SEVEN

BUSINESS CYCLES AND ECONOMIC INSTABILITY

Businesses operate best when they have a clear picture of their target customers, their competitors, and the major demographic, economic, social, technological, and political forces affecting the broad business environment. Conversely, businesses operate poorly when many of those elements that deeply affect business performance are random and unpredictable.

There are two great injectors of risk and uncertainty into business decision making. One is the persisting presence of business cycles in capitalist economies. The other is the rising level of market turbulence in this new era of globalization and rapid technological development. Let’s examine each in turn.

THE PROBLEM OF THE BUSINESS CYCLE

Business cycles seem to be an intrinsic feature in a capitalist market economy. From 1857 to today, the American economy has experienced thirty-three recessions. From 1960 until today, the United States experienced eight contractions (from peak to trough) of business activity.¹ The average contraction period from peak to trough lasted thirteen weeks. The average period from trough to peak took sixty-five weeks. As you can see, the contraction period is short, but the return to the next peak is five times as long.

The aim of economic policy is to keep the economy moving at a healthy growth rate. It should be able to create jobs for everyone who wants a job, and do so without causing inflation. This leads us to examine the following questions:

1. What are the phases of a business cycle?
2. What factors generally precipitate a business contraction?
3. What factors normally contribute to a more rapid recovery?

What Are the Phases of a Business Cycle? A business cycle passes through four phases.²

Contraction. When the economy starts slowing down, it is usually accompanied by a bear market. GDP growth slows to the one to two percent level before actually turning negative.

Trough. While the economy continues to decline in a recession, GDP’s negative performance each period eventually gets smaller and the economy gets ready to turn the corner.

Expansion. When the economy starts growing again, it’s usually signaled by a bull market. GDP growth turns positive again and should be in the healthy 2 percent to 3 percent range. If the economy is managed well, it can stay in the expansion phase for years.

Peak. When the economy gets into a state of “irrational exuberance,” with overly high expectations, inflation starts to appear. The peak phase is when the economy’s expansion slows. There is usually one last healthy growth quarter before the recession starts. If the GDP growth rate is 4 percent or higher for two or more quarters in a row, the peak is just around the corner.

What Factors Generally Precipitate a Business Contraction?

Much of the business cycle is explained by changes in the level of business, investor, and consumer confidence. Periods of economic growth occur when investors, businesses, and consumers have a positive outlook on the economy. Consumers buy when they can depend on their income level and home value. Even a little inflation can encourage consumers to buy sooner before higher prices set it. High consumer demand leads businesses to hire new workers and make further investments. Investors may take on riskier investments to gain some extra return. There is much capital and liquidity available, many people are making good money, and everyone believes that the good times will continue. All this suggests that the peak is not far off.

There are early signs that tell that an economy is getting overheated. Usually there is too much borrowed money going into a major “hot” area. The dot-com boom in the 1990s was followed by a dot-com bust (1999–2001), when speculative investors realized that many of the new dot-com companies were making little or no money. The next “hot” area turned out to be the 2003–2006 boom in housing, with many mortgages being taken by people without the means to pay them if they lost their job. In these two cases, consumer and investor debt increased substantially. The late MIT economist Charles Kindleberger said that bubbles can’t exist without borrowing: “Economic disasters are almost always preceded by a large increase in household debt.”³

Specific downturns can be precipitated by different combinations of factors. A contraction can start as a result of poor earnings, job cuts, major strikes, ballooning inventories, inflation fears, and other factors. Business, investor, and consumer confidence is shaken and the contraction phase begins. Investors start selling stocks, buying bonds and gold, and hoarding cash. The contraction is marked by businesses laying off workers and others hoarding cash rather than spending it. Stock prices fall drastically and inventories pile up.

