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How to Benefit While the Economy Slides

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(This article was written in March, 2008.)

The bad news: It looks like a recession is coming, and may in fact already have begun.
The good news: an economic downturn represents an exceptional opportunity to improve your company’s strategic position.

Evidence of a likely recession is everywhere.  The Conference Board’s index of leading economic indicators suffered its sharpest six month drop through Jan 2008 since the last recession of 2001.   The latest jobs report revealed that overall US employment was lower last month than three months prior.  Every time that happened since the 1970s a recession was underway or came soon after. 

With recession likely, the instinctive reaction is to cut R&D, capital expenditures, marketing programs, personnel, etc. to maintain liquidity and profitability.  While such actions may be understandable and indeed necessary for a few financially ailing firms, for most companies they would be a grave mistake. 

Numerous studies have documented how aggressive firms have made significant long term gains against competitors that cut back on key investments during recessions.  For example, a 1980s McGraw Hill analysis of 600 companies showed that firms that maintained or increased advertising during the 1981-82 recession grew 275% through the mid 1980s, while those that cut ads grew only 19%.  

During the 1990-91 recession, amid a brutal price war with AMD, Intel invested $5 billion in new factories for its Pentium chipped and launched its brilliant “Intel Inside” branding campaign, enabling dramatic gains in market share and profitability throughout the 1990s.  Locally, South Shore Equipment, a Waipahu based distributor of lawn & garden equipment, stepped up marketing expenditures during the 2001-2003 slowdown and grew significantly.

Several factors enable forward thinking companies to gain share during recessions:   retreating competitors, owner motivation due to financial pressures, heightened customer receptivity to change, and increased management and staff time to devote to redesign of business processes.

Seven keys strategies can improve your competitive position during the coming downturn, although many will cause a short term hit to profitability.

1) Understand your financial position and address any burning issues.  If you are in a cash crunch, you may need to secure capital or cuts costs and investments quickly.  Closely monitor and evaluate inventory, receivables, new customer credit, capital investments, and discretionary expenses.

2) Improve customer service.  Understand customer needs and economics to increase value delivered, as opposed to discounting.  Bain & Company consultants report that a 5% increase in customer loyalty can lead to 40% to 90% increases in the lifetime value of a customer. 

3) Improve efficiency.  During boom times prices are influenced most by the high cost producer.  In a recession, the low cost producer rules.   Invest in technology and reengineer your systems to streamline operations, engaging your employees in the process. 

ComTel, a Honolulu-based communications technology provider, implemented in January its own telecommuting and virtual office technologies to enable more of its employees to work effectively from home.  Savings in rent and parking costs exceed $8,000 per month, while employee satisfaction has increased

4) Maintain or increase investments in marketing programs, and monitor ROI.  South Shore Equipment has again increased its advertising, and is offering aggressive promotions on complimentary products valued by its customers.  It is concentrating ad dollars on the few media vehicles with the best returns. 

Now is a great time to launch or expand Internet marketing initiatives.  All Islands TimeShare Resales, a real estate brokerage firm specializing in time share resales, recently overhauled its web site and optimized it for search engine placement, an investment that is already paying dividends.  Owner Douglas Lupton loves that his web site costs aren’t at the mercy of Hawaii landlords.

5) Let poor performers go, and apply the savings to increased investments in training for remaining staff.  Communicate your growth plans regularly to maintain morale.  Adjust performance targets if necessary to keep them realistic.  Don’t shut down the recruiting process.  Recessions are the best time to pick up top talent. 

6) Acquire synergistic companies or product lines, but avoid unrelated diversification.  Hawaii Intercontinental Corp., a distributor of beach lifestyle products, recently purchased one of our clients (Military Nutrition, Inc.), adding several complementary and growing nutritional product lines of interest to many of their current customers, and gained numerous new customers.

7) Stay optimistic.  Communicate your vision and confidence to employees, suppliers and customers.  Remember, the average recession lasts only 11 months, with real output falling only 0.5 to 2%.  Your ardent belief in the potential for extraordinary gains can become a self fulfilling prophesy.