A potential economic downturn brings both opportunities and risks for businesses. J&A has collected a set of specific and general strategies that business owners may use to evolve and thrive in changing economic conditions. We provide examples of which companies utilized the specific strategies and how the general strategies can be incorporated into a more complex corporate charter.
Specific Strategies for Responding to an Economic Downturn
Consider International Expansion
Global economic conditions affect areas of the world differently. In times of pandemic, strong governments will be able to respond in ways that hold or rejuvenate investor confidence and capital markets in ways more democratic governments do not. J&A expects this confidence to be reflected in countries with more centralized political power by continued investment in core industries, such as food and security, as well as an increase in special situation investments.
Starbucks famously increased its revenue growth by opening more licensing opportunities for the brand during the 2000 recession. This is also an effective way to expand internationally.
Leverage a Part-Time Workforce
Talbots hired more than twice as many part time workers as its competitors before and during the 2000 recession. This allowed them to maintain a high amount of marketing during the recession and emerge as a leader during recovery.
Focus on Selling Products and Services of the Future
Verizon switched from selling phone minutes to more expensive broadband services during the 2000 recession. Cost per customer acquisition often increases during an economic downturn while sales decrease, creating a very risky cash position for companies. Firms should double down on products and services of the future that customers are already paying for.
Reduce Costs Early to be a Resilient Company
In addition to the above specific strategies, companies can incorporate more complex thinking into their corporate charter that includes debt financing, better inventory management, and diversification. J&A identified which of these strategies should be part of the conversation with your financial and banking advisors.
General Strategies to Prepare for and Manage a Potential Economic Downturn
Focusing on having the right inventory levels will reduce the amount of needed committed capital and can lead to the ability to pay suppliers more quickly. This combination will drive to securing more favorable contact terms.
Deliberate Cost Reductions and Productivity Increases
Being prepared to preemptively cut costs as the economic downturn steepens will support the ability to refocus spending. A delicate combination of reduction in spending at the right time will support positioning through the downturn. Ensuring the right resources are fully utilized will ensure quality talent is retained and offer the ability to capitalize on opportunities during the downturn.
The Bottom Line
Companies that perform best in an economic recession do two things well. First, they strategically position themselves before a recession becomes a reality (as identified in the above specific strategies), and second, they react definitively and swiftly to cut costs and streamline operations when the recessions begin.
Originally published April 7, 2020.
Sources: Harvard Business Review | McKinsey and Company
Graphic taken from: McKinsey Quarterly, May 2019
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