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Economic Strategies: Managing Marketing in Uncertainty


The Gist

Economic resilience enhanced. Diverse strategies needed for CEOs and CMOs to navigate uncertain economic waters.Trust rebuilding essential. Transparent communication and deliberate strategy key to rebuilding customer trust in inflationary times.Prepare for surprises. Understanding macroeconomic risks critical for businesses planning amidst unpredictable economic conditions.

The complexities of building trust with customers, especially during the post-pandemic inflationary period, was highlighted by Christine Alemany, the CMO at i2c, in a recent HBR article. She finds that consumer sentiment has shifted due to uncontrollable factors such as industry and economic conditions.

Although the annual inflation rate in the United States has seen improvement, Alemany says businesses need to address customer concerns through deliberate economic strategies and transparent communication.

Inflation Pinch: Shoppers Tighten, Brands Risk

Inflation without question continues to impact consumer spending by increasing price sensitivity. As the cost of goods rise, consumer purchasing power shrinks, leading to more scrutiny in purchases and practices like comparison shopping. In fact, a recent CNBC story shared that Walmart is seeing more high-end buyers at its stores. Brands that fail or refuse to deal openly with the realities of inflation risk losing customers altogether.

As the cost of goods rise, consumer purchasing power shrinks, leading to more scrutiny in purchases and practices like comparison shopping.Fred Marie on Adobe Stock Photos

Related Article: Perks, Promotions and Personalization: Brand Loyalty in the Age of Inflation

New Guide Maps CEOs Through Economic Chaos

Today’s CMOs and CEOs face a challenging task in predicting economic trends and managing their companies’ paths forward with economic strategies. The new book “Shocks, Crises, and False Alarms” by Phillipp Carlsson-Szlezak and Paul Swartz at Boston Consulting Group, aims to fill the gaps left in traditional MBA macroeconomics coursework. Their book provides the tools needed to assess macroeconomic risk and offers a comprehensive roadmap to plan for the future.

Related Article: Inflation Is No Excuse to Cut Customer Experience Programs

Economic Strategies: Navigating Shocks, Crises and False Alarms

To succeed, CMOs and CEOs need to develop a deep understanding of the forces that impact the stability of economic conditions or risk being violently seesawed by market changes. They need to recognize macroeconomic risks and the potential for both positive and negative impact. The authors share as an example the automakers in early 2020 who cut their semiconductor purchases, anticipating a COVID-induced recession like the Great Depression. Instead, COVID had a V-shaped recovery. This mistake underscores the need to adopt a more grounded approach to macroeconomic risk.

Related Article: Economic Modeling: Boosting CX & Growth Marketing Success

Leaders Dodge Doom, Chart New Economic Paths

Risk is inevitable, but smart leaders will figure out how to navigate the whiplash of negative headlines that exaggerate fluctuations into doomsaying outcomes with economic strategies. It’s time to rethink the idea of economics as a dismal discipline by addressing its inherent negative bias. Incorporating a broader set of perspectives and methods is essential.

Leaders, say the authors, should not be intimidated by number crunchers and model-based forecasters. Instead, they should embrace uncertainty with a mix of knowledge, skill, and experience — in short, judgment.

Related Article: As Economic Headwinds Gather, Make Customer Experience Excellent

Accessing the Business Risk

There are two types of macroeconomic risk that CMOs and CEOs should consider in their business planning: cyclical risks and structural risks. Cyclical risks include downside risks like recessions and shocks, and upside risks such as recoveries and accelerations. Structural risks, on the other hand, encompass deflationary recessions and inflation breaks, as well as productivity shifts and capital stock deepening. The good news, claim the authors, is central banks have gotten good at lessening structural downside risks.

Smart Leaders Skirt Crises with Eclectic Strategies

While we cannot predict the conditions and contexts in which future shocks and crises will occur, we can understand the drivers, their interactions and the risks they pose. Smart leaders, according to Carlsson-Szlezak and Swartz, discount the doom-mongering and practice economic eclecticism — assessing risk with a broad array of economic strategies, doing so structurally, pragmatically and stoically. In this process, they seek narratives that are plausible and coherent, asking what drives risk.

Economists Stumped, CEOs Master Recession Dynamics

They consider real economy risks, financial risks and global risks. In this process they realize that the only certainty about future recessions is their uncertainty. The authors assert importantly that despite advancements in analytical sophistication, economists are no closer to reliably forecasting downturns. For this reason, the goal of CMOs and CEOs should be to learn how to assess, isolate, and compare the drivers and dynamics of recessions.

