Prospering in an Economic Downturn

Between World War II and the boom of the 1990's, the U.S. experienced unparalleled growth and stability. Since then, our economy has experienced a decade of turbulence-Y2K, tech bubble, 9/11, Katrina, Asian financial crises, Tsunami, Mad Cow, AIDS, Enron, WorldCom, SOX, threats from Korea and Iran, devaluation of the U.S. dollar, credit crisis, stock market volatility, etc. Uncertainty has become the norm. Those companies who have planned for various economic scenarios (including economic downturns and upturns) will dominate their industries. Positioning during an economic downturn can have an enduring affect. A recent Bain Co. study revealed 20% of companies jumped to the top 25% quartile of profitability in their sectors in the last recession. It is easier to gain share during a downturn when competitors are weak, then in an upturn when competitors are strong; however share is typically not worth "buying". In an upward market, the high cost producer sets the price, and most companies make money. In a downward market, the low cost producer sets the price, and most companies will lose money. In 2001, Dell grew 11% as industry sales decreased 22%, due in part to a well thought out pricing strategy that yielded 90% of the industry's profits.

1. Be Aware of the Phases of Recession and the Traps that Come Along with Them

Bain & Co. analyzed 377 Fortune 500 companies that survived industry slumps and recessions over the last two decades and interviewed nearly 200 executives. Their research revealed 3 stages:

Phase 1 Storming - Indicators move downward. In this phase, executives are over confident. They continue to pull the same levers, but they are not nearly as effective.

Phase 2 Eye of the Hurricane - The trend cannot be disputed. Companies reduce forecasts, and slash costs (including cap-ex), drop ancillary services, and push for suppliers to reduce costs (thereby injuring vendor relationships). They layoff people who they have to hire back once the upturn begins (average downturn is 11 months).

Phase 3 Renewal - Lower interest rates help expand capacity. Those who managed their core business and maintained relationships with customers, employees, and vendors will return to profitability the fastest.

2. Accept Realities Quickly

Gains or losses show up early. Be cognizant of your realities, but do not arbitrarily cut into your margins. Understand that customers are treasure hunting (trading down for some goods and services, and up for others), and price accordingly. Offer low cost alternatives in lieu of discounting your core offerings.

3. Get Back to Basics

Focus on your core business. Avoid diversification. While diversification may work for investors, it does not work well for companies as each new market represents lower odds for achieving market leadership, and is subject to more earning volatility.

4. Unless you are the Low Cost Leader, Focus on Differentiation

Focus on customer experiences, and expanding your bundle of services to provide more value.

5. Take Care of your Existing Customers

If you rely on customer loyalty as your model, these relationships must be strengthened in a downturn. Remember that customers are in the same boat you are. Focus on the sectors that are still performing such as energy, technology and materials.

6. Be Selective in Cutting Back on Key Investments

It may be time to make some counteractive bets. With many companies cutting marketing spend; acquisition costs for marketing resources are low. This is an excellent time to buy a building. Commercial real estate usually lags behind a depressed residential market.

7. Take Care of Valued Employees

Be wary of cutting headcount that you will need to add again at a higher cost within 6 or 9 months. This is an excellent time to poach talent from competitors.

8. Be a Good Customer

Be reasonable in your relationships with vendors. Negotiate new terms (such as a discount for prompt payment) without arbitrarily demanding cost concessions.

9. Find Bargain Basement Acquisitions

Look for weakened competitors. Only purchase assets and customer lists (there is typically no equity to be had, and it is not a time to overpay).

10. In Lieu of Buying Market Share, Have a Laser Focus on Profits

Companies are moving away from shared services and outsourcing non-essential activities. As entities become smaller and more efficient, revenue goes down and profit goes up.

11. Execute Flawlessly

Find relevant internal and external metrics that predict future profitability. Become personally involved with managing cash and inventory.

12. Be Fully Prepared to Take Advantage of the Upturn

Lock in credit lines as rates are low. Consider scenarios in your strategic plan (examine social, technological, economic, ecological, and political factors that will influence profitability).