Economists have long worked on the idea of putting together indicators of economic activities that would help predict changes in the economy. Leading indicators are those that change before a change occurs in economic activity. Lagging indicators are those that change after the economy has changed. Coincident indicators are those that change at approximately the same time as the whole economy. Among the indices used by these three indicators are earnings reports, the unemployment rate, the quits rate, housing starts, the consumer price index (a measure for inflation), industrial production, gross domestic product, bankruptcies, broadband Internet penetration, retail sales, stock market prices, and money supply changes.

What Factors Normally Contribute to a Recovery?

Each recovery has its own explanations, such as the role played by federal monetary and fiscal policy, business recovery success stories, good international news, and so on. Some people argue that new wars often end a depression: The Great Depression of the 1930s really ended with the beginning of World War II. In the midst of an ongoing recession, government does what it can to ease monetary policy, bringing down the interest rate to a level so low (called “quantitative easing”) that businesses and consumers can easily borrow. But even when the interest rate is down to almost zero, it often isn’t enough to stimulate a recovery. The debate then turns to fiscal policy and the use of taxes and incentives to stimulate the economy.

The big debate is about the best course of government policy. Here, two diametrically opposed positions battle. One—known as the austerity solution—states that the recession will eventually end on its own. Companies need to reduce their costs through cutting jobs and postponing investments. Workers need to accept lower wages if they want to hold on to their jobs. At some point, more companies will once again see opportunities to improve their profit and then the recession will be over. Europe tried this approach during the 2008–2011 period, and it made basket cases out of the PIGS countries (Portugal, Italy, Greece, and Spain)—partly because it was imposed on these countries, not chosen by them.

The other position is called stimulus spending. Here the government passes a stimulus spending bill such as legislated in the American Recovery and Reinvestment Act of 2009. The government essentially prints money to spend on needed construction, infrastructure improvement, and a variety of social needs. This puts money into the pockets of many people. Most of it gets spent and generates more money in other pockets. The stimulus spending in 2009 contributed to reducing the unemployment rate from 11 percent to 7.5 percent in three years.

Economists Atif Mian and Amir Sufi have suggested that contractions would be less severe if homes were financed with “shared-responsibility mortgages.”⁴ If home prices in a particular ZIP code fell by, say, 30 percent, the homeowner’s monthly principal and interest would fall by 30 percent. If prices recover, payments go up but not above the original amount. The mortgage holder could be given, say, 5 percent of any capital gain that the homeowner realizes in selling the home.

THE PROBLEM OF HEIGHTENED MARKET TURBULENCE

Besides the risk and uncertainty that is introduced in different stages of the business cycle, another phenomenon has been occurring—that of heightened market turbulence.⁵ In his book The Age of Turbulence,⁶ Alan Greenspan describes his experiences as chairman of the Federal Reserve, where he had to deal with a great number of economic disturbances and shocks for which the only recourse was to muddle through and pray. He had to handle burgeoning trade deficits and retirement funding, as well as the proper role of government regulation.

The fact is that the world is more interconnected and interdependent than ever before. Globalization and technology have created a new level of interlocking fragility in the world economy. Globalization means that producers are increasingly importing resources from other countries and increasingly exporting their output to other countries. Technology—in the form of computers, the Internet, and mobile phones—enables information and communication to course through the world at lightning speed. News of a breakthrough discovery, a corporate scandal, or the death of a major figure is heard around the world almost instantly. While global interdependence works in everyone’s favor in good times, it rapidly spreads much pain and damage in bad times. The good news is lower costs, but the bad news is increased vulnerability.

But what is turbulence? We know it when it occurs in nature. It creates havoc in the form of hurricanes, tornadoes, cyclones, or tsunamis. We experience turbulence in the air from time to time when a pilot asks us to fasten our seat belts. In all these cases, stability and predictability vanish only to be replaced by being buffeted, bounced, and jabbed by conflicting and relentless forces.

Business turbulence is defined as unpredictable and swift changes in an organization’s external or internal environments, which affect its performance.⁷ Yes, economies normally return to “normal” conditions, but in this new era turbulence at varying levels becomes a persistent factor. A particular company or industry can be living through conditions of turbulence.

