Market turmoil: If change is constant what’s the surprise?

While change is a constant, people tend to underestimate its pace. In the space of one short year, the global economy has turned on its head and South Africans have gone very quickly from being cash-flush to penny-pinching. The effects of these dramatic changes are widespread and the situation is likely to deteriorate further, says Mandla Moyo, Director, Business Risk Services at Ernst & Young.

“People and businesses have been surprised by the rapidity with which the environment has changed. Despite the fact that recession follows growth like night follows day, it seems many have been caught completely off guard by an entirely predictable situation,” says Moyo. He says these economic cycles typically run over periods of seven to ten years.

Moyo does, however, concede that the impact of the financial sector meltdown is exacerbating the effects of the inevitable economic downturn. “However, even this problem has its roots in fundamentally flawed logic. Businesses assumed that house prices would continue to rise indefinitely, something which historically, we know has never been true,” he says.

In terms of risk, the present economic climate leaves many companies uncomfortably exposed to a range of risks which are more pressing in tight times than may have been the case in a bull market. “Now is a time for introspection and an examination of value creation, value propositions and appropriateness of product and service offerings for a changing market,” Moyo says.

A case in point, he says, can be found in the United States motor industry. Moyo says Detroit manufacturers have not changed their strategies appropriately for changing markets. Rising fuel prices and increasing awareness of the need for alternatives have already and will continue to impact on the sales of large, fuel-inefficient vehicles. “Arguably, some of these manufacturers which find themselves on the brink of failure, have not responded to changing circumstances. They have focused on short-term profitability rather than long-term sustainability. The result is that they are now in a position where they are no longer able to offer a product mix which is relevant to changing market demands,” he says.

Planting seeds for the future is therefore an essential activity of which South African companies must take cognizance. “If one looks at the mining industry, for example, it is necessary to continue investing in the infrastructure and capacity for the future demand which will follow the present slump,” Moyo notes.

While looking into the future is a notoriously difficult and error-prone endeavour, it nevertheless remains an essential responsibility for those in charge of strategic direction.

“History continues to provide the best insights, especially where economic trends are concerned,” says Moyo. “Scenario planning which provides for an understanding or an indication of possible outcomes based on the unexpected remain valuable; if the input assumptions change, companies should have some sort of indication of what the outputs may be – allowing them to plan for that accordingly.”

“The events which we tend to think happen only once in a century, actually happen with regularity. Financial crisis and market turmoil are not unprecedented; boards and management are tasked with looking at, understanding and planning for risks and realities,” Moyo continues.

While a rising tide floats all boats, he says that when the waters of economic boom times recede, it is those companies which are based on sound business principles and which have the flexibility to respond rapidly which will stay afloat. “A good business will always succeed. There are always random events in the market; for these companies, the ability to change a strategy which may become obsolete remains essential,” Moyo concludes.