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s t r a t e g y

MARCH 2009

The new normal
The business landscape has changed fundamentally; tomorrow’s environment will be different, but no less rich in possibilities for those who areprepared.

Ian Davis

2

It is increasingly clear that the current downturn is fundamentally different from recessions of recent decades. We are experiencing not merely another turn of the businesscycle, but a restructuring of the economic order. For some organizations, near-term survival is the only agenda item. Others are peering through the fog of uncertainty, thinking about how to positionthemselves once the crisis has passed and things return to normal. The question is, “What will normal look like?” While no one can say how long the crisis will last, what we find on the other side willnot look like the normal of recent years. The new normal will be shaped by a confluence of powerful forces—some arising directly from the financial crisis and some that were at work long before itbegan. Obviously, there will be significantly less financial leverage in the system. But it is important to realize that the rise in leverage leading up to the crisis had two sources. The first was alegitimate increase in debt due to financial innovation—new instruments and ways of doing business that reduced risk and added value to the economy. The second was a credit bubble fueled by misalignedincentives, irresponsible risk taking, lax oversight, and fraud. Where the former ends and the latter begins is the multitrillion dollar question, but it is clear that the future will revealsignificantly lower levels of leverage (and higher prices for risk) than we had come to expect. Business models that rely on high leverage will suffer reduced returns. Companies that boost returns to equity theold fashioned way—through real productivity gains—will be rewarded. Another defining feature of the new normal will be an expanded role for government. In the 1930s, during the Great Depression,...
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