When he was the CEO of Intel, Andy Grove had to deal with all kinds of threats to damage Intel’s preeminent position in the computer chip manufacturing business. It would take just one agile competitor to come out with a superior chip at a lower price to topple Intel. As Grove described in his book, Only the Paranoid Survive, he had to live with uncertainty. Intel had to erect an early-warning system that would reveal signs of imminent trouble. It had to create different what-if scenarios. And it had to preplan different responses to the different scenarios in case they occurred.⁸

Most companies operate with the assumption that there is a built-in self-restoring equilibrium. Economists built price theory with equilibrium in mind. If oversupply occurs, producers will cut their prices. Sales will increase, thus absorbing the oversupply. Conversely, if a shortage occurs, producers will raise their price to a level that will balance demand and supply. Equilibrium will prevail.

In our book Chaotics (AMACOM, 2009), my colleague, John Caslione, and I postulate that market turbulence is now the normal condition of industries, markets, and companies. Turbulence is the new normality, punctuated by periodic and intermittent spurts of prosperity and downturn. Today we can expect more big shocks and many painful disruptions, causing heightened levels of overall risk and uncertainty for businesses at both the macroeconomic level and the microeconomic level. On top of the everyday challenges of dealing in a perpetual competitive arena, as well as business cycles, business leaders need to recognize a heightened stream of major and minor disturbances challenging their business planning.

And turbulence has two major effects. One is vulnerability, against which companies need defensive armor. The other is opportunity, which needs to be exploited. Bad times are bad for many, but good for some.

But even when normalcy returns to the overall economy, it doesn’t return to every industry or market or individual company. Hypercompetition operates continuously and relentlessly in normal times. The U.S. auto industry today is experiencing a perfect storm of high health care costs and enormous pension obligations converging with a weak demand for its products, which for decades have been seen as less attractive than foreign competitors’ products. The airline industry is marked by too much capacity, and further consolidation is likely. Even without a global financial meltdown, times can be turbulent for specific industries and organizations.

Business owners and businesspeople have always lived with certain levels of turbulence in the business. This is normal and part of a normal economy. And in the past, broad economic swings lasting several years were an essential feature of the normal economy.

THE SOURCES OF TURBULENCE

We can identify and describe seven critical factors that raise the stakes for business risks:

• Technological Advances and the Information Revolution
• Disruptive Technologies and Innovations
• The “Rise of the Rest”
• Hypercompetition
• Sovereign Wealth Funds
• The Environment
• Customer Empowerment

Technological Advances and the Information Revolution

Information technology (IT) is one of the key driving factors in the process of globalization. Advances since the early 1990s in computer hardware, software, telecommunications, and digitization have led to the speedy transfer of data and knowledge throughout the entire world. The information revolution is probably the single greatest contributor driving and shaping the new global economy. Through the creation of interconnections with the potential to link all people and all business via a single medium—the Internet—the world’s buyers and sellers can search, inquire, evaluate, and buy or sell from long distances. People do not need to limit their buying or selling to only their local area.

The Internet has transformed and globalized commerce, creating entirely new ways for buyers and sellers to conduct transactions, for businesses to manage the flow of production inputs and to market their products, and for job recruiters and job seekers to connect with each other. New media—websites, email, instant messaging, chat rooms, electronic bulletin boards, blogs, podcasts, webinars, cloud computing—create a global system that makes it much easier for people and businesses with common interests to find one another, to exchange information, and to collaborate.

But the information revolution contributes to the level of turbulence because there are so many more people sending and receiving messages about events in every country that can help or hurt different companies in different parts of the world. Enterprises need a key officer who can sample the stream of messages for trends, corrections, and problems that might affect the enterprise.

