A world beset with continued challenges.
According to the International Monetary Fund, global recovery remains subdued, with growing regional divergences and little room for economic policy mishaps. The baseline forecast expects global growth to slow from 3.5 percent in 2022 to 3.0 percent in 2023 and 2.9 percent in 2024, well below the historical (2000–19) average of 3.8 percent. Advanced economies like the U.S. and Canada are expected to slow from 2.6 percent in 2022 to 1.5 percent in 2023 and 1.4 percent in 2024 as policy tightening starts to bite. Global inflation is forecast to decline steadily, from 8.7 percent in 2022 to 6.9 percent in 2023 and 5.8 percent in 2024, due to tighter monetary policy aided by lower international commodity prices. Core inflation is generally projected to decline more gradually, and inflation is not expected to return to the target until 2025 in most cases.
To add to this lackluster forecast, Economist Intelligence expects climate change, geopolitics and AI to present the most significant challenges to businesses this coming year. With the backdrop of COP28, climate change will drive demand in sectors relating to mitigation and adaptation. While insurers, companies, and governments need to help price the increasing risks. EU and US regulations on environmental, social and governance (ESG) reporting will push companies to scrutinize their operations and supply chains. However, skepticism about ESG will harden in the US ahead of November 2024’s presidential elections. Corporate concerns over taxation will increase as the OECD introduces its global minimum tax rate and individual governments try to reduce budget deficits and national debt levels. Geopolitical tensions and wars will complicate government and corporate responses to the above. Investment in supply chains, particularly for technology and the energy transition, will adapt to minimize political risk. Generative artificial intelligence will disrupt a few sectors, but most companies will find ways to use AI to increase productivity.
Considering this economic outlook, 2024 is likely to remain painful with numerous obstacles, requiring organizations to remain adaptive, vigilant, and resilient, but also highlighting the importance of managing risk and uncertainty more than ever.
What is business resilience, and why is it so important?
Resilience is the strategic organizational capability to mitigate and adapt to disruptive and destructive threats, reshape environments, and overcome foreseen and unforeseen risks. To achieve resilience and demonstrate the ability to survive and even thrive, a company’s strategies must be fit for purpose, be based on sound analysis, and ensure each internal business element works in concert. With uncertainty remaining elevated as indicated by the World Uncertainty Index, any resilience capability must be built to flex continually to changes in the external context.
The world is running faster than ever. For example, the velocity of innovation and information coming at leaders and organizations in this digital age is massive. Statista estimates that over the next five years up to 2025, global data creation is projected to grow to more than 180 zettabytes. Furthermore, economic, demographic, and political volatility, such as the war in Ukraine and Israel creates even more complexity and instability. According to a recent article in the Financial Times, the US is heading for recession, and the historic decline in government bond prices is over. Investors are alarmed by this volatility, indicating more uncertainty in the coming year.
Specific components of resilience unpacked.
In our experience as strategic advisors, highly resilient companies take specific actions across six key parameters to stay competitive: portfolio, financial, operational, market, stakeholder, and talent management. As the model illustrates, business resilience is a marathon and requires the continual long-term cycle to identify, adapt and mitigate external risks.
- Portfolio Resilience – Involves aligning the portfolio to the business strategy, reallocating capital to optimize returns, divesting underperforming, or noncore assets, and driving opportunistic transactions and partnerships to share capital and costs, including joint ventures.
- Capital & Financial Resilience – Includes flexible long-term financing, ensuring the business has achievable debt covenants supported by robust cash flows, strong working capital performance and robust management of legacy liabilities.
- Operational Resilience – Incorporates more significant management of operating costs, optimization of supply chain management, management of operational and carbon related risks, innovation of operating models and proactive investment in technology.
- Market Resilience – Typically includes the management of revenue, product, pricing and sales risk, customer management, market and competition, regular use of market and tracing data to align customer-facing activity and the investment in disruptive technology.
