Navigating the Storm: How Multiple Crises are Redefining Business Profitability
The business world has always faced challenges, but the nature of those challenges is evolving. A recent study highlights a critical shift: it’s no longer enough to prepare for single economic shocks. Instead, companies must brace for the increasingly common occurrence of combined crises – the simultaneous impact of banking issues, currency fluctuations, sovereign debt concerns, and economic recessions. This isn’t a theoretical concern; we’ve seen it play out in real-time with the overlapping impacts of the pandemic, inflation, and geopolitical instability.
The Interplay of Crises: A New Economic Reality
Traditionally, economic models have treated crises as largely independent events. However, research is demonstrating that the combination of crises creates a far more complex and damaging environment for businesses. The study in question, analyzing firms in both emerging and mature economies, found that the impact of factors like liquidity, ownership structure, and even a company’s age, dramatically shifts depending on the specific combination of crises at play.
For example, a company heavily reliant on external financing (high external dependence) might weather a single recession relatively well. But combine that recession with a banking crisis – limiting access to credit – and a currency devaluation – increasing the cost of imported materials – and the situation becomes exponentially more difficult. We saw this acutely in Turkey in 2018, where a currency crisis compounded existing economic vulnerabilities, leading to significant corporate distress.
Key Factors Influencing Profitability in Turbulent Times
The research reinforces some long-held business truths, but with important nuances. Gross margin remains a key driver of profitability, particularly during stable periods. However, its importance can be overshadowed during a crisis. Leverage, unsurprisingly, consistently harms profitability, and the study confirms that larger companies tend to fare better during non-crisis periods.
But here’s where it gets interesting: the study suggests that previous profitability models may be flawed due to a lack of consideration for these combined crisis scenarios. This means businesses may be misinterpreting their own financial health and making decisions based on incomplete information. Consider the example of Evergrande, the Chinese property developer. Its high leverage, combined with a slowdown in the Chinese economy and regulatory changes, created a perfect storm that led to a near-collapse.
The Rise of Resilience: Strategies for Future-Proofing Your Business
So, what can businesses do to navigate this new landscape? The answer lies in building resilience. This isn’t just about cutting costs; it’s about fundamentally rethinking how your business operates.
- Diversification: Reduce reliance on single markets, suppliers, or funding sources.
- Strong Balance Sheets: Maintain healthy cash reserves and minimize debt.
- Agile Operations: Develop the ability to quickly adapt to changing conditions.
- Scenario Planning: Regularly model the impact of various crisis combinations on your business.
- Supply Chain Resilience: Identify and mitigate vulnerabilities in your supply chain.
Companies like Toyota, known for their “just-in-time” inventory system, were severely impacted by the 2011 Japanese earthquake and tsunami. This event forced them to re-evaluate their supply chain and build in greater redundancy, a lesson many companies are now taking to heart.
The Data Speaks: Increased Crisis Co-occurrence
Data from the International Monetary Fund (IMF) shows a clear trend: the frequency of overlapping crises has increased significantly in recent decades. IMF Working Paper highlights the growing interconnectedness of global financial systems and the increased risk of contagion. This isn’t a temporary blip; it’s a structural shift in the global economic environment.
Frequently Asked Questions (FAQ)
- What is a “combined crisis”?
- A combined crisis refers to the simultaneous occurrence of two or more economic shocks, such as a banking crisis, currency devaluation, debt crisis, or recession.
- Why are combined crises more damaging than single crises?
- The effects of multiple crises are often amplified due to their interconnectedness. They create a more complex and unpredictable environment for businesses.
- How can businesses prepare for combined crises?
- By diversifying operations, strengthening balance sheets, building agile operations, and engaging in scenario planning.
- Is this trend likely to continue?
- Yes, due to increasing global interconnectedness and systemic vulnerabilities, the frequency of combined crises is expected to rise.
Want to learn more about building a resilient business? Explore our articles on risk management and business continuity planning. Share your thoughts in the comments below – what challenges are you facing in this evolving economic landscape?
