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The COVID-19 pandemic ended an 11-year record run on the US stock market. This, along with the oil price slump fueled by Saudi Arabia and Russia, has all the signs of an impending global recession. Depending on who you believe with your forecasts, most experts predict a global contraction that could last anywhere from 6 months to 2 years.
Small Business Ideas During Recession
The word “recession” strikes fear into the hearts of startups and established companies alike—and for good reason. Long-term studies in dozens of countries show that global recessions lead to a doubling of bankruptcy and unemployment rates, as well as a sharp drop in the unemployment rate. the number of new companies that were formed. On the other hand, new evidence now shows that – in the long run – recessions do not affect the ultimate success of the business. In a study by the Kauffman Foundation, 8,464 American companies were analyzed. against the backdrop of nine recessions and found that their propensity to make initial public offerings was unaffected by economic contractions. In fact, tech and non-tech companies like Apple, Microsoft, Morgan Stanley, Walt Disney and Krispy Kreme can trace their origins to various recessions.
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As part of my consulting practice, I work closely with PE and VC executives, CEOs and boards of directors on a wide range of corporate strategy and organizational change topics. These days, their number one concern is making the right strategic calls now to better navigate the next recession and come out the other end poised for growth. To ensure that there was sufficient scientific rigor in my feedback, I conducted an extensive review of the research literature, analyzed dozens of companies that successfully recovered from the 2008 financial crisis, and interviewed several of them about how they are successfully adapting to these changing times. .
Given the current news cycle, it is easy to imagine that the recession is affecting all companies equally, resulting in similar levels of underperformance. Studies show that this assumption could not be further from the truth. Some companies suffer from declining sales due to the recession, while others experience a sudden increase in sales. In addition, the popular doctrine that small businesses are particularly vulnerable to recession is also open to debate. What small businesses lack in resources and cash, they more than make up for in speed and flexibility. One thing we can be sure of: regardless of size, your company’s ability to adapt quickly is the best defense against a downturn.
So make sure you are fully aware of the forces your business will be exposed to during this time and then choose your battles strategically. You can do this by monitoring the health of your largest customers and their changing needs, exploring the stability and relevance of your existing supplier base, and deepening your understanding of your company’s competitive advantage in this new world order. Work with an independent review board—say, an advisor or mentor—who can review and co-create your new strategy. The last thing you want to do is make big decisions with either a lens of excessive pessimism or optimism without the checks and balances of either.
Recessions are usually triggers for major layoffs and cost-cutting, regardless of sectors and company size. In fact, as of now, the US is headed for historic unemployment levels in the face of the COVID-19 lockdown. Ironically, in HBS’s research on recessions, it becomes abundantly clear that following a single “just cut costs” strategy is a recipe for disaster. This is because such an approach assumes that talent, technology and opportunities will be readily available to the company once the recession has passed. This is usually never the case, and a company that only pursues a cost-cutting strategy will have a hard time regaining its capabilities and capacity when the economy returns to normal. That’s why performance never returns to pre-recession levels.
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It is much better to prepare your organization for a sudden increase in productivity during this downtime. So how do you get started? Start with the customer. Which of your current customer-facing operations can be streamlined or digitized to deliver products and services faster, cheaper and better? Can you streamline underperforming offerings and product lines? Can you invest in technology, equipment or training that will improve performance fairly quickly? Such a strategy will not only reduce your cost structure, but will also help you outpace the competition with better quality products and services. During this process, you will have to let go of some employees you no longer need. However, this number is likely to be less than what you would have lost if you had only cut costs.
Businesses, buildings, equipment, and land—all become cheaper to acquire during a recession. However, just because a property is cheap doesn’t mean you should buy it. For example, retail stores that are losing sales to e-commerce companies should not buy more low-cost locations, even if the prices seem like a steal. Such purchases will become a waste of cash and become a manager’s focus when the economy recovers, creating a drain on your company’s performance. Instead, such marketers could use this time and resources to invest in improving technology and digital talent. In the process, they will accelerate their transition to an e-commerce-centric business model.
As with the above, doubling all R&D and marketing costs before the recession is not a good idea. However, if done selectively, increased spending in these areas is an incredible engine of growth. When it comes to research and development, increase spending on projects that help you double your relevant competitive advantage in the new world order. For example, if you are a furniture manufacturer and your customers have become fashion and price sensitive due to the recession, now would be a good time to invest your research and development budget in researching new types of materials and production equipment that I can help you with cheaper delivery. but fashionably made pieces of furniture. On the other hand, doubling down on research and development on superior materials would not be such a good idea.
The same goes for marketing spend. If it’s not relevant to solving customer problems through the lens of the economic crisis, don’t put marketing dollars behind it. If your spending solves customer problems, double down quickly to increase market share. A good example is Hyundai’s Genesis, which became a runaway success during the financial crisis thanks to a clever marketing campaign and a clear positioning towards “affordable luxury” – something that other carmakers simply did not they could follow at that time. Hyundai won the prestigious North American Car of the Year award in 2009 and won a record market share and increased deliveries in an otherwise shrinking auto market.
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Recessions are a difficult time for most businesses and many companies will go out of business during this time. However, recessions are also an incredible time to initiate change in your organization – for the better. We all have many things to improve or many promising opportunities to explore, but we did not have time to do it before. With the current situation over, we should use this time to take some creative risks and take the long-term performance of our companies to the next level.
Hamza has 15 years of experience in leading technology in Asia and Europe. As co-founder of the technology consultancy, platypodes.io, he advises on strategy, digital transformation and organizational psychology. His real job is being a father to two beautiful girls and two kittens.
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