previous prosperity: 6 years

• Causes: The collapse of the housing market led to bank collapses in the US and Europe, causing the amount of available credit to be sharply curtailed, resulting in a massive liquidity crisis. In addition, oil prices were high, stock markets crashed worldwide, and a banking collapse took place in the United States.

Note: Technically, economists in the US define a recession as two quarters of negative GDP growth. Officially, the beginning and ending dates of US recessions are determined by the National Bureau of Economic Research (NBER). The NBER defines a recession as “… a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” From the period starting 1945-2007, the NBER has designated 11 recessionary periods with an average duration of 10 months.

In general, most short-lived recessions have minimal behavioral impact legacies 6 to twelve months after economic recovery. It is during the economic transitions that buying patterns will be tied to the emotional anchors of the previous economy. These emotional buying anchors manifest themselves in two primary forms.

The first economic transition behavior is a “wait and see” approach in terms of whether this economy is truly transitioning, e.g. “I’ m not going to buy that new car until I really see things turn around”, “I’ m not going to sign up for that big vacation until I feel comfortable spending that much money again.”

The second economic transition behavior is more opportunistic in nature in terms of looking for economic advantages in a particular transition, e.g. “Prices are dropping, it’s a buyer’s market; I should be able to get some good deals” or “I’ m going to wait to visit my family until the airlines deepen their discounts.” Or as Warren Buffet says: Be afraid when everyone is greedy; be greedy when everyone is afraid.

One travel destination business had created a premium travel service for 16 destinations around the world covering 10 continents. These all-inclusive vacations were geared toward a more affluent segment of the population. Shortly after the inception of this travel service, the economy contracted. Despite the fact that their business began with great success and garnered top travel ratings, they noticed their customer behavior changing not only in productivity in bookings but also in the timing of the bookings. Because of the nature of these high-end vacations, a typical lead time for a family to book a trip would be six to 12 months prior to the departure date. As the economy contracted, they saw a migration from eight months to lead times approaching 90 days. Many of the customers were used to booking their second vacations annually and no longer felt comfortable booking them so far in advance. The anxiety caused by the economic contraction had prompted them to postpone booking their vacation until economic indicators mitigated that anxiety. A portion of their customers turned into “hunters” which meant that they were now “hunting” for better deals on a holiday that previously they would have booked regardless of price.

Understanding the customer buying dimensions that drive such behavioral changes is imperative for a business to maintain relevance and business results during changing economic cycles.3

Economic forecasting

All businesses need to engage in economic forecasting to help predict what and how customers will buy. The key is not to view economic forecasting as a panacea but one of the tools used by businesses in visioning their future direction - the past is not always a predictor of the future. Not only will economic forecasts help predict behaviors relative to how much consumers have to spend, economic forecasting will also give the business an advantage when negotiating with suppliers.

Macroeconomic forecasts are also critical because of how interlinked not only industries but geographic economies are. Economic forecasting also helps manage not only a business’s fixed costs but also what variable costs may look like in different economic cycles.

One of the biggest components is the labor force. The degree to which this can be managed in each business is directly related to the nature of the work force, e.g. unionization, regional employment factors, nature of work. Long-term forecasts are also critical to understanding what consumers will be evolving toward, such as what technology will be available or what type of cars will be driven in the future.

These strategic scenarios can span 20 to 25 years and be geared toward making strategic acquisitions whereas other short-term forecasts may be explicitly targeted toward spending over the next three months. These activities must be balanced with proactive scenario planning for a wide range of economic conditions. The reason for the balance is that no one can perfectly predict the timing and severity of economic cycles but every business can create proactive scenario plans for economic cycles provided the scenarios have sufficient diversity.

In the last downturn, many businesses were lulled into a false sense of security that volatility had somehow engineered itself out of the classic business cycle. Much of this thinking came from businesses experiencing more gentle economic cycles lacking the volatility that existed in previous cycles. As a result, many of the scenario plans only addressed minor corrections in the economy. For example, many scenario plans’ worst case scenarios contained a 15% reduction in revenues over six to 12 months. Many businesses in the last contraction experienced a 40% drop in revenues within 30 days. The speed and severity of this economic contraction was unprecedented. Scenario planning requests are now coming in not only for baseline, upside, downside but also disaster scenarios. This set up two powerful psychological predispositions.

The first was that businesses are now extremely fearful that future economic contractions will be as quick and as severe.

The second was that there is a growing fear that the speed and severity of economic contractions are largely unpredictable which creates an anxiety, permeating every facet of business.

Businesses were even debating whether the classic business cycle was dead. This makes future investment a higher risk proposition for businesses.

Plan for the likely business cycle while preparing for economic extremes

Most businesses plan for a range of economic scenarios with a variation of 15% either way. This variation is also planned to occur over a period of months, and not days. This thinking resulted from the economic pattern of recent history where business cycles trended shallower and shallower. The 2008 melt-down showed how both those parameters were insufficient: 15% was too little and months was too long.