Disruptive Technologies and Innovations

Every company’s business might be seriously disrupted suddenly or slowly by a new technology or innovation. The great Harvard economist Joseph Schumpeter pioneered research into how radical innovations lead to “creative destruction” and are necessary for a dynamic economy.⁹

More recently, Professor Clayton M. Christensen introduced the idea of “disruptive innovation” in a series of books.¹⁰ A disruptive innovation can create dramatic change and render an older technology or way of doing business obsolete. Some disruptive technologies include mini steel mills replacing vertically integrated steel mills; digital photography replacing chemical photography; digital phones replacing traditional phones; and semiconductors replacing vacuum tubes. Disruptive technology has the potential to be the ultimate “game changer” that can create chaos in an entire industry, especially for the incumbents who haven’t been paying attention to the turbulence swirling around them until it’s too late.

Christensen postulates that “low-end disruption” occurs when the rate at which products improve exceeds the rate at which customers can adopt the new performance. Therefore, at some point the product’s performance overshoots the needs of certain customer segments. Then, a disruptive technology may enter the market and provide a product that does not perform as well as the incumbent product, but exceeds the requirements of certain segments, thereby gaining a foothold in the market.

Once the disruptor has gained a foothold in this customer segment, it will proceed to exploit the technology in order to improve its profit margin. Typically, the incumbent does little to defend its share in a not-so-profitable segment and usually moves up-market to focus on more attractive, profitable customers. The incumbent is eventually squeezed into fewer markets until the disruptive technology finally meets the demands of the most profitable segment, ultimately driving the incumbent out of the market entirely.

In disruptive technology battles, disrupters usually win against older technology incumbents in the industry. One reason is an asymmetry in financial incentives. A disrupter may see a huge opportunity whereas the incumbent sees a much smaller one. Another reason why disrupters usually win against incumbents is the fact that the larger, successful incumbent companies are organized into product divisions that often have silos that don’t communicate. R&D doesn’t communicate enough with design and development, production, marketing and sales, and business development. This silo effect leads to a slow-moving ship instead of a fast-moving speedboat. Collaboration across silos is slow. The disrupters are looking at what customer needs are not being met, while the incumbents are focusing on the existing product.¹¹

When attacked by a disrupter, the first reaction of executives in incumbent technology companies is usually to protect their high-paying positions and their well-worn, comfortable business models. The typical response: Close your eyes and maybe it will go away. But usually it does not go away, and then the chaos really kicks in: Scramble to cut staff. Argue and debate. And make it as difficult as possible for the customer to actually adopt the new technology.

Incumbents typically do everything in their power to put off the day of technological reckoning. Their biggest problem is that they must bear the burden of supporting the older technology and the business model built around that technology, while at the same time experimenting with, building up, and transitioning into the new business model structures. Meanwhile, the technological disruptors do not bear this double-cost burden. For disruptors, everything is fluid and relatively low cost.¹² And while the incumbents are fighting to make sense of the chaos in which they are so deeply mired, the disrupters are aggressively plowing forward with the winds and waves of turbulence at their backs.

The “Rise of the Rest”

Another source of turbulence is the rise of other countries establishing political and economic power in a global situation where until recently the United States was the undisputed power. Fareed Zakaria’s book The Post-American World and the Rise of the Rest¹³ attests to the world’s rising emerging market powers, most notably the BRIC (Brazil, Russia, India, and China), along with Indonesia, Turkey, and the whole cash-rich Middle East. Europe became powerful in the 1500s, then the United States in the 1900s, and now Asia in the twenty-first century.

There are a rising number of competitors coming from emerging markets. Established Western multinationals will be confronting a growing number of emerging countries’ multinationals.¹⁴ A process of redistributing money and power—away from the U.S. and Europe and toward the resource-rich countries and rising industrialized nations in Asia and the rest of the emerging world—has been under way for years. They will be aggressively buying their way into the Fortune Global 500 with their acquisitions of leading Western companies—juicy acquisitions with their experienced global and local management teams and their established global brands.

