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This paper offers a practical overview of the U.S. credit cycle and the challenges it poses, along with a perspective on where we seem to be in the cycle in early 2023. Suggestions are then offered for how corporate executives can address cyclical challenges from a corporate strategy perspective.

The United States credit cycle was out into context by following the trend of Moody’s Baa corporate bond yields from January 1919 to November 2022. Under the Moody’s rating system, Baa is the lowest level of investment grade credit, and as such it possesses speculative characteristics that are sensitive to cyclical dynamics. Another reason for choosing Baa credit patterns for analysis is data availability: over 100-years of continuous Baa data is searchable at the U.S. Federal Reserve.

The prior credit cycle wave of progressively lower inflation and interest rates began in 1982 and ended in 2020. The current credit cycle of wave of progressively higher inflation and interest rates will present strategic risks and opportunities that executives will increasingly have to deal with.

This is the first corporate strategy paper we are aware that practically addresses the credit cycle change. It is also the first paper we are aware that provides practical suggestions on how to address that change from a corporate strategy perspective.

The books, The Innovator’s Dilemma and Fooled by Randomness were best-sellers, and both books’ authors rightly have legions of followers. Nevertheless, the dynamics each author analyzed so well continue to plague many executives. Why? Is there some way to close the analytical loop between these two extremes? Put another way, is there a practical method of being productive and profitable in “normal” environments while at the same time working to capitalize on the impact of volatile disruption? This paper presents a practical approach for doing so that builds on prior research.

This paper differentiates between the normal, linear environment of “business as usual” (BaU) and the volatile, nonlinear environments of disruption to both upside and the downside. It then profiles how to navigate each environment, illustrated by way of examples.

Our findings, which are supported by historical and contemporary examples, are that leading executives consistently navigate the environments of BaU and disruption due to explicit strategic decisions based on an “information advantage,” which is knowledge that their competitors either do not have or choose to ignore. Such advantages are monetized by efficient operations in BaU and by economically, which is to say strategically, benefiting from disruptive volatility to the upside and/or avoiding it on the downside, over time.

Managerial focus should be directed to potentially disruptive innovations and other kinds of ambiguous threats, which could develop to be strategically significant over time, and these need to be tracked in a meaningful way. To benefit from an information advantage, executives must selectively – that is, strategically – make small investments that could either payoff dynamically or economically mitigate the risk of extreme losses over time.

This paper offers executives a practical explanation why the environments of BaU and disruption must be analyzed and planned for separately by different functions. Doing so facilitates the efficient realization of corporate goals and objectives over time in both normal (linear) and highly volatile (nonlinear) environments.

The author offers executives a strategic process for proactively mitigating the risk of catastrophic unwanted Black Swan surprises that can severely, and often abruptly, impair a balance sheet.

One practical way to apply the author’s approach is through hedging concentrated balance sheet exposures when market volatility is low or contracting.

Though no one can reliably anticipate pandemics and related stock market turbulence, executives do not have to predict the future to economically protect their balance sheets from Black Swan events.

Managers can construct Black Swan scenarios to assess how an unforeseen, disadvantageous future could develop and which risk management derivative would best mitigate it.

This strategic approach to managing balance-sheet-threatening risks could help a firm outperform its competitors during future crises and catastrophes.

All too often M&A deal making falls into the trap of head-to-head competition that drives valuations to “sky-high” levels. The author suggests ways to avoid the trap. 10; 10; 10;

Four lesser-known corporate development strategies offer lucrative alternatives to engaging in an M&A bidding war.

One strategy: The derivatives market allows executives to acquire financial products to hedge their material balance sheet exposures when market pricing is incredibly low.

Relatively few acquirers make initial “toehold” investments in their targets prior to making a bid.

The strategic logic of hyper-efficient resource utilization has rarely been popular, despite how “obvious” it may initially appear. Most executives seem psychologically oriented to a growth-based approach irrespective of the risks that approach may generate over time. 10;