1

S E P T E MB E R 2 0 0 9
How managers should approach
a fragile economy
For the immediate future, business leaders will have to master
the disciplines of uncertainty.
Lowell Bryan and Bill Hoffman
S T R A T E G Y P R A C T I C E
2
A powerful tension is at work today in global economic sentiment. The fnancial
markets, pundits, and policy makers think the global economy is out of the woods, but
executives arent so sure. Our research suggests that the executives are rightand that to
thrive, companies must adopt some new approaches to management.
In early September, McKinsey surveyed more than 1,600 business executives around the
world about their current views on and hopes for the economy. Only 20 percent believed
that a normal recovery starting in late 2009 would be the most probable outcome. Some
42 percent thought that 2010 would be a year of fat economic activity. About a third
believe that an extended period of anemic global economic growth (below 1 percent per
annum) is likely for the next several years. The remaining 7 percent felt that something
akin to a double-dip recession was probable. (The full survey results can be found in The
crisisone year on: McKinsey Global Economic Conditions Survey results, September
2009, mckinseyquarterly.com.)
Simply put, the daily experience of business leaders suggests that a full recovery
of economic activity to pre-crisis levels is further off than expected. Moreover, the
distribution of responses suggests that, as a group, executives simply dont know what will
happen. An improving global economy is not the same as a recovering one.
We see three main underlying reasons for this confusion and skepticism. Each of
them presents tough management challenges. Lets start with public policy. Yes, the
unprecedented monetary stimulus, government guarantees, and injections of capital seem
largely to have ended the short-term crisis that landed the capital and credit markets in the
hospital. But it remains unclear what will happen when the patient is taken off its meds
less risk taking and lower returns in the global fnancial system seem inevitableor what
will be the unintended consequences of the recent massive growth in public balance sheets
and of rising regulatory costs.
A second reason for the uncertainty is the diffculty of comprehending the information
available on unfolding economic eventsinformation often delivered in the form of
sound bites with little explanation of what various indicators really mean. We track 12
indicators of macroeconomic, credit, and capital market activity across nine developed and
developing economies. If you compare the July performance of the indicators with those
from the previous month, 60 of a possible 108 showed improvement. On the other hand,
68 of the indicators also highlighted a deterioration (often a severe decline) from pre-crisis
conditions the year before. Each indicator might get reported with its own headline. We
believe that without an analysis of a much broader picture, including how the indicators
interrelate, there is no hope of understanding current conditions (exhibit).
3
The third reason is the very nature of the economic shift under way. This crisis wasnt
and still isnt a singular breakdown. Rather it consists of many smaller crises, each with
its own pace and impact, that are interrelated and still under way. The US fnancial crisis,
which began a year ago, causing global credit markets to seize up, was the epicenter of the
global economic shock. The strong defensive actions companies took in response caused
an even-sharper-than-expected economic decline in the fourth quarter of 2008 and into
the frst quarter of this year. Companies just now regaining access to credit fell behind
in restocking their inventories. Their efforts to compensate explain much of the nascent
macroeconomic improvement and resurgence of trade observed across the world.
But that doesnt mean the problems are over: the change in the behavior of US consumers
alonethey may well go on reducing their debts even when the economy recoversis still
playing out. Personal savings as a percent of disposable income has climbed to more
than 4 percent, from pre-crisis readings near zero. In the absence of income growth, each
1 percent increase in US consumer savings results in $100 billion in foregone spending.
As a result, the potential for a continued US economic contraction remains signifcant.
The countries of the European Union (including the United Kingdom), where consumers
and fnancial frms alike are reducing debt, appear to be on the same slow improvement
path as the United States. Russia and several Eastern European economies are lagging
further behind.
Brazil and India have benefted from their relative lack of involvement with the global
capital market. And while China seems well positioned for a true recovery, its ability to
meet a year-end 8 percent GDP growth target is being driven by a massive government
fscal and monetary stimulus. This stimulus has has also raised the median price-to-
