| What better way to celebrate the Shortlist’s first anniversary than by discussing the importance of resilience? Plus, why the world economy is increasingly Asia-centric and partner Abdur-Rahim Syed on building entrepreneurship culture. Thanks to our readers for a great year and, you know, get your friends and family to sign up! |
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| The last big economic downturn kicked off more than a decade ago. Even as financial markets wonder whether another one is brewing, many C-suite executives are already quietly gearing up. For them, the question isn’t whether to prepare, it’s how. |
| The 2008 downturn offered some painful lessons, of course, but also cause for optimism. Even as many companies struggled, a well-prepared minority emerged stronger. Examining the trajectory of more than 1,000 publicly traded companies during the last downturn, McKinsey found that about 10 percent of them fared materially better than the rest—a group we call “the resilients.” |
| It turns out these companies had a few things in common, including planning that started before things started to get hairy. As a rule, they created flexibility by cleaning up their balance sheets before the trough—which positioned them to acquire assets just as less-prepared peers were dumping them. (It’s never a bad plan for companies to stress test their investment strategies, guarding against over-leverage.) |
| The resilients also cut costs ahead of the downturn. Taking a possible cue from mid-2007’s brief global market seizure, resilients had trimmed their operating costs by 1 percent by the first quarter of 2008 compared with the previous year, while their peers were continuing to add costs. Then these companies maintained and expanded their cost lead in seven out of the eight quarters during 2008 and 2009. |
| Got all that? Good, because the next time around may call for different types of flexibility. “The one thing that I feel fairly comfortable saying is this one will be different,” said Sven Smit, a McKinsey senior partner, who talks out planning scenarios in this podcast. |
| A future downturn could pose new challenges because the global economy has changed so markedly. Markets and supply chains are even more fragmented than a decade ago. Digitization has changed the playing field. The Internet of Things and machine learning have redefined opportunities and contracted the timeline for action. |
| Plus, many CEOs are more constrained in their ability to cut costs, as activist investors and pressure from Wall Street have driven companies to become as lean as possible. |
| Leaders may also need to seek other ways to weather adversity, including energy resilience. For more than a century, it’s been a given that energy use and GDP growth move in tandem. But the next downturn may not come with energy declines—calling for a new type of rainy-day calculation. |
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| SPOTLIGHT ON |
| Agriculture |
| New regional insights from our agriculture experts: From the United States, a recent McKinsey survey explores how increasing economic pressure on American farmers will affect their spending on agricultural inputs. And from India, where agriculture provides livelihoods for about half the population, four leaders in Indian agriculture discuss the sector’s challenges and digital innovation’s potential impact on small farmers. |
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| MORE ON MCKINSEY.COM |
| What’s the value of experience? | Marketing experts have asked this question for decades. But in industries like medical devices, where technology is enabling ever-faster disruption, that question is more urgent than ever. |
| Asia’s future: More than a China story | In a two-part interview, global-strategy adviser Parag Khanna describes the ways that the world economy is increasingly Asia-centric and why it will be moving more swiftly in that direction. |
| Automation in retail: Are you ready? | Automation is reshaping business models and the broader value chain in retail, which is already stretched by margins and consumer expectations. Here’s how to understand its implications. |
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| THREE QUESTIONS FOR
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| Abdur-Rahim Syed |
| Abdur-Rahim Syed, a partner in the Middle East, focuses on technology, telecoms, and private equity. He co-leads McKinsey’s entrepreneurship work in the region, including at Fuel, an initiative focused on scaling innovative start-ups and fast-growth technology firms.
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| How would you describe the environment for entrepreneurship in frontier markets? |
| Frontier markets are often blessed with youthful populations swiftly going digital and a rapidly expanding middle class. These form fertile ground for digital start-ups, but the ecosystem of government support, private investment, and talent often has not coalesced around them.
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| Take Pakistan, for example: It is one of the youngest countries in the world—with 130 million people under the age of 30—and a fast-growing economy. McKinsey data projects that between 2015 and 2025 Pakistan will add 2.1 million middle-income households and 700,000 high-income households. In the past three years alone, data-enabled mobile connections have grown four-fold; in 2018, the country’s e-commerce market beat analysts’ predictions to cross the $1 billion mark. |
| The government has taken a role in helping entrepreneurs, introducing a three-year tax relief plan for technology start-ups and creating regulations for local venture-capital firms and investors to set up shop in the country. There is clear acceleration in the start-up scene, but there’s room to do much more. |
| What are some of the challenges for entrepreneurs in the region? |
| In the case of Pakistan, the entrepreneurship ecosystem, although progressing, still lags behind its peers. According to the Global Entrepreneurship and Development Institute, Pakistan ranks 122 out of 137 countries. And funding continues to be a challenge: on average in the past three years, Pakistan has received 6 cents per capita in venture-capital investments, lower than Bangladesh’s 7 cents per capita, and Nigeria’s 18 cents. |
| What steps are needed to help start-ups? |
| Our latest research suggests that the country could adopt a three-pronged approach to accelerate growth. First, the government could lay groundwork policies like building a payments gateway. Second, the private sector can help create more access to capital, from start-up equity investing to venture debt. Third, it’s important to cultivate local talent—tapping into the country’s more than 600,000 new graduates every year and teaching digital skills through vocational institutes. |
| Ideally, the government, the private sector, and universities would work together to help entrepreneurship reach its full potential. While the government can help reduce barriers to start-ups flourishing, the private sector can look to create value through funding the next big disruption. Together, they can cultivate an entrepreneurial culture that could also lead to digital disruption. |
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| BACKTALK |
| Have feedback or other ideas? We’d love to hear from you. |
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Copyright © 2019 | McKinsey & Company, 3 World Trade Center, 175 Greenwich Street, New York, NY 10007
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