How to Survive a Recessionary Economy – Change Your Strategy in Business

The business environment you operate in has a significant impact on your strategy in business. This is true whether your business is operating during a weak, strong, or recessionary economy.

However, it is even more important to understand your business environment during a recession; which is a time when buyer power is stronger than ever, and business survival strategies need to be quickly developed and launched. Your business needs to change to survive; it can even thrive and grow during a recession providing your efforts are focused on recession marketing strategy planning.

A strategic business plan is typically written for a 5 year period, with annual updates and adaptations. Most small business owners did not foresee the current global economic conditions (actually most large and mid-size business owners did not seeing these conditions coming); therefore, the strategic business plans that were written in a different economic climate are not useful in today’s recessionary economy.

To survive a recession, re-visit your small business plan:

  • Is your vision statement still relevant? Do you need to revise it for the future you see ahead (although remember that a vision statement is typically a view of the future you would want for your business in the years ahead – it might not change that much).
  • Re-define your priorities and re-develop your action plan. If you have available cash, this might be the time to buy new equipment that has been on your capital expenditures plan for two or three years in the future. It is likely that you will get a very good price on that equipment; you’re in a good negotiating position right now. If cash flow is a serious issue for your business; what can you do to conserve cash? Does it mean canceling plans to add a new location or launch a new product? Does it mean laying-off staff if you think the business is going to shrink substantially (and if there’s nothing you can do to turn it around)? Or consider whether now is the time to look for a partner, or merge with another business, or acquire a competitor?
  • Review your line of products or services. Are some of them unprofitable? Some products or services can be used as a loss leader; bringing in other, more profitable business. That can be an acceptable investment if the profitable business covers the cost of the losses, and more. Can the products or services be re-developed to become income earners or is it time to ‘retire’ the product or service.
  • Review your business strategy: Are you a market leader, a follower or a market challenger? A market leader may be able to manage a recessionary environment if its cost structure is highly competitive and if the leader is the best-price option. A market follower might be able to ‘cherry pick’ the best orders by focusing on business that is most closely aligned to the follower’s strengths and uniqueness. A market challenger will likely find a recessionary environment the most difficult; it is expensive to challenge for better market position.
  • Reconsider your market strategy: This is the time to do a strengths, weaknesses, opportunities and threats (SWOT) analysis on your business. What impact will a recessionary economy have on your SWOT analysis? Can you capitalize on fragile competitors? That’s an opportunity. What impact will swings in interest rates and/or dollar exchange rates have on your business? If it’s a negative impact, that’s a threat. Is your management structure strong? Do you have effective leaders in your organization? If yes, that is a strength; if no, that is a weakness.
  • Develop new marketing strategies; considering the four elements of marketing mix: product, price, promotion and place or distribution.
  • Make sure that you develop a daily ‘hot list’ of business performance measures (also known as key performance indicators or KPIs) because in today’s economy you need to know, more than ever, how your business is doing, and the only way to know, is to measure. Customize what you need to know for your business; this might include daily job estimates, daily orders or sales, receivables, inventory reports, supply purchases, number of calls incoming, gross profit margin by customer, and more.

There are marketing and sales upsides to a recessionary economy if you re-develop your strategy in business. To survive the downturns, you need to focus your efforts on adapting and moving forward, quickly.

Are Commodities The Next Investment Bubble?

I have heard it said that in a bubble, the price of the hot item affects the economy more than the economy affects the price of the hot item. While this was true during the past two bubbles (internet/technology stocks of the late 1990′s and early 2000 and housing) does this hold up with the current sector shift into commodities? Could we be witnessing the formation of the next bubble?