Emerging-market companies such as Brazil’s Petrobras and InBev, Russia’s Gazprom and Severstal, India’s Reliance and Tata, and China’s Lenovo, Haier, Alibaba, and Huawei will increase turbulence and disruptions. These companies are growing at record paces. The pace at which they acquire Western firms will increase as the global recession takes a bigger toll on companies in North America and Europe than on those in emerging economies. In fact, in 2008, emerging-market contributions to the Fortune Global 500 stood at sixty-two, mostly from the BRIC countries, up from thirty-one in 2003, and they are set to rise rapidly. Based on current trends, emerging-market companies will account for one-third of the Fortune list within ten years.¹⁵ These extremely ambitious and aggressive companies will do whatever it takes to beat competitors from developed economies and also in developing economies, since it’s in the developed economies where the most robust profits are found.

Hypercompetition

Hypercompetition occurs when technologies or offerings are so new that standards and rules are in flux, resulting in competitive advantages that cannot be sustained. It is characterized by intense and rapid competitive moves, in which competitors must move quickly to build new advantages and erode the advantages of their rivals. Competitors thrive on speed and surprise to introduce more appealing or lower-cost products and cater to more fragmented customer tastes. The falling barriers to trade contribute to structural disequilibrium and to the dethronement of industry leaders.¹⁶

Richard D’Aveni, professor of business strategy at the Tuck School of Business at Dartmouth College and author of Hypercompetition: Managing the Dynamics of Strategic Maneuvering, argues that competitive advantage is no longer sustainable over the long haul.¹⁷ Advantage is continually created, eroded, destroyed, and recreated through strategic maneuvering by those firms that disrupt markets and act as if there were no boundaries to entry. The way to go about winning today is to render the current market leader’s competitive advantages obsolete.¹⁸

In the hypercompetitive environment, profits will be lower for firms failing to create new competitive positions faster than their old positions crumble, especially as the weight of their depreciated and costly strategies will prevent many of them from adapting and adopting new behaviors fast enough.

Sovereign Wealth Funds

The increase in sovereign wealth funds (SWFs) means more capital can move swiftly to areas of opportunity and out of areas of saturation, causing another source of turbulence. A sovereign wealth fund is an assemblage of stocks, bonds, property, precious metals, and other financial instruments. SWFs have been around for decades, but have increased dramatically since 2000. Some are held solely by central banks that accumulate the funds in the course of their management of a nation’s banking system. This type of fund is usually of major economic and fiscal importance. Other SWFs are simply the state’s savings, which are invested by various entities.¹⁹ The largest SWFs are the Abu Dhabi Investment Authority, Norway Government Pension Fund, Saudi Arabia AMA Foreign Holdings, Singapore Investment Corporation, China SAFE Investment Company, Kuwait Investment Authority, China Investment Corporation (CIC), Russia National Welfare Fund, Hong Kong Monetary Authority, and Singapore Temasek Holdings.²⁰

During the global financial crisis in 2008, several U.S. and European financial institutions avoided bankruptcy by accepting SWFs from the Chinese government and various Arab kingdoms.²¹ This says a lot about the “rise of the rest” as well as which among those rising will be the key groups making waves in the new age.²² Sovereign wealth funds gained worldwide exposure by investing in Wall Street financial firms, including Citigroup, Morgan Stanley, and Merrill Lynch, when those firms needed a cash infusion due to losses at the beginning of the subprime mortgage crisis in January 2008. The tremendous damage that surfaced from the crises in 2008 only accelerated the transformation process.

The wealthy state-owned investment funds of China, Singapore, Dubai, and Kuwait control assets of almost $4 trillion. They are in a formidable position to buy their way onto Wall Street and the major London and European exchanges in a big way, making big waves.

In mid-2008 U.S. lawmakers and congressional investigators went on record stating that the unregulated activity of SWFs and other speculators had contributed to the dramatic swing in oil prices, and that the massive investment pools run by foreign governments are among the biggest speculators in the trading of oil and other vital goods, such as corn and cotton, in the United States.²³ They can be seen as major sources of the heightened turbulence.

