Even in a global market, we are increasingly facing high volatility that is getting worse. Years ago, we calculated conjuncture cycles of four to five years. Now, it seems, these cycles are becoming shorter, and it is not always obvious to us when downturns occurs and what causes them. The complexity of the economy has made it difficult to predict these downturns. But it is not only the downturns of our businesses that make these predictions difficult. We have also to be fast enough to detect recovery and be ready to follow the upturn of the markets. Not being fast enough in an upturn can cause us to lose market shares.
Not following a downturn quickly enough can cause cash problems, and not following an upturn quickly enough can cause a loss of market shares. What can we do to follow the market’s volatility better?
We have to implement volatility management in our companies, which will assure that we are prepared and that our actions are in place quickly enough. What we should do?
- We should measure KPIs and market indicators continuously, and we should define beforehand which action we will take if these indicators reach certain values.
- According to the indicator values, information should be given to the organization with regard to which level of action should be applied.
- The actions should be defined beforehand, and every manager should be clear regarding how to apply the respective actions.
- In the same way that the downturn actions are applied, the upturn actions should also be defined beforehand.
- Upturns should be managed in the same way as downturns. General information should be given to the organization, and the organization should apply the necessary actions accordingly. This works, if the actions are defined beforehand.
This should be the general procedure. What does this mean in detail?
KPIs and market indicators, which can indicate, for example, downturns or upturns in advance, are purchase manager indices that can determine whether order intake is decreasing or turning over. However, stock exchange indices and general market prognoses can promote these decisions. If these indicators show a risk, then the upper management can give information to the organization, e.g., to slow down. The organization can stop investments and cease further employment. If the indicators worsen, then the upper management can give the message to stop. This may be an order for the organization to freeze budgets and to obtain write-offs for a temporary labor force. If a message indicating a crisis comes from the upper management, we could shorten work hours, reduce stock further to assure cash flow, and prepare for further reduction of the work force.
The same procedure should work the other way around. If indicators improve, the upper management should inform the organization to release the brakes. This should indicate the building up of stock and the releasing of budgets to invest and to assure that all key people are on board. A message to speed up should indicate to go for investments to assure the capacity and employ people or to assure leasing people.
With such a procedure, which defines very clear, what to do generally in the situation of down turn and upturns, the organization will react quickly enough to volatility in our markets. If at every stage the definition of these measures is performed again, the upper management must decid, the organization must learn what to do next, then the organization will not be able to react quickly enough. Downturns will be followed too late, and the company will lose money. It is even worse in upturns. A slowly changing organization cannot take advantage of market opportunities.
Good volatility management is being prepared for the ups and downs in the markets. This assures cash for the company in downturns and allows for the taking advantage of all opportunities in upturns.
But we have to be also careful. Companies with seasonal business or predictable ups and downs should not use these actions, which are only appropriate for following market volatility. Following market upturns and downturns with the necessary action will not make a company stronger. These actions only assure that it stays alive. Predictable ups and downs should be followed with planned measures, which will not surprise the involved parties.
The volatility of the markets should be followed in a timely manner. This will assure that a company can survive a crisis and can exploit opportunities in an upturn.