Why your business should have two business plans right now

Is your business plan right for recovery?

Recession-recovery cycles are a fact of business life and most senior leaders have experienced their fair share. Your management team probably has a business plan ready to swing into action following the most recent recession.

But what if the plan is wrong? What if it's based on the false assumption that this recovery will be like all the others? You know how to climb out of the usual recession, so I'm not going to discuss this norm. Instead, I want to present you with a different proposal.

Types of economic recovery

Economists talk about three main types of recovery. First is the commonest V-shaped variety. The economy goes steadily down over time and then steadily comes back up.

The dramatic L-shaped recovery is fortunately rare. Here markets crash in a day, for example 1987's Black Monday - typically boom and bust. Could we be in an L-shaped situation? No, because we haven't experienced the typical sudden plummet. No, because our economy has bounced back before flat-lining, unlike the L-shaped situation.

Between 2007 and 2009, the economy steadily declined, but at a "45 degree" angle rather than the L-shaped perpendicular, to drop circa 60% over two years.

Another less common recovery is W-shaped, or so-called ‘double dip', which generally only happens every 30 or 40 years. But the term ‘W' is slightly misleading. The economy doesn't normally follow exactly the letter W - down, up and then down, up again. The economy climbs after going into recession, but instead of going back down immediately, it flattens out for a period. Then it dips a second time before full economic recovery.

Read or download our article on The 'W' Shaped Recovery for more details on a double-dip recession.

V-shaped versus W-shaped recovery

Several analysts initially predicted a common V-shaped recovery once the markets began to look a little rosier - and the media climbed on this happy bandwagon. We all wanted to believe the predictions because Vs are something we've all experienced.

But economically, Vs and Ws differ. The W-shaped recession is deeper than the V-shaped variety. In the W-shaped situation, suddenly no one is investing - for example six quarterly periods of negative growth. No investment means no return and importantly no cash coming out of the recession.

The V-shaped recovery, on the other hand, usually follows a mild recession. During this recessionary period, investors are still willing to spend a little money, which pays dividends and fuels growth.

Conversely, there is no real growth from investment coming out of a W-shaped recession. This means no sustained kick-up like the V-shaped recovery. We have an initial spurt, making it resemble a V-shaped recovery. But this time, because there is no cash from investment, the apparently mild recession deepens into a double dip recession.

Current market charts show striking similarities between 1973-81 and 2000-2011. Between 1973-5 the market similarly fell away circa 60% over the two years and comparative trend analyses suggest the current probability of a similar W-shaped recovery period is high.

The key question: ‘Do you have two business plans - one for a V-shaped recovery and one for a W-shaped recovery?'

Why two plans?

Typically, a V-shaped recovery business plan predicts cycles of growth through cash investment-growth-reinvestment-more growth. But this is not the pattern of a W-shaped recovery and it is logical to suppose a complementary business plan must be significantly different.

Everyone is conditioned to expect a V-shaped recovery and at a recent seminar, business leaders predictably asked me the classic V-shaped recovery questions. ‘How to get more sales? More growth? Better product distribution?'

But what if we are in a W-shaped recovery instead? You might initially have cash to invest, but when there is no return eventually the cash is gone. You will travel across the worrying flat period wondering where to find the next cash injection.

In this unusual situation, what might you do differently - and have you got a plan to help?

When these same leaders saw my business plan they were amazed at the differences. Instead of the usual sales and distribution focus, my team is using the current flat period by preparing to maximise the eventual upturn. For example, we plan to manage risk, build capability and develop innovative products.

Right now, two plans are better than one

Having two plans means being better prepared. What's more, the rule of thumb says that markets are a good economic predictor by about six months. As soon as the markets say ‘V-shaped' or confirm ‘W-shaped', you will know which business plan to pick up.

Apart from CEOs back in the 70s, most of us have never grown our business out of a W-shaped recession. The likelihood is that in your career lifetime, unless you are still running a business in 2040, you will only have one crack at a W-shaped recovery - and this could be it.

V-shaped recovery business plans tend to take a shorter-term view, understandably focusing on selling more to generate revenue. In a W-shaped recovery, senior teams need to move their time horizons out five to 10 years to focus on risk, organisational capability and innovation.

Planning your way through uncertainty

By the time we reach the second dip, before going into the boom, our business has to be in tip-top condition with the maximum capability to deliver several years of growth. If your business is short of cash, capability and innovation at this point you will lose out. Being unprepared means struggling to gain the momentum that will eventually propel your business up the growth curve.

Let us say the next boom lasts seven years. If we are currently let's say 18 months away, our plan must therefore cover the next eight and a half years. We have been experiencing a flat market trend since September 2009 and the million dollar question remains: ‘How long will we continue heading across this line?'

History is no help to us because every other flat trend line has differed. 1974-5 took circa two years, while the minimum period is likely six months. As we have already passed the six months mark, a period of one to three years seems likely.

Some futurists say August or September 2010 will see us move down into the double dip. Some say it will take 12 months to journey across the flat land, others say longer. Some still say the recovery is V-shaped, although it looks increasingly W-shaped because we are not yet into a V-shaped recovery boom.

Technically, we just don't know timetables.

Preparing your business for growth

We can play around with dates, but how long have you really got left to get your business into shape? No management team can simply click its fingers and make immediate changes to the company because significant change takes around nine to 18 months. Even if you started preparations today by focusing on innovation and lifting capability, you probably haven't got long before true economic recovery begins.

Given that the economy generally lags the markets by around six months, the FTSE is a good indicator of economic trends and a key consideration when reviewing your business plan. It will help you predict whether a V- or W-shaped recovery is most likely and which of your plans to implement.

Think about it from a risk management perspective. It would take only a few days of your leaders' time to invest in creating a second plan and one you could well need. What's the cost to your business of having the wrong plan - and is it worth the risk of not creating one now, while you have the time?

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