Latent fears about incredibly wealthy—and opaque—sovereign wealth funds will add to the inevitable rise in protectionist sentiment when there is a return to less financially turbulent times. This rise in fear will be further fueled by the inherent disdain that many Westerners have for oligarchic and state-led capitalism, both of which are prevalent in many emerging markets with the biggest SWFs.²⁴

Ultimately, through corporate acquisitions and the investments of SWFs in the U.S., Europe, and other Western economies, the role of the state (often an undemocratic one) in the global economy is rapidly expanding, and with it the inevitable “push back” from Western governments and businesses, creating new sources of turbulence with which businesses will need to contend.

The Environment

Ecological groups pressuring businesses to pay more attention to the environment are also introducing turbulence. All companies are facing increased pressure to conserve scarce natural resources and reduce pollution to ward off global warming so that life on the planet is not irreparably damaged. The “green movement” is growing and gaining clout, and adds to the cost of doing business overall, irrespective of any investment returns. Citizens and companies are entreated to consume and invest more conscientiously in systems that conserve air, water, and energy. And though most companies would like to support the green movement, it isn’t easy to prove that investments in environmental initiatives at the company level are actually bringing a return, especially for shareholders.

Most companies now recognize the growing markets for cleaner energy, water, food, and transportation. Many are already seeing bottom-line benefits from business strategies and innovation based on sustainable development. General Electric is one company, through its Ecoimagination program, trying to profit by providing solutions to energy and pollution problems. More executives at companies such as Samsung, BASF, and BMW now see environmental issues as opportunities rather than risks.²⁵

Because competitors are likely to invest in going green at different rates, this circumstance will, at least in the short term, favor those who skimp. In some markets, leveling the playing field may require more government regulation and enforcement. The overall effect will be to increase the level of turbulence within and across different industries. At first glance, the U.S. and Europe are likely to be competitively disadvantaged relative to less developed countries because the latter are less able and less likely to make and enforce “green” investments. The West may try to use this situation as an excuse to lessen its own investments, leading to an ecologically risky outcome for everyone.

Ultimately, the value of companies is likely to change as environmental factors begin to affect their performance. The short-term impact on cash flows may be limited, but it will eventually be significant in some industries. As nations and companies begin acting more aggressively to address environmental concerns, including potentially expensive systems to reduce carbon emissions, major shifts in the valuations of sectors and companies will start to become clearer and more predictable. A critical first step is to review and quantify a company’s exposure to noncompliance with current or prospective regulatory measures (such as carbon pricing, new standards, taxes, and subsidies), new technology, and environmentally prompted changes in customer and consumer behavior. Business executives will have to ask how specific changes would affect a company’s competitive position if other companies adopted new business models and moved more quickly to “green” business practices.²⁶

Customer Empowerment

In the past, businesses dominated the information airwaves. They would send out volleys of powerful brand messages using radio, TV, newspapers, magazines, and billboards. If customers sought further information about a brand or a seller, they could only turn to their own experiences or to friends and family. Such “asymmetric” information was weighed in favor of the sellers.

In the last decade a revolution has occurred. Today’s consumers continue to get advertising from sellers, but they also can survey hundreds of “friends” on Facebook or LinkedIn or Twitter. They can look up the reports on Angie’s List or Zagat and learn what other businesses and people like themselves think of a company’s products and services. Increasingly, each region or individual country around the world has its own new group of online, interactive sites connecting businesses and people to share experiences.

This means that customers and other stakeholders—employees, suppliers, and distributors—are no longer passive agents in the marketing process. They can learn as much about a company, product, or service as they choose. Beyond that, customers and all stakeholders can use what they have learned and tell others in their network by blogging, podcasting, emailing, or chatting.

The profound implication is that sellers who make substandard products or provide less than high-quality service will disappear faster than ever. The volume of word-of-mouth coming from businesses and people who have experienced a product or service will end up advertising the good guys and defeating the bad guys. And it will prod the good guys to get better and better. So customer and stakeholder empowerment acts as a catalyst leading to continuous improvement in the offerings of serious competitors.