Ben Bernanke, while Chairman of the Board of Governors of the United States Federal Reserve, referred to these phenomena as the “Great Moderation”. Bernanke’s “Great Moderation” or “the substantial decline in macroeconomic volatility over the past twenty years” was beginning to permeate not only the business managers’ psyche but economic forecasters’ as well. If this is, and forecasters believed that this was, “the way things were going to be” businesses could plan for just minor variations in their markets without risk of both extreme economic and business cycles.

This “Great Moderation” turned out to be only the “Great calm before the storm”. Businesses grew increasingly complacent as business cycles moderated and inflation subsided. The only downside was that asset prices were beginning to get out of control e.g. home prices, real estate, and general.

Another economic tradeoff is the long-term effect of lower inflation and lower volatility in growth. Low interest rates for long periods of time create asset levels. These interest rates have been falling for a period of over 30 years. Consumers kept spending because credit was easy, and they counted on the asset prices, e.g. home prices, continuing to increase.

One of the factors in the extreme business cycle was not the event itself but the reaction to the events. Many consider allowing Lehman Brothers and AIG’s downfall as a significant driver toward what caused that economic contraction to be so deep. As the economy contracted, the ripple effect of the financial system freezing up took what could have been a mild recession into a deep freeze. When one looks at the drop in the stock market from the 2001 recession, it was the worst drop since the Great Depression - yet the business cycle was mild.

Leveraging consumer lessons from previous economic cycles

On September 11, 2001, the terrorist acts in the US dealt a crushing blow on the US economy and globally. A major Canadian bank experienced a surge of investors pulling their investments out of the stock market after those investments had plummeted from the reaction to terrorism. This action crystallized their losses. The market then returned in three months to its pre-9/11 levels, having a devastating effect on those bank customers who withdrew from the market. In the downturn of 2009, the same bank didn’t experience the same surge of investors pulling their investments out of the market because of what they had learned in 2001. At the same time, the experienced customer put less investment in the stock market and more in safe, guaranteed financial vehicles, taking the view, for example, that “I’d rather get 3% return than a negative return”. There is an opportunity to use learning from previous economic cycles to create a marketing package showing the historic rebounds to educate consumers beyond their current fears.

Use consumer confidence data in context

Consumer Confidence Indexes (CCI) are indicators designed to measure consumer confidence in different regions and markets. Its goal is to reflect the degree of optimism consumers are feeling about the state of the economy with their savings and spending rates. There is not a global consumer confidence measurement because there is a wide variance of consumer confidence by country. There is an aggregated international consumer confidence measure that provides a glimpse of economic trends.

In the United States, consumer confidence is rated monthly by The Conference Board, which studies 5,000 households. The Consumer Confidence Index began in 1967 and is benchmarked to 1985 at a level of 100. This year was chosen because it represented a midpoint of economies. It is best to use this measure as one consumer barometer in the context of other market and industry consumer indicators. Many businesses argue that this is more of an art than a science as it is done with surveys and extrapolations of only 5000 consumers. Opinions on current conditions comprise 40% of the CCI with consumers talking about their future expectations being a full 60% of the index.

As a result, many nuances of markets are simplified and approximated. Also, the consumer confidence level is a more relative measure than it is absolute. Therefore businesses should not assume that the economic dynamics which create a certain numeric consumer confidence level are the same as in previous cycles. Other consumer indexes are tracked by the University of Michigan’s Institute for Social Research.

Plan market scenarios based on a country’ s import versus export emphasis

Consumers have an inherent cultural bias toward the balance of saving first then spending. Governments also influence this with their emphasis toward the balance of imports versus exports. Governments will purposefully create export policies that promote domestic led growth rather than export led growth that will significantly impact consumer spending. This is to help isolate them from volatile changes in export dynamics. Asian countries as well as countries like Germany realized that any focus on export led growth created a huge risk and dependency on export activity. When exports dried up, these regions realized that an addiction to exports was as problematic as a new addiction to debt. It’s imperative that a business understand its own import/export balance and how changing economic cycles will affect it.

Scenario planning

Businesses can make up for a degree of unpredictability in the economic cycles with good scenario planning. Every size of business should do scenario planning. Then they will have at least thought through the full range of scenarios. In this way, they’ ll be much better equipped to act and react - to doing what’s needed to sustain through the tough economic times and to capitalize on the good economic times.

For the smaller businesses, they do not have the resources to spend on sophisticated economic analysis and forecasting. Therefore, it is best to go through simple scenario planning including extreme upsides and downsides.

For larger businesses, seeking outside expertize is a good investment to understand not only regional market issues but also global economic issues. There are also boutique economic forecasters that focus on particular niches within industries and regions. These forecasters are very helpful to define particular economic characteristics within niches.

Apply these 13 basic steps for scenario planning4

1. Identify important questions of the business scenario

Assess whether scenario planning is the best approach to address the most important business questions. If the question is based on minor variations or a trivial number of elements, use more prescribed methods.

2. Establish the time and scope of the business scenario

Consider how quickly changes occured over a period of time and assess the predictability of frequent trends, e.g. demographic shifts, product life cycles. Use timeframe ranging from one to 10 years.

3. Name most important stakeholders