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The full version of this article is available on Harvard Business Online (subscription required).
The Idea in Brief
Even before the September terrorist attacks in the U.S., business executives were paddling furiously to traverse the economic doldrums. Now it is almost certain that the crossing will be longer and harder. How can your company make it through the difficult times ahead? The following practices will help ease your passage.
1. Build strategic contingency planning into your culture
The contingency measures that World Trade Center tenants adopted after the landmark's 1993 bombing are widely credited with saving lives and businesses in the wake of the most recent disaster. The impending downturn, however, calls for more: you'll need entire strategies crafted to address your worst-case scenarios.
• What if your risk profile shifts dramatically? Act now to spread that potential risk or buy it down. U.S. insurers rethought risk-sharing in the wake of 1992's Hurricane Andrew, which caused a then-record $16.8 billion in losses. Primary insurers (think Allstate) began to share risk more broadly among themselves and sell off more to reinsurers (think Lloyds of London), which provide surplus coverage for major losses. The reinsurers upgraded their computer models to predict payouts and avoid overextending themselves. As a result, the insurance industry expects to fare better today even though the damages from the September attacks may be double those of Hurricane Andrew. How about your industry? How could your risk profile change, and what should you do today to prepare?
• What if demand suddenly falls off? Could you quickly find allies who could help you consolidate the industry and save jobs? Arrow Electronics (Melville, N.Y.), a distributor of electronic components and computer products, faced just such a dilemma when computer sales flattened in 1985. Arrow, the industry's scrappy No. 2 player, was able to acquire the No. 3 player. This swift move catapulted Arrow to the No. 1 position, which it still holds. Chairman Stephen Kaufman says his company's outward focus has enabled it to react more quickly than its competitors. Companies today should take a cue from Arrow, reviewing their competitive landscape and thinking through merger scenarios.