Possibly the most damaging long-term effect of a troubled economic climate is when a business chooses to put its growth strategy on hold to "weather the storm."
Daily now I am asked what the economy is doing as it seems that there are indicators pointing at a recovery. As an economist I’m trying to move forward and stay away from the spin doctors and otherwise motivated dream-weavers out there, predicting that soon we will all be back on track to a life of affluence and credit spending. Well it won’t be.
The economy has too many bubbles from the past to already claim victory and return to the high life. To explain this you will simply have to understand that the US economy in particular is based for 60-70% on consumer spending. And that is a big catch 22 for a true recovery in the next couple of years. Some pockets of industry may show better than expected results on occasion is they were less reliant in the past on credit structures, but to claim that as a sign that the recession is behind us, equals abuse of the ignorant. Far too many people have been hurt by the financial system and the unethical “bait and switch” behavior of financial institutions. There is no confidence among the majority of the people. For the first time in years Americans are not spending every dime they do and don’t have (credit). Americans are keeping money in reserve (they call this saving). Currently about 7% of their income, but expected to grow to about 10-12%. That means that the US economy will be forced to change course and build in some structural long term changes.
On the micro or regional level far too many business owners revert to a ‚Äúsafe mode‚Äù as panic spreads. A natural or “responsible” course of action typically is perceived as doing one (or more) of the following:
* Tightening purse strings
* Laying off key employees
* Putting growth plans on the backburner
Doing anything different may be seen as “risky” and irresponsible.
This misdirected “wisdom” has always proven to be wrong. Cutting out excess fat is OK, it should be done anyway. You should have done that in the good times, but never got around to it as growth opportunities unfolded, but when a recession hits, above reactions are wrong.
An old adage states, “Only dead fish swim with the current,” and that philosophy applies to your growing business as well. I hear people constantly complain about not getting loans from banks to keep their business up and running. Well, I got news for you. Loans are meant to finance expansion, not to finance your operation in the current state. Come with a plan on how you intend to grow market share and develop market territory and new products and services that are in demand and no bank will refuse you.
Following is my take on the three biggest business mistakes made in tough economic times, and the implications of each:
Mistake #1: Shrinking your sales and marketing budget
When there is less money to go around, budgets get cut. But it’s a bad idea to take too many of those dollars away from marketing initiatives. Actually, if you have or can secure the resources, now is the appropriate time to continue (or expand) your marketing. Why? Most of your competitors will cut their budgets, out of a ‚Äúknee-jerk‚Äù reaction to the economic downturn — leaving you a greater window of opportunity to get your message across to your market. Business owners who ‚Äústick it out‚Äù during tough times will likely enjoy increased market share once the economy rebounds.
Mistake #2: Laying off key employees
Another, often more challenging decision, is whether to cut staff. Whatever you do, don‚Äôt lay off your top talent. Great people are your most valuable resource — hold on to them. In fact, if you‚Äôre in a position to hire, now is a great time to hire, because so many other businesses will be shedding their top talent and the ability to negotiate salary structures are available.
Mistake #3: Putting growth plans on the backburner
Possibly the most damaging long-term effect of a troubled economic climate is when a business chooses to put its growth strategy on hold to “weather the storm.” If you cut back on new product development and innovation today, you will have fewer product offerings when the market bounces back.
Warren Buffet’s advice to investors is also great advice for entrepreneurs:
“Be fearful when others are greedy, and be greedy when others are fearful.”
In my opinion there is no better time to grow exponentially than today. But you can’t do that without spending money. Re-evaluate your marketing and advertising budgets, look for a better return, and give new media with a proven track record a nod, especially if the effect of your advertising dollar can be measured. This recession gives the opportunity to get way ahead of your competitors. Don’t waste the time or play dead in the water.
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Great and very true article. Yet an add-on strategy is to not expand more of the same but to look at alternatives to deliver more of the same but through different channels. Channels that are opening-up in massive ways. One of the many examples is to cutting out intermediary and thus cost raising factors, shorter supply lines, lower physical product display and more – extensive – visual display via the means of the internet.
Look for alternatives to have your employees working from home i.s.o. conglomerated into a building that serves no other purpose than flocking together if your type of business allows this way of thinking and acting. Why outsource to India if you can outsource at almost the same expense in the local population and almost pay the same while communication with your customers and potential customers will only improve because your employees understand the business model you have, speak the language and are part of the operation, unlike most outsourced business.
Think different, think outside the box, think outside the commercial real estate, re-write your business plan on how you see this model working for you and you will find willing ears at the banking (lending) institutions. Show that with less overhead you can increase your product development, increase your marketing budget and gain market share.
In order to survive today there must be a new recipe for the future. Business owners today can no longer hold on to the model of yesterday, things are changing and they must make changes too in order to survive. With all the problems I see in the banking industry I can understand that perhaps they see this and are financing compainies with new business plans and models that work. Banks may be more willing to talk about lending if they felt they were looking at a portal into the future rather then a picture book of the past. Business owners must consider reinventing themselves with models that work.
Yes and no. When you're talking about cutting out intermediaries you seem to imply the sales and distribution channels. Yes when it comes to traditional brick and mortar distribution channels that add to the sales price for the consumer. Cut that out wherever you can or at least start looking at opportunities. GM goes on eBay on Tuesday. That is cutting out thousands of dealerships. It's natural progression no matter if it cuts jobs on the short term. Harley Davidson will follow soon believe me.
Now that is a distribution/sales channel development that every business owner should look into and that is sales affiliation. The system is simple: if you know somebody who knows somebody that wants to buy your product, would you give him/her a commission if the sale is arranged through him/her. No paperwork, no invoices, no intermediaries; just a good word from the intermediary.
Well the thing is that even banks have to start thinking and acting out of the box. Their previous business model has proven to be faulty as well.Their most important loan qualification criteria should answer the following questions:
1. who is the person(s) wanting a loan. In today's new economy we see many partnerships with a wide variety of know how and experience.
2. does the business plan reflect a valid, valuable and growing market
3. does their market plan include and master all new technologies and is this properly budgetted
4. is their substantial personal meat invested in the operation.
Agree with your points. Banks are going to have to start thinking down a different road and are going to have start doing what they were invented to do, loan money. It will take some time for businesses to see the new models and many won't make it, there will be many who will become just another stat on the business battle field. Those that change and find a bank wise enough to realize the change will survive.
affiliate system is implied in my first paragraph about finding different channels and cutting out the intermediary. No I wasn't talking only about brick and mortar outlets. I'm talking about the Amazon.com model. Everyone is working from home. All those book reviews etc. upload of data is done from home. People working for companies from home. A huge savings in an internet business model that requires data entry. So not only in Brick and mortar circumstances but also in online business models. The whole banking industry is as ancient as can be. 99% of the banking interaction can be done from home. Why do they all need plush outlets, wannabee “private banking” chique? It adds to the cost. Internet banking is one example but I can think of many more: Insurances, accounting, legal, HMO transcribers, News desks, TV stations, reporting and journalism, realtors, R&D, User manual writers, human resources, cable stations, and I can go on and on. All of them don't need pompous buildings anymore. Oh I forget education (higher education especially). So there is much more than sales and distribution channels that can be turned into “cutting out the middle man”.