The Modern Economic Cycle

According to Carlsson-Szlezak and Swartz, the modern economic cycle fundamentally changed over the last 40 years. The time spent in recession has decreased dramatically, from 30% over the prior 80 years to just 8% in the last 40 years. This change is attributed to shorter and less frequent recessions, with the average duration dropping to nine months and the time between recessions averaging 103 months. Structural changes in the underlying risk profile make recessions far less frequent.

Recessions Recast: Economy Evolves Past Real Risks

Recessions come in three types: real economy recessions, financial recessions and policy-induced recessions. Carlsson-Szlezak and Swartz compare these to human mortality from infections, heart disease and cancer, respectively. They suggest that, like humans who have largely overcome mortality from infections, the economy no longer suffers from real economy recessions. Real economy risks occur when exogenous shocks or endogenous production volatility drag growth below zero. A century ago, something as simple as a weather change could cause this kind of recession. While this risk remains, a highly diversified economy is more resilient to real economy risks.

Meanwhile, policy recessions have grown in prevalence, and the authors compare them to heart disease. Heart disease became a larger share of deaths as infections were lowered as a cause of death. These recessions occur when monetary policymakers try to slow the economy by raising interest rates but end up triggering a recession. Such recessions can happen accidentally by driving interest rates too high and tanking the economy rather than merely cooling it, or by holding interest rates too low, allowing the economy to overheat and setting the stage for a painful correction.

Finally, financial recessions, akin to cancer, have become the leading cause of downturns. They dominate the landscape, exemplified by events like the dot-com bubble. These recessions are more complex and harder to predict. As societies have become better at avoiding real and policy-induced recessions, financial recessions have come to dominate the landscape.

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Risk-Based Economic Strategies for CMOs and CEOs

Economic strategies that CMOs and CEOs should consider should be based on risk types rather than probabilities and be scenario versus forecast based. At the same time, the authors point out recovery strategies should be considered as a part of this process. We should not conflate recession intensity with recovery but instead focus on output trends and growth rates.

In this process, leaders should assess the impact on the economy’s supply side avoid assuming the worst and maintain a balanced and informed perspective. Understanding the gravity of growth is crucial for leaders. Growth hinges on the supply side of the economy — our ability to produce determines our level of prosperity, not merely our ability to consume.

Meanwhile, an economy’s productive capacity is shaped by its supply of labor, stock of capital and level of productivity. In the U.S., the labor supply offers no upside due to slowing population, suggesting that future labor growth will be less robust. This aligns with the premises of the book “Open Talent.” Meanwhile, capital has a modest upside; higher rates of return could spur more investment, but higher depreciation rates could offset these gains. Labor equates to more workers, while capital encompasses more intellectual property and machines/automation. Productivity is where the real upside lies for the US economy because it creates more value per input.

Unfortunately, no one escapes the gravity of growth. As societies like the U.S. become wealthier, labor supply growth slows because population growth diminishes. Capital formation also decelerates because larger capital bases lead to diminishing growth rates in capital stock. Similarly, productivity growth slows as the easiest gains are achieved. For leaders, navigating these dynamics involves focusing on productivity and understanding the structural changes in labor and capital. Embracing innovation and efficient resource utilization are key to sustaining growth in a mature economy.

Technology Impact of Growth

Technology is a critical engine of growth, according to the authors. AI places us at the brink of a new technological age, yet innovation alone does not translate into significant productivity gains. The key to substantial productivity boosts lies not in product innovation but in large-scale labor cost reduction. These reductions drive down prices and raise real incomes, which consumers then spend elsewhere in the economy.

Tech’s Twist: More Services, Less Growth

Despite its potential, technology often fails to lift growth because, over the last 70 years, consumption has shifted from goods, where productivity growth is relatively high, to services, where productivity growth is relatively low — a shift of about 20%. At the same time, labor displacement technologies do not necessarily lead to lower headcount. The service economy, characterized by low productivity growth, underscores that cost leadership is essential. Only relative cost advantage matters.

Good Strains and Systematic Risks

Twice in less than 20 years, the U.S. economy came perilously close to a macroeconomic precipice. However, existential stimulus prevented a full-blown crisis. Such stimulus is not reserved for crises; when recession looms or recoveries are sluggish, it can be applied.

The reality is that without the stimulus, systemic risks cannot be averted. However, stimulus creates its own risks. Tactical stimulus can aid in prolonging expansions, accelerating recoveries and boosting growth rates. Yet, its effectiveness hinges on the willingness of policymakers and politicians to deploy it judiciously.