earnings ratio of its listed stocks above 50 and caused new credit issuance to surge, by July
of this year, to nearly twice the level for all of 2008.
Thoughtful economic modeling can start to capture all this complexity. Working with our
colleagues in the McKinsey Global Institute, we recently modeled four economic scenarios
corresponding to those the business executives evaluated in our recent survey. For the
US economy alone, the results show possible outcomes that span nearly $2 trillion in
GDPthe difference between the most optimistic scenario for GDP growth (10 percent
higher than it is today) and the most pessimistic one (3 percent lower) by 2012. Although
scenarios dont predict the future, they are a powerful tool companies should use to assess,
plan, and prepare for a range of possible outcomes in the face of such great uncertainty.
What else must companies do these days to survive and thrive? First, they must drop
the pretense that they can predict the future. Second, they must continue adapting their
management processes and capabilities with an eye to making better decisions under
4
Severe decline Worsening No signifcant change Improving Signifcant improvement
July 2009, change from previous month
Real-estate market Macroeconomic
Infation
Consumer spending
Trade momentum
Business environment
European
Union
Russia United
Kingdom
Developed economies Developing economies
United
States
Japan Brazil Central,
Eastern
Europe
1
India China
Consumer confdence
Equity performance/volatility Credit/capital
markets
Business confdence
Credit availability
Cost of capital
2
Foreign-exchange
discontinuities
Risk premiums
1
Czech Republic, Hungary, Poland.
2
Cost of capital based primarily on central bank interest rates and commercial paper spreads; risk premiums based on industry
specic interest rates, bond spreads, or credit default swap spreads.
Source: McKinsey Global Institute analysis
Economic and nancial indicators
Severely worse Signifcantly worse Moderately worse Near normal Pre-crisis or better
Change from pre-crisis to July 2009
Real-estate market Macroeconomic
Infation
Consumer spending
Trade momentum
Business environment
European
Union
Russia United
Kingdom
Developed economies Developing economies
United
States
Japan Brazil Central,
Eastern
Europe
1
India China
Consumer confdence
Equity performance/volatility Credit/capital
markets
Business confdence
Credit availability
Cost of capital
2
Foreign-exchange
discontinuities
Risk premiums
1
Czech Republic, Hungary, Poland.
2
Cost of capital based primarily on central bank interest rates and commercial paper spreads; risk premiums based on industry
specic interest rates, bond spreads, or credit default swap spreads.
Source: McKinsey Global Institute analysis
Economic and nancial indicators
Severely worse Signifcantly worse Moderately worse Near normal Pre-crisis or better
Change from pre-crisis to July 2009
Real-estate market Macroeconomic
Infation
Consumer spending
Trade momentum
Business environment
European
Union
Russia United
Kingdom
Developed economies Developing economies
United
States
Japan Brazil Central,
Eastern
Europe
1
India China
Consumer confdence
Equity performance/volatility Credit/capital
markets
Business confdence
Credit availability
Cost of capital
2
Foreign-exchange
discontinuities
Risk premiums
1
Czech Republic, Hungary, Poland.
2
Cost of capital based primarily on central bank interest rates and commercial paper spreads; risk premiums based on industry
specic interest rates, bond spreads, or credit default swap spreads.
Source: McKinsey Global Institute analysis
Economic and nancial indicators
July 2009, change from
previous month
Exhibit: Economic and nancial indicators
Change from
pre-crisis to July 2009
5
uncertaintyfor example, by abandoning the fxed calendar and planning schedules
typical of annual budgeting and operating processes. This change will require a
shift to monitoring macroeconomic indicators in real time, something akin to just in
time manufacturing approaches applied to decision making. It also means building
greater fexibility into strategic activity by putting a greater focus on acquiring
options, contingency planning, and the use of stage-gating techniques for committing
resources.
All this portends a shift to more dynamic management in a more complex and
unpredictable environment. The industry leaders of the futurestalwarts
and upstarts alikewill be able to adopt, adapt, and build these capabilities for
navigating uncertainty.

The authors would like to thank Ezra Greenberg, Matt Hirschland, John Horn, Ina Kota, Jeff McBride, and Kazuhiro
Ninomiya for their contributions to this article and the research underlying it.
Bill Hoffman is an associate principal in McKinseys Minneapolis ofce, and Lowell Bryan is a director in the New York
ofce. Copyright 2009 McKinsey & Company. All rights reserved.
Related articles

The crisisone year on:
McKinsey Global
Economic Conditions
Survey results,
September 2009
Setting strategy in the
new era: A conversation
with Lowell Bryan
and Richard Rumelt
The crisis: Timing strategic
moves