- Stakeholder Resilience – Involves a clear vision for the business supported by market trends and organizational capabilities, active engagement and alignment with equity, financial, regulatory, supplier and other stakeholder groups.
- Talent Management Resilience – Includes the increased investment in employee skills and capabilities, active cultivation of organizational culture, stable and accountable leadership, headcount management, including alignment to corporate goals and salary and bonus adjustments.
Driving success by building business resilience capabilities.
Based on extensive exposure working with numerous organizations, previous surveys on resilience and interviews with business leaders, we’ve identified the following top ten capabilities to help become a business resilience athlete:
- Stabilize baseline factors: Cash is the lifeblood of a business. While a company can optimize its earnings, its cash flow provides an idea about its real health. Financial stability should be reached before making more significant changes, as a necessity for business resilience.
- Build shock absorbers: Organizations need to be able to absorb moments in time when business is tricky, and the challenge hits you square in the face. Absorbers include a strong balance sheet, access to debt financing, thoughtfully diversified portfolio, and the right mix of products and customers.
- Control headcount: When times are tough, hiring decreases. Focus on rational, purposeful headcount management, including the right contract workforce vs. employee balance. Be careful not to cut too deeply, dampening growth when the economy recovers.
- Invest in people: As the Forbes Business Development Council outlined, people are your most important asset. To run fast, organizations need to look for ways to improve skills and capability, taking advantage when pools of talent become available. This will help attract and retain talent.
- Investing in culture: Gartner says only 31 Percent of HR leaders believe their organizations have the culture necessary to drive performance, so we have to do better. Proactive investment in organizational culture is strongly associated with companies that thrive in these challenging conditions and set them up to take advantage of future upturns.
- Stay connected: Companies must remain connected to external threats, opportunities, stakeholders, and emerging technologies. The moment they are not connected will be when they miss something important that could impact their business.
- Create a learning organization: As Jack Welch, former CEO of GE, once said, “An organization’s ability to learn, and translate that learning into action rapidly, is the ultimate competitive advantage.” An organization’s ability to learn and adapt is essential to overcoming external challenges. Leaders should build a business operating model that fosters continual learning — precisely, deep curiosity to understand what’s happening in the industry, emerging technology and talent management, learning from past mistakes and avoiding bad habits.
- React appropriately to risks: Thriving organizations excel at identifying, mitigating, and quickly adapting to emerging risks and challenges, creating opportunities when least expected.
- Manage opportunities: Businesses should explore and exploit opportunities through the pursuit of adaptability and innovation. It can take practice to identify fruitful areas, but developing this skill will set organizations apart from competitors.
- Focus on the future: The most resilient companies balance the needs of the now, next, and beyond. Think through your plans from a multiple-horizon perspective, so you’re resilient and managing risk, but also adapting to new environment and set for growth and long-term stability.
In a tumultuous world, what next, and where do we go from here?
Context is everything when building business resilience. For example, larger organizations can maintain a broader focus and take advantage of scale but can lack flexibility. Smaller organizations should prioritize a few critical factors most important to their business due to constraints imposed by available capital and take advantage of their agility.
There will always be market challenges across organizations and industries alike. The top three barriers or traps that can handicap resilience are complacency, short-term thinking and losing faith in the company’s strategy. Organizations should never be comfortable with the status quo. This leads to a sense of security and short-term focus instead of a long-term view of the organization’s strategic position and purpose. The future requires strong leaders who maintain a faith in wining and staying competitive, despite various hurdles.
Prepare to operate in a tumultuous world. The speed of change will never be this slow again and stability is a thing of the past. The race for success will involve many obstacles, so organizations should work toward a better understanding of the changing realities ahead and build business resilience to survive or even thrive in 2024.
Written by Dr. Lance Mortlock (EY Partner, Author of Disaster Proof & Adjunct Associate Professor) and Karleen Batty (EY Partner)
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