Commercial Priorities for the Year Ahead

The prospects for growth in the UK over coming year and beyond are becoming clear. The final revisions to Q4 data for the US and UK tell a story that both these economies grew more rapidly in the Christmas quarter than had been thought at first. It is likely that we are out of recession but still in a depressed state when you look at activity levels compared with three years ago. Opinion is somewhat divided over the pace of recovery in 2010 – indeed whether we will slip back into recession in the West if a perfect storm of poor policy plus lack of confidence in ‘the markets’ and in the real economy fails to ignite growth.

We can learn a lot about the potential unfolding of this recession by reflecting on our previous experiences. The National Institute of Social and Economic Research (NIESR) produces a time-line for the UK recession compared with the four main recessions experienced in recent times: in 1930-34, 1973-76, 1979-83 and 1990-93. If you look at the progress of the recession in months since the peak of the cycle and the level of activity in relation to that peak, you see some very clear patterns.

First, the current downturn has not plumbed the depths of that in the 30s, although its initial decline was alarming: the rate of the collapse during the first few months was only beaten by that of the mid 70s when oil prices rocketed and the global economy stood still. Second, of the four big recessions two have had a W profile and two a U profile albeit quite a shallow U and written with a pretty shaky hand. It tells us the recovery from a deep slowdown is not a smooth and unambiguous bounce back to growth. Finally, the UK ended 2009 some 6% below the peak levels of activity in 2007 which means that at the current rate the UK will take some 3 to 4 years to get back to that level of GDP.

You can see the regularly updated image on the NIESR website at:  http://www.niesr.ac.uk/

Given the way past recessions have unfolded and the context of the current situation, the UK is not likely to experience a full blown W recession. There will likely be some shakiness over the coming months, but more consistent with a volatile upward path than a collapse back into recession. The flexibility of markets and a more proactive approach to fiscal and monetary than has been used in the past will be key growth drivers and stabilisers.

The state of economic growth and the gross level of activity means there will be some major challenges for businesses and as ever these will also provide some opportunities for the fleet of foot. Of these there are three particularly significant issues:

1) Competition intensifies in many sectors – low growth plus over-capacity leads to aggressive competition between companies for market share and margin. Innovation is key to success in this environment. The main focus for innovation now is around processes – what is core and what is not? How can you out-source the processes that are really not central to your strategic strengths? Whether in the public or private sector we must now face the challenges of getting a lot more productivity out of the same or fewer resources.

2) Engagement and transparency – the dynamics of the market place are shifting. The top priorities for business in the last two decades were fast product innovation and migrating from a product into a service based proposition. We now add to this the need for high levels of workforce and customer engagement as differentiators. For the workforce it is needed because of the scale of the challenge we require of them. For customers it is because they are not drenched with easy money – at least not in the West – and are suffering from a lack of confidence following the tough times of the last three years.

3) Values not value – many people are not satisfied with what the market has done and may yet do again for us: a growing demand for sustainable growth is just one example of the popular willingness to question what the unfettered market did and is doing to the global economy. This questions the mechanism that connects the actions of single businesses pursuing the goal of increasing their shareholder value with the idea that it delivers the best outcome for the economy as a whole. It was the single minded pursuit of profitability and ‘value added returns’ which were then distributed as a mixture of shareholder returns and executive pay proved to have been what might be called unhelpful to most of the planet in 2008. There will be many commercial opportunities for businesses to base their competitive positions on social benefit, community engagement and business responsibility: building their businesses on values not just financial value.

There is still a lot of uncertainty in exactly how we will progress through the coming year. A little reflection, however, starts to uncover some of the form and magnitude of the opportunities and priorities that will be facing us over the coming months.