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Navigating Through Market Volatility

John O'Rouke and Karen Dale Torre

Introduction

 

Businesses are experiencing an unprecedented level of change. Natural disasters, economic contagion, and geo-political considerations have combined to create enormous levels of market volatility.

There is also a certain irony about the current state of affairs. Just as the world is starting to see the green shoots of recovery, large enterprises and some institutional investors are underinvested, wondering what to do with mounting piles of cash while smaller companies struggle to raise credit. Although corporate coffers are full, interest rates are low, and a benign economy inevitably offers bargains, many companies seem to be holding back.

Market volatility and fears of a double-dip recession are certainly part of the reason but a recent McKinsey Quarterly report identified the surprisingly strong role of decision biases in the investment decision-making process. The survey found that most executives believe their company is too stingy, especially for investments expensed immediately through the income statement and not capitalized over the long-term. Indeed, about two-thirds of the respondents said their company underinvests in product development, and more than half of the respondents said their company underinvests in sales and marketing and in financing initiatives for new products or new markets.

It seems that market volatility and the uncertainty it creates are holding back progress—sapping the confidence to invest. So how does a company buck the trend? The answer is about much more proactive management—accurate forecasting, constantly testing the temperature of the waters, seeking out new opportunities, formulating scenarios, assessing risk, and assigning probabilities of success.

Improving Forecasting Capability


When dealing with a volatile economy it is important to increase the frequency of forecasting. The artificial horizon of the annual budget and attendant forecast revisions acts as a brake on forecasting accuracy. Rolling forecasts, which as the name suggests are based on a rolling 12-month (usually four quarters) timeframe, are regarded as delivering superior accuracy for businesses facing constant change.

The accuracy of financial forecasts is heavily influenced by the richness of data capture. In practice, this means extending data capture to the very fringes of the organization—those closest to the front lines of the business—that can see what is happening on the ground. This not only helps improve forecast accuracy but also helps to capture new opportunities from a wide field of vision.

Leveraging New Technology


Leveraging newer technologies can provide a rich volume of possibilities when considering new market opportunities amid a sea of contradictory data. For example, information captured in a CRM system can help management identify new and exciting opportunities from existing relationships with customers and prospects.

Social media can also add new insights. In combination with traditional analytical techniques, it has the potential to shed light on market trends and future prospects in a uniquely illuminating way. The ability to trawl unstructured data (mainly commentary) residing in blogs, discussion forums, tweets, Facebook, and other Websites and turn it into quantifiable information (sentiment scores, volume of commentary, market segmentation) about the market’s affinity for a particular product can provide valuable, forward-looking insights.

Managing Risk


When dealing with market volatility it is vital to formally recognize both risk and probability in both strategic and operating plans as well as investment appraisals to help focus attention on the sensitivity of plans to unforeseen events. If the results of the McKinsey Quarterly report are to be believed then it is also time to recognize decision bias as part of risk assessment.

Of course, none of this is possible without enabling technologies—principally, enterprise performance management systems that support collaborative planning processes and governance, risk, and compliance (GRC) systems that help embed risk management processes into the business planning cycle.

Only such robust systems and measures will give organizations the confidence to steer their way through the choppiest trading conditions in more than half a century.

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