Before we get ahead of ourselves, it is a good idea to determine what classifies a “bubble.” A bubble can be loosely defined as when excess resources, capital and financing are being poured into a specific hot investment as compared to other capital investments. There are differing types of bubbles, but James Montier did a good job of categorizing them:

  1. Greater fool theory – higher prices are willing to be paid as long as there is someone else to buy it from them – speculative
  2. Fundamental analysis – investors err by extrapolating that past returns will continue indefinitely into the future
  3. Fads – investors succumb to pressure to conform to the majority’s view (social and psychological factors)
  4. Informational – prices deviate from the fundamentals because investors assume they have hidden information that supports higher prices

Additionally, if you take a look at both of the most recent bubbles mentioned above, you can see a consistent pattern emerging from their formation to the eventual bursting:

- Bubbles usually start because of rotational investment shifts; investors seeking “the next big thing” move money into these investments in an attempt to improve returns

- Hype and over-promotion become rampant

- The word “new” is usually always bandied about by the pundits and used by investors to rationalize why this time is different than the past

- Institutional investors are usually leading the charge into the hot investment

- Individual investor follows the institutional money

- The non-investor feels they are being left out and follows the herd, believing they must not miss out

- Speculation follows – leverage and margin are used in excess

- Bubbles seem to be always tied to loose credit policies or easy money

- Bubbles tend to initially fund unsound business, and promote over-investment

- Bubbles invariably start slowly and gradually build over a period of years

- At the peak of a bubble misrepresentation and fraud flourish

- After the peak, prices fall precipitously and then partly recover

- After the recovery there is usually another protracted period when prices stay stagnant or drift lower

- Bubbles are often followed by economic recessions

The inevitable bursting of a bubble can be very painful and has the tendency to redistribute wealth, as the early adopters who cash out take the money from the late arrivers. Sadly, the late investors then usually get saddled with an investment rapidly declining in value that frequently becomes illiquid, and as such they lose out even more. However, even with the associated pain bubbles are good for a free economy. Daniel Gross points out in his book, “Pop,” that bubbles leave behind a new commercial and consumer infrastructure. “The stuff built during infrastructure bubbles – housing and telegraph wire, fiber-optic cable and railroads – don’t get ploughed under when its owners go bankrupt,” he reasons. “It gets reused – and quickly – by entrepreneurs with new business plans, lower cost bases, and better capital structures.

So where does this leave us with our original questions?

As an investment advisor I am in a unique position to be able to see the trends of a bubble develop. I see when institutional money begins its shift into other markets. I see the promotional machine begin and when it ramps up to a furious pace in an attempt to lure investors’ money. I see when clients begin to take abnormal interest in their portfolios and start calling to make sure they have some exposure to the current “hot” investment. Finally, my clients let me know it’s time to take some profits off the table because the phone rings continuously requesting a change in their portfolio to heavily skew it away from a successful, less risk, diversified strategy to one of putting the majority of their eggs in one basket. While the timing may not be spot on, every time we have had bubbles my clients turn out to follow that consistent pattern mentioned above, which is a great forecaster of things to come. So when clients started calling and asking about their exposure to commodities, it raised a red flag for me.

Without question, commodities could be the next technology or housing bubble. Many of the patterns seen in past bubbles are present today. Based upon my clients’ activity level I would put us mid-stream into the bubble. From a fundamental standpoint as well it seems only mid-stream because some of the imbalance in commodity prices is due to the current imbalance in supply and demand and is therefore justified. Upward price adjustments can also partially be contributed to the weakening US dollar (e.g. oil’s mercurial rise – the largest component of a commodity index – which is pegged to the US dollar). With the dollar continuing to fall, some of the price increase is exacerbated. The rest is due to world economic expansion and, my cause for concern, speculation. Because the majority of the rise is not speculative, at this time it is a little different than previous bubbles and therefore makes it harder to gauge. Of course, the greater the speculation, the closer we approach a true bubble.