Stimulus Stumbles: Navigating Policy Pitfalls

Existential stimulus can fail from policy errors, such as failure to act, political failure, and market rejection. Therefore, leaders should not underestimate policymakers, but understand the politics of stimulus, and remain realistic about market reactions. It is also crucial to recognize that tactical stimulus can sputter. This can happen due to monetary objections, political objections (where politics overcome cyclical concerns), market offset (market rejection of policy), and policy offset (monetary or fiscal policy counteracting cyclical stimulus).

Inflation Illusions: Decoding Spikes vs. Breaks

At the same time, breaking inflation is hard, yet low and stable inflation is the cornerstone of a well-functioning macroeconomic environment. When inflation arises, executives need to discern whether it signifies a structural break or a cyclical spike. This understanding is vital to crafting appropriate responses and maintaining economic stability. The authors argue that conflating a structural inflation break with a cyclical surge occurred in public discourse as inflation surged post-pandemic. This misinterpretation led to false alarms, generating misguided fears and calls for policies to preemptively trigger a recession to control inflation.

Inflation Queries: Leaders Decode Economic Signals

To discern whether inflation is structural or cyclical, leaders should ask three critical questions: Is there a demand/supply mismatch? Is there an expectation of inflation? Are there clear monetary policy signals? These questions are the basis of formulating appropriate responses. The authors claim that the post-COVID inflation spike never resembled a structural break. It was triggered by a mismatch of demand and supply, and long-term inflation expectations did not significantly change. The risk of structural inflation in the end was overstated. The authors suggest that leaders need to trust the signals, have faith in monetary policy, and understand the business implications.

New Norm: Leaders Adapt to Rising Inflation

Today, leaders need to learn to live with an upside inflation bias. We are transitioning from a period of labor market slack to one of tightness, from disinflationary to inflationary global value chains, and from subdued to confident investment imperatives. This shift reflects a more normal economic environment. Both cyclical and structural factors contribute to what is likely a durable upward inflation bias. Consequently, we can expect higher but healthy interest rates moving forward.

From Slack to Tight: Anchoring Economic Expectations

As a goal, it is crucial to have anchored expectations which arise from the tightness or slack in the economy. Unanchored expectations lead to either runaway inflation or deflation. Currently, we are transitioning from slack to tightness. This shift is a material change, necessitating a more efficient allocation of resources in the new economic regime.

Resilient Economies: Thriving Amidst Rate Volatility

Tight economies come with more jobs, investment, productivity growth, and an efficient allocation of resources. Going forward, leaders will find investing will be harder and there will be more rate volatility, but we can learn to live with higher rates. By the end of 2023, the authors believe the economy proved more resilient than thought. As important, debt only becomes a threat when the nominal growth rate is less than the nominal interest rate.

Bubble Management: Leaders Embrace Inevitable Risks

Leaders, meanwhile, should learn to live with bubbles, which are unsustainable trends that build over time and typically deflate rapidly. Bubbles are ubiquitous and can be classified by their characteristics, risks, and damage. Spotting or stopping bubbles is illusory; accepting them is necessary. From a geopolitical standpoint, organizations should not forget to de-layer geopolitical risk and to frame risks, not outcomes. To respond to change, leaders should focus on building skills, not just plans, use experts wisely, and remember that the shock is only half the story.

Goals for Business Leaders

Leaders should analyze macroeconomic risk and consider the landscape of real, financial, and global economic risks. Shocks, crises, and false alarms will continue to occur. When they do, leaders should revert to economic fundamentals. We are entering an era of tightness and growth. The global economy will reinforce this tightness in the coming years. Leaders should be rational optimists, recognizing that growth will shape the real economy more than growth risks. While cyclical growth risks and recessions remain, they will be overshadowed by better growth across cycles.

At the same time, we are entering an era of strategic investment and technological advances. Here leaders need to recognize the importance of tight labor markets and the need for strategic investments related to climate change, decarbonization, and reallocating productive capacity. Generative AI, will drive more investment and enhance productive capacity, enabling organizations to do more without necessarily reducing workforce numbers. Contrary to fears of tech unemployment, the authors, like David De Cremer in “The AI Savvy Leader,” believe the opposite will prevail.

Parting Words

We are entering a new era and economy. In this era, CMOs and CEOs should expect inflation with a cyclical upside bias. In this era, in contrast to what I hear on CNBC, we should anticipate higher but healthier interest rates.

To operate in this period, leaders should pursue more disciplined capital allocation and be realistic about the risks including public/private debt, potential inflation regime breaks, and deep financial crises. Leaders should remain aware of the evolving economic landscape and adapt their strategies accordingly to navigate and capitalize on these shifts effectively.

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