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Looking at Business CyclesManaging through business cycles – and there are many types of them – challenges even the most seasoned leaders. Responding to or anticipating market changes can require bold and risky decision-making with potentially profound consequences. A leader’s first exposure to market volatility can be challenging, unsettling and wrought with mistakes. But what if you could practice reacting to and managing through market swings before you are subjected to them in real life?

On Thursday, October 22, Caterpillar Inc. announced its 2015 Quarter 3 results. Caterpillar reported a decline in both revenue and profitability. Compared to prior year quarterly results, revenue for the current quarter dropped by 19%. Was this a surprise to investors? Not necessarily, as Caterpillar CEO Doug Oberhelman had previously revised quarterly forecasts and tempered expectations throughout the year. Still, it was unsettling news for Caterpillar stakeholders – for its shareholders, its dealership network, and its employees.

What is Caterpillar doing wrong? In a word – nothing. Caterpillar, the world’s largest heavy equipment manufacturer, is the victim of global market forces and market volatility. Why the 19% drop in revenue? Declining demand for mining equipment, the past year’s decline in oil prices, and the slowdown in China – all important markets to Caterpillar.

How is Caterpillar responding? Let’s hear from Mr. Oberhelman himself, “Managing through cyclicality has been critical to Caterpillar’s success for the past 90 years; it’s nothing new for us or our customers. We can’t control the business cycle, but we continue to drive improvements in our business.” The company is taking proactive measures to align its cost structure with its revenue; improve its market position; and invest in emerging technologies to cement its position as an innovation leader. Here’s one example: Caterpillar announced it will reduce its roughly 100,000 person workforce by 5 – 10% over the next two years. Painful? Yes. Carefully considered? Absolutely. Necessary? Unfortunately.

Business simulations allow leaders at all levels to experience and practice managing through the cyclicality Mr. Oberhelman describes. Simulations can be designed to reflect a variety of business cycles: rampant growth driven by new business models, technologies or market accelerations; sharp declines due to macroeconomic forces or new competitors; imbalances between supply and demand; or slow, pernicious erosion in customer demand due to changing customer preferences or habits.

Business cycles are inevitable. All businesses serve customers and end-markets that are subject to their own unique market forces. Help your leaders not only survive, but thrive, during such cycles by using a business simulation to practice and experience them before they encounter them for the first time.

 

Ned Wasniewski is a partner at Insight Experience, a Boston-based firm delivering contextually rich, immersive business simulations and learning experiences to accelerate and integrate leadership, business acumen and strategy execution.

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