When it comes to bubbles recognition is only half the challenge. The other half is what to do and when to do it with regards to your investments. It is recommended that investors manage their risk exposure by never investing more than 5-10% of their assets into any one sector. This approach always limits potential losses so if a bubble does occur, while you may have some minor pain (a 10% loss) you have not been wiped out. Another prudent practice is to regularly review your asset allocation and rebalance your portfolio to insure that any investments that have become out-of-balance are readjusted (i.e. partially sold off) to within the risk tolerance you have set for your portfolio. The advantage of this is that during bubbles, those investments will rise, and regular rebalancing will bring this investment back to an acceptable risk level, thereby reducing exposure and locking in some profits. While this may not maximize gains it unmistakably minimizes losses, which are a major concern if the potential for a bubble exists.

As the hype surrounding commodities continues to build, the chances are increasing that we are moving closer to a true bubble, which is terrible news considering we have yet to recover from the previous one. The effects of another bubble so soon after the last could be devastating to the US economy. However, the good news is that it’s not too late to turn it around. Even with the excess capital flow into commodities continuing unabated, I feel we are still months, if not a few years, away from this situation turning into a full-fledged bubble. This gives the forces that could slow it down or reverse the trend a chance to take hold. In the meantime, be aware that the signs are there, because you don’t want to end up as one of the late arriver’s.

How to Write a Perfect Business Plan

The importance of having a business plan cannot be underestimated. Very few businesses survive without a business plan.

These questions might help you get started writing:

1. What is it that your business provides and what needs does it fill in the market?
2. Who are your potential customers and why will they purchase from you instead?
3. How do you plan to reach your potential customers?
4. Do you have the financial resources to put up your business? If not, where do you plan to get it?

As soon as you have a workable idea for a business, immediately begin to put together your business plan. You should do an extensive market research for your product or service. It is very important that you are able to determine a) how soon your product will pay for itself and b) what your prospective clients really need.

The market’s dominant rule for a business to be successful is that the product or service it sells must be driven by market demand.

In developing and formulating a plan, you have to anticipate and project the different ways your company will make money. An objective examination and assessment of your product or service marketability is an absolute requirement. The planning stage is the best time to determine flaws and shortcomings of your business scheme rather than during the operational stage, by then it is already too late. Correcting the flaws of your business while at the planning stage saves you money in the end.

Defining Your Business Plan
Essentially this contain a description of your business, an executive summary, the primary target market, the opportunity, the management team, financial projections, and so on.

It should be easy to read, clear, concise and to the point. It should also contain the specific milestones for progress so that the success of the company is measurable against well-defined objectives. Prospective investors use the business plan as a tool to gauge management’s ability to actually implement the plan.

Future direction of your business. If you clearly identify where your business will be five years from now, you can effectively formulate a plan that to support your business goal. Your expertise, needs, knowledge, leadership abilities, resources, level of risk, and the nature of your business are necessary and important factors you must consider when identifying your personal business goals. Clearly state your business goal in your plan.

The goal. Will the business plan be used to secure funding or as a guide to operating the business or both? If you are trying to secure funding, concentrate on the financial requirements of the business: state the amount of money required, how it will be spent; be sure to include a repayment schedule as well. If the plan is going to be an internal, functional guide, include the how-to’s of accomplishing specific goals and milestones with emphasis on the business process. The goals of a functional plan are to measure operational progress, analysis of planning projections, predict capital requirements, evaluate addition or elimination of products or services, and assess operational procedures.

Home-based businesses are gaining acceptance as a viable business opportunity and not as a simple hobby anymore. This means even a home-based business needs a plan to guide its growth and future development. Depending on your business, you may put greater emphasis on particular areas of your plan like meetings with clients (service provider), logistics plans and techniques (goods provider).

Writing the Plan
There is no standard formula for the structure of a plan; however, it is generally divided into four sections: Description of the Business; Marketing; Finance; and Management.

A business plan also includes an executive summary, financial projections and other supporting documents but these are considered as attachments.

Including as much information as you can by describing each aspect of your business in detail makes it easier for you to run the business, and for prospective partners and investors to understand the viability of venture.