By the same token, word-of-mouth has the potential to create turbulence and chaos for sellers. A person who experienced terrible service during a commercial flight can create a website devoted to the airline and welcome others with bad experiences to tell their tales. One irate customer or consumer can potentially undo an established company. Vigilant companies need to aim for high customer satisfaction and monitor the talk on the Internet to make sure that one angry individual doesn’t destroy the company.

As customers increasingly demand greater input into how businesses interact with them, leading organizations of all sizes will gain advantages by transforming this increased customer involvement from risk to opportunity and long-term success.

*   *   *

The business cycle and heightened market turbulence are factors that greatly influence the performance of a market economy. I’ve described these factors as constituting a shortcoming of capitalism, but in fact they are an intrinsic part of any economic system. The Soviets claimed that their economic system had eliminated the business cycle, but all they were able to do was conceal it from their news media. Someone living in Moscow had little knowledge of the economic health or sickness of other regions of the Soviet Union.

The Soviets also could claim that their economy was not plagued with turbulence. After all, the economic system had eliminated class warfare by eliminating the rich. The proletariat was no longer exploited. They ruled the country. All Soviet ads and films applauded the New System and the harmony and hope that it generated.

The fact is that the business cycle and heightened turbulence characterize all economic systems, but these characteristics are particularly salient in a free and open market economy characterized by hypercompetition and rapid technological change. The real task is not to dream of eliminating the business cycle or turbulence, but to moderate their amplitude and impact so that economic decision makers can operate more rationally.

The business cycle can be moderated by improving the ability of those guiding the economy to recognize a bubble when it is forming and to take action to cool down the speculation and “irrational exuberance.” And when a recession has occurred, those guiding the economy have to take quicker action to infuse money and credit into the market economy so that spending can start up again.

Heightened turbulence can also be moderated. More business enterprises are monitoring the latest data on consumers and their changing needs, expectations, and level of confidence. Businesses are more able to measure their standing (i.e., perceived value) in the minds of their target customers and respond to any dips in their standing. Businesses are watching their competitors more closely and evaluating their plans and their standing in the marketplace. No one expects that these steps will eliminate surprises coming from random and unpredictable events. But the keener knowledge of what is taking place will hopefully reduce the number of real surprises.

Having reviewed the main factors causing business cycle change and turbulence, businesses need a new strategic framework for operating in each phase of the business cycle and in each level of turbulence. When he wrote of turbulence during the deep recession in the early 1990s, Peter Drucker stated:

In turbulent times, an enterprise has to be managed both to withstand sudden blows and to avail itself of sudden unexpected opportunities. This means that in turbulent times the fundamentals have to be managed, and managed well.²⁷

Businesses must develop the skills, systems, processes, and disciplines to quickly detect and predict changes in their environment, to identify their vulnerabilities and the opportunities that come from change, and to enable the business enterprise to respond wisely and with strong resolve. All business leaders are intensely focused on creating strategies, organizational structures, and company cultures that create and deliver superior customer value over the life of a business enterprise. In turbulent times, as Drucker noted, maximizing the creation of continuous value will require a new business outlook and set of behaviors.

While companies are gearing up for the greater turbulence and chaos that lie ahead, they will not soon forget the pain and the lessons of the 2008 financial meltdown. Companies will proceed more cautiously and adopt a risk-oriented mindset. Government will try to pass regulations to prevent a repeat of this kind of housing and mortgage bubble. Banks and companies will be less prone to sell their goods and services “with no money down.” Credit practices will be monitored more carefully to avoid another “house of cards” economy.

The perennial drivers of globalization over the past fifty years, the United States and Europe, will no longer play their former dominant roles. A process of redistributing money and power around the world—away from the U.S. and Europe and toward the resource-rich countries and rising industrialized nations in Asia—has been under way since the 9/11 terrorist attacks, when China, Russia, the Middle East, and other rising economies began to accumulate tremendous hoards of cash as globalization soared, along with prices for oil, natural gas, and other commodities.