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How to prepare for the next economic upswing

We've never been good at predicting economic booms. But businesses need to be ready to ride the wave when it comes.

The prospects for our economy, as expressed in a Time Magazine editorial on "Why We're So Gloomy:"

"While some economists have described the current slump as a near depression, that phrase overstates the case if it is taken as a comparison with the period 1929-33, when the U.S. economy contracted by nearly a third. The D word becomes more valid, especially with a small d, when it is used to compare the growth rate of the 1930s, which averaged 0.5% a year, with the expected sluggishness of the next decade, which some economists predict will see an average growth rate of 2%.

"The deeper tremors emanate from the kind of change that occurs only once every few decades. America is going through a historic transition from a heedless borrow-and-spend society to one that stresses savings and investment. When this recession is over, America will not simply go back to business as usual.

"The underlying change in the way American consumers and business leaders think about saving and spending will make the recovery one of the slowest in history and the next decade one of lowered expectations. Many economists agree that the U.S. will face at least several years of very modest growth as consumers and companies work off the vast debt they assumed in the last decade."

The Time editorial presumably reflects the general malaise expressed by commentators and economists alike at our future growth prospects.

Oh, I should mention one thing before we go any further:  The above passage is from a Time editorial published on January 13, 1992. That was around the time of the dawn of the Internet and World Wide Web revolution, which resulted in an explosion in growth and productivity. (Thanks to Dr. Mark Perry for the Time magazine pointer.)

Hence the old saying, "It's tough to make predictions, especially about the future."

It's been a real white-knuckle ride with the 2008-09 economy, and there are many people suffering as a result of layoffs and foreclosures. But things are starting to look better. And it's time to consider strategies for managing through the coming upturn. What will things look like as we emerge from the other side of the downturn? What's in store for the "10s"? As was the case in the early 1990s, nobody can predict what's coming.

What we do know is that every downturn has shaken up the old order and created new patterns. The PC revolution emerged from the recession of 1980-1982; the Internet revolution from the recession of 1990-1991; and social media arose from the 2000-2002 post-dot-bomb recession.

  • In 1982 -- while business commentators were predicting years of stagnation and decline -- no one foresaw the PC revolution that energized the 1980s, and created an entire new industry (led by companies such as Microsoft, Apple and Oracle). In fact, futurists at the time were predicting all sorts of gloomy dystopic scenarios, such as IT forcing female workers even deeper into "pink-collar ghettos" with endless mundane data-entry work.
  • In 1992 -- while business commentators were predicting years of stagnation and decline (see the Time editorial, above) -- no one foresaw the Web revolution that created the huge Internet-driven economy of the 1990s.
  • In 2002 -- while business commentators were predicting years of stagnation and decline -- few foresaw the immense new opportunities to be created by the rise of Web 2.0, social media, mobile computing and smartphones, business intelligence, and many other things.

Given our past history, we may on the verge of an economic boom based on factors we can't even describe yet. For businesses seeking to prepare for this new era, it raises some quandaries. As described by a new article in Knowledge@Wharton, decision-makers now face such thorny issues as ramping up production and renewed hiring. These may be more difficult decisions than managing through the economic downturn:

"That is because managers must make risky decisions on issues like increasing production back to pre-recession levels: Do it too soon and a company could waste millions on unsold inventory, while inaction could lead to significant lost revenue opportunities if the U.S. economic recovery is strong and takes place quickly."

Indeed, economic boom periods are often more disruptive than downturns, as new industries and nimbler competitors emerge on the scene. Consider the way the PC-oriented companies gained strength in the 1980s, or the Internet-savvy enterprises have been able to reap competitive advantage starting in the latter half of the 1990s.

To prepare for this new world, Wharton's management experts say this is a good time to start looking at the longer-term picture: "shoring up relations with existing customers, looking at shedding unproductive units while strengthening the core brand, and putting an emphasis on branding and on research and development -- areas that should not have been abandoned in the first place -- in order to be ready with new products when the recession is clearly over."

Here are key strategies to prepare for the new growth phase:

  • Explore new niches, and new ways to reach these markets. Wharton management professor Ian MacMillan cites consumer electronics giant Best Buy's "aggressive move to open new niches in the crowded retail market, including targeting the growing Latino market, coming up with innovative uses of the social network Twitter, and offering lower price 'private-label' TVs."
  • Think strategically about the future: "Companies that have made steep cuts now have an opportunity to think strategically about their future -- whether that means expanding into adjacent lines of business or opting instead for a tighter focus on the core market when the inevitable turnaround hits," says Wharton management professor Lawrence Hrebiniak.
  • Ramp up research and development: It's critical for businesses to maintain a viable research and development operation for the future, even if there is a short-term need to keep current production costs low. "One thing you definitely don't want to do is cut research, R&D," says Wharton management professor Olivier Chatain. "If you do, you lose a lot of knowledge. You always want to have some new products in reserve so that when times are better, you are ready to hit the road running."
  • Unlock the power of information technology even wider: This is a message I heard IBM VP Sandy Carter convey at the IBM Virtual Global SOA Forum, "Work Smarter, Take Out Costs In a Tough Economy." It's an opportunity to thrive, not just survive, she says. (Transcript of Sandy's speech available here.) Information technology is at the core of the movement to a smarter planet in which people, businesses and events are now interconnected by trillions of components and devices. "Service orientation really is the key to agility and cost optimization," she relates. "By extracting services from your applications, putting those business services in a reusable format, it allows you to quickly change, based on what's happening in the environment, or to invoke change yourself on the industry. It allows you to flexibly connect information, because you isolate the business logic from the underpinning IT. and then you can reuse. Not just the IT assets, but the business assets as well. This allows you to unlock the power. Of your business resources, as well as your IT resources. And provide agility and cost optimization."

As stated above, no one can predict what's around the corner. We certainly were not able to predict the expansive growth and opportunities seen as a result of the PC and Internet revolutions, even in the early years of these events.

This post was originally published on Smartplanet.com