Published on December 14th, 2022
How Future-Ready Companies Can Weather The Downturn
Published on December 14th, 2022
This article was originally published on imd.org
IMD’s latest Future Readiness Indicator report offers companies key insights on how to be recession-proof.
Companies that are future-ready demonstrate market resilience and are “recession-proof” in difficult economic times. This was the key takeaway from IMD’s latest Future Readiness Indicator 2022 report.
Professor Howard Yu, author of the Future Readiness Indicator report, highlighted the key lesson for business leaders in the coming year:
“Diversity is king. Be it gender, race, or business diversity, single-mindedness may have brought them this far, but won’t be as forgiving through 2023.”
The Future Readiness Indicator measures the corporate world’s resilience and how prepared industry incumbents are for the future.
The latest report, which is in its third edition, analyzed 89 of the world’s largest pharmaceutical, technology, and retail companies. Nike, Google, and Roche topped the global rankings in their respective industries, but Burberry, Alibaba, and Meta fared much worse than expected, dropping four, nine, and two spots respectively. Amazon lost its winning spot to Microsoft, while Twitter surprisingly rose six places and Netflix fell 22 spots.
IMD released its inaugural Future Readiness Indicator in December 2021, which benchmarked the highest-revenue companies against their competitors by how future-ready they are for the post-pandemic economy and their likelihood of thriving in a world marked by fast and frequent change.
Yu explained why he targeted the pharmaceutical, technology, and retail industries in the latest report.
“The NASDAQ has fallen by about 30% [since last December] and people want to know who the winners and losers are in the tech sector,” he said. “As for the retail sector, everyone has heard of luxury brands like Louis Vuitton and Cartier, and people want to know if fashion brands will continue to do well in a recession.”
The pharmaceutical industry, which is forecasted to be the most recession proof among the three sectors, was featured because it exhibited “different dynamics”, according to Yu.
“We wanted to showcase an industry where there is hardly any market competition and look at what makes them future-ready,” he said. “Unlike the technology and retail sectors, where there is stiff competition, pharmaceutical companies do not compete on the product level. When you have a certain medical condition and see the doctor, they will give you a prescription, which often comes in only one version. It’s not like buying a car.”
In the course of their research, Yu and his team at the IMD Center for Future Readiness uncovered several interesting findings.
“Compared to 2021, one surprise we learned about the tech sector in 2022 is that unicorns are one-trick ponies,” said Yu.
“In the consumer sector, another big surprise is that, during the pandemic, regular apparel brands thrived while not all luxury brands performed well. With a looming recession, it turns out that luxury brands are more recession proof than more affordable brands.”
The reputational crisis faced by the pharmaceutical industry also stood out. “The whole healthcare ecosystem is experiencing a crisis,” he explained. “Not an economic one, but a moral one. For example, some hospitals are prioritizing profits rather than patient well-being.”
Below are other key takeaways from the report.
Diversifying for survival
As the world becomes less globalized, there is a need for companies to diversify risk to survive in the long run.
“Companies that we’ve associated with innovation powerhouses for a long time, all of a sudden, they’ve lost their magic. The reason is that they’ve never been really future-ready from a balanced scorecard perspective,” said Yu.
“To be future-ready, you need to have strong cash flow and a robust innovation pipeline. At the same time, you need to have a diversified set of businesses.
“Tech giants such as Google continue to stay strong. Its advantages are rooted in many applications that it provides to end users such as Google Maps and YouTube. If you compare its portfolio of business to Facebook’s, you’ll see how Google’s technology stack is not just broader but more in-depth. As a result, it’s a lot more resilient during a recession,” he explained.
Developing strategic partnerships
To be future-ready, companies have to develop strategic partnerships. Successful organizations should not aim to do everything in-house. Instead, they should make alliances and explore collaborations to navigate challenging times.
“For example, in the tech sector, specifically in the semiconductor segment, what we’re seeing is a divide-and-conquer strategy, which is key to navigating a recession. This is how NVIDIA continues to do well – they don’t manufacture their products.”
Yu cited the example of Intel, whose ranking fell this year as it lacked the manufacturing capacity of chip maker TSMC.
By contrast, NVIDIA, which has outsourced its manufacturing activities to TSMC, moved up the rankings in the latest report. NVIDIA nearly dominates the advanced chipset market for artificial intelligence. Google, Tesla, Amazon, and Meta are customers of NVIDIA, which is one of the few tech companies that continues to operate in both China and the US.
Putting purpose at the core
Purpose is an important factor in determining a company’s preparedness for the future. Winning firms stay true to their purpose, a credo adopted by top-ranking pharmaceutical companies such as Roche, Pfizer, and AstraZeneca, which are continuing to focus on innovative R&D as a core strategy to drive future growth.
“What this report shows us is that a future-ready company does not simply cut back on all costs,” said Yu. “Instead, they must prioritize their needs that are aligned with the organization’s purpose and continue to invest in important areas such as innovation.”
Purpose-led companies make choices that prioritize considerations other than profit, he said. “If you cut back on all innovation or let go of all your talent during a recession, you might not be able to restart your engine when the recession is over.”
Building a brand into a cultural phenomenon
Companies in the fashion industry can future-proof themselves by building a brand to be a “cultural phenomenon”. The leading brands in the consumer retail industry are those that can demonstrate the strength of personalization and leverage omnichannel marketing strategies.
Citing the top two brands in this year’s report, Nike and Lululemon, Yu explained: “Their products are a platform for opinion leaders to express themselves. For example, for Nike, you can personalize your sneakers and get it shipped in weeks. The company has also built Nikeland in the metaverse, just like Gucci. This is how a sneaker brand builds direct-to-consumer relationships amongst the ‘cool’ people who hang out there.”