Strategies in recessions – What kind of strategies work best?
We’ve been using Simplified Strategic Planning for over 40 years now, and we’ve seen companies fare well through recessions many times. Those that do well use strategies that are just a bit different from most of their competitors. You should consider those differences for your own company.
Industries that are more susceptible to economic downturns have an approach that is baked into their culture.
As a general rule, some industries are more susceptible to economic downturns than others. Companies that have succeeded in those industries usually have an approach that is baked into their culture. For example, many years ago, most successful players in the RV manufacturing industry were located in communities with strong farming cultures. They habitually accommodated farmers who would also work at their plants. This worked well because the farm provided those employees with a backup to the manufacturing jobs they had. Today, however, that particular alternative doesn’t work as well. Now, both farming and manufacturing are more specialized and rely more on specific skills that don’t transfer easily. Still, the idea that the culture of businesses scaling up and scaling down can be useful, even today.
More vulnerable industries require conservative strategies.
Another approach that’s common in businesses with greater volatility is a tendency towards financially conservative management. While more growth is available to highly leveraged companies, a volatile business that is highly leveraged will inevitably go bankrupt. The more volatile the industry is, the more likely the most successful players are going to have extremely conservative balance sheets.
Differences in volume is as important as differences in products or services.
In less volatile industries, you can still suffer if the economy goes south. As a general rule, the greatest issues arise from building too much fixed cost into the business. When sales decline, profits tend to decline much more rapidly if costs are too difficult to scale down. This is true in many industries, and in the most competitive industries, differences in volume are as important as differences in products or services.
For example, a tech manufacturer that makes 1,000 of a product will use largely different processes, equipment and people from one that makes 100,000 of the same product. For the higher volume business, this means that scaling down will bring you into competition with companies that already operate efficiently at the lower levels of sales. Clearly, this can be a serious strategic issue, and it goes without saying that growing your business to that level can leave you with a terrible downside when sales decline.
Fortunately, the strategic choices that lead us into this kind of volume trap are usually specific to targeting commodity customers. Commodity customers are those that prioritize price over any other attribute of the product or service they are purchasing. Targeting such customers – whether in B to C or B to B selling – usually leads to a very cost-sensitive and volume-sensitive position. While these strategies aren’t inherently bad, commodity strategies usually leave a company more susceptible to economic downturns. There is one exception to this, and it involves products or services that can be substituted for more expensive products and services. A good example of this is beer replacing whiskey, which may lead certain producers of beer to do a little better in a recessionary market.
Commodity strategies usually leave a company more susceptible to economic downturns.
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