Preparing for the unknown

 You need the Adobe Flash Player to view this video. Get Adobe Flash.

By Joe Atkinson

The post-recession global economy will look very different. The tried and tested may not deliver in the face of new realities such as climate change, food insecurity, tighter credit, emerging-economy clout, stakeholder activism, and disruptive technologies. That’s why some companies are moving toward a new approach to managing risk and pursuing opportunity—one that depends on long-term thinking and collaboration. Within the new environment, success will come to those who demonstrate the resilience to endure change and prosper from it.  

 


The speed, spread, and intensity of US economic problems have shocked everyone and inspired a serious global crisis of confidence. PwC's 12th Annual Global CEO Survey finds the mood bleak in most parts of the world—and nowhere more so than in the US.1
(See Figure 1.) Almost all American CEOs have reduced their growth expectations as a direct consequence of the financial crisis, with 90 percent saying the crisis is increasing their costs and delaying their investment plans. (See Figure 2.) Independent statistics confirm that business investment in the US is shrinking in the first half of 2009, and economists are hoping for at best a modest recovery later in the year. With the private sector pulling back along with consumers, the worry is that our economic woes may be inducing behaviors that will prolong the suffering.


Figure 1: Confidence has fallen off a cliff

Chart: Confidence has fallen off a cliff

Source: PwC, 12th Annual Global CEO Survey, 2009

Figure 2: Impact of financial crisis on growth prospects

Chart: Confidence has fallen off a cliff
Source: PwC, 12th Annual Global CEO Survey, 2009

 


Of course, not all boats rise or fall with the prevailing tide. Some business leaders recognize that nothing is more perilous than abandoning market mechanisms and retreating inward. Instead of running away from risk, their companies are moving toward a new approach to risk management—one that is as dynamic and competitive as the business methods it monitors. “You can’t stop investing, but you’ve got to be very targeted in what you invest in—the things that will make a difference, which often turn out to be opportunistic investments,” says John Donahoe, president and CEO of eBay Inc.2

The online auction and shopping Web site has certainly not escaped the economic slowdown; in the fourth quarter of 2008, it reported the first-ever revenue decline in its 14-year history. But that has not stopped eBay from making strategic acquisitions. Late last year it bought Bill Me Later, a service that gives online shoppers access to credit with interest, to add to its existing PayPal online payment service.3 Speaking to PwC, Mr. Donahoe described it as an “opportunistic investment in eBay’s future at a counterintuitive and tough time.”

Those who are going against the tide understand that the circumstances that underlie risks also present opportunities—and that success lies in making informed choices early. Companies can mount an early response only with an understanding of so-called emerging risks—a term that has now decisively entered the global business lexicon, although many companies are less certain about how to respond to them.

As political scientist Ian Bremmer has pointed out in his new book The Fat Tail and as the current crisis has illustrated only too well, emerging risks are increasingly high-impact events that lie outside the realm of the immediate expectations of economic models. Accurate assessment and informed management of these events require a new set of tools and frameworks not traditionally employed by executives.

So how can companies manage what they cannot predict?


1 A total of 1,124 CEOs participated in the survey, including 97 in the US.
2 PwC, 12th Annual Global CEO Survey, January 2009.
3 Business Wire, “eBay completes acquisition of Bill Me Later,” November 7, 2008.

pg.1