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Responding Effectively in a Down Economy
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Many businesses focus on identifying growth opportunities and developing strategies to exploit them. This works well in good times, but when the economy turns, businesses can find themselves with seemingly shrinking or non-existent opportunities. Following a period of increased foreign aid and double digit economic growth, the country has seen aid flow decreased, loss of jobs and investor confidence, and a slowing economy. Businesses are now faced with the task of weathering the downturn as the economy transitions from outside support to a more stable base.
This situation can cause confusion in trying to find strategic direction. It can be tempting for management to respond with the option of aggressive cost cutting across the board, often to the point of crippling the company and eliminating any strategic advantages it may have once possessed. Taking a measured approach during these times is crucial. This measured approach should include reevaluation of three key areas of your business: the customer, the product, and distribution.
Your company should have already put together a detailed profile of your customer to support your existing marketing activities. The next step here, when the economy turns, is to analyze how your customer is affected to determine how your customer will respond. This will guide what action the business will take. The first thing to consider is what segments of the economy are affected. Is this isolated or far reaching? Do your customers come from all walks of life, or are they more concentrated? If concentrated, do they actually belong to the segments impacted by the economic downturn? These are the questions you need to begin asking. Once you’ve determined how your customer will be affected, you can then examine their response. Look at purchasing habits and your customers’ reasons for buying before assuming they will become more price sensitive. Luxury goods, for example, may be status symbols that are important to maintain during difficult times. For customers that will have to make cuts in their budget for the category of goods you are selling, examining their product priorities and reasons for buying your product can help you determine whether they will be purchasing less or making a brand switch, and if switching, what products they might switch to. You can then make appropriate adjustments to your product portfolio.
Once you’ve reevaluated your customer, you can begin the process of rationalizing your product portfolio. While you may discover your business may be fortunate enough not to feel the effects of recession, we will not assume that in this case. More likely, overall demand will drop, and your business will need to change and/or reduce the products it sells in order to optimize the product mix. To determine which products to keep and which to drop, you can evaluate your products on two measures: profitability and marketability. Profitability depends not only on margin, but scale. It may be helpful to calculate profitability under various demand scenarios and consider how much risk your business is willing to take on; products with a higher percentage of variable costs can be easier to manage and less risky during a recession. Be careful here not to view costs in isolation; if five products share a bulk of the manufacturing process, you cannot simply eliminate one fifth of the cost by removing one of the products. Rather, you will need to recalculate the profitability of remaining products, and if insufficient, make a decision on all five as a combined group. As you identify your most profitable products, you should also be identifying which products your firm can actually sell in the down economy. This is where your above assessment of the customer comes in. You can combine the anticipated demand for each product with the money you could potentially make from it to form a list of your best products; these are the ones you should keep.
As you’re determining your core product set, your business should take a close look at its distribution- how large of a footprint do you have in the market, and what is its shape? In a down economy, both of these may have to change. Your business should focus on those territories that provide the best chance of success. You will want to be present in the markets where your company has won or could win. If an outlying region has been consistently losing money while you struggle to gain a foothold, now is the time to let it go. At the same time, you should be examining both current and future potential. If that same region will better favor your product now during the economic downturn, it may make sense to remain. Markets should be evaluated not only in terms of how well you are performing against the competition, but also the cost required to serve them. If a market is so difficult to serve or far away that your potential profits are consumed, you will likely be forced to retreat. Though these decisions need to be made in the context of the competitive environment, as well. If your competition faces the same high costs to serve the market, the downturn might cause sales to drop such that they are forced to withdraw as well. In such a scenario, the vacuum created may present an opportunity for you to gain share to a point where the market is once again profitable.
In a downturn, reductions will likely be necessary, but don’t let yourself become blinded to the opportunities like the one above that are provided to you. These opportunities will likely depend on which strategic direction you have chosen to take. If your business is a low cost leader, then an economic downturn presents an opportunity to increase market share as others are forced out. You can force this process yourself by lowering prices to levels unsustainable for the competition, but which you can be profitable at once you capture their business. You should also be on the lookout for opportunities to increase the scale of your operations by acquiring companies that are not doing well. Consumers have been found to naturally shift towards lower cost generic store brands during recession, so working with your distribution channels to create or expand these brands may prove successful. If instead you have pursued a differentiation strategy, realize that while consumers will become more price sensitive, they will also be looking to reduce risk. A well-known brand can provide some of the stability they will be looking for. Focus on your value proposition and communicate how much more customers get for the money. Promotion is important to maintain during a downturn to stay relevant to your customer; too many companies sabotage themselves by slashing marketing budgets during this time. Maintain your presence during the downturn, and you will not only survive the storm, but be in a better position to take advantage once things pick up. If the cost of capital turns cheaper as well, this may be a good time to invest in new longer term projects that will yield products customers will flock to buy once the economy improves. To further demonstrate value, your business can also focus on improving service during the downturn. Instead of eliminating a large portion of your workforce, you can use the excess time to train all of them up to a higher level that will help your business in the long run.
Resist the urge to slash indiscriminately, focus on the areas described above, and keep a lookout for unique opportunities provided to you, and your business will be able to not only survive but thrive in the face of an economic downturn.