If economic leaders fail to believe in the recovery of the situation, their fears could become a self-fulfilling prophecy. It helps to be optimistic during a recession when everything else is bleak. Such an attitude is often positively recognized by clients, suppliers, and business partners.
Prepared by: Vanja Figenwald
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In an environment of bankruptcies, insolvencies, falling stock indices, credit crises, and $700 billion, it is difficult to save the financial industry. All of these are disasters, one worse than the other. When and where all this will end and how the global economy will recover is hard to predict. However, when it comes to the steps companies need to take, or not take, things are not so uncertain. In short, expert advice can be reduced to five classic mistakes to avoid in unpredictable times. For each of the steps, there are also concrete tips aimed at better positioning the company in the turbulent year ahead.
Postponing Long-Term Decisions
The first wrong step would be postponing decisions that will improve the long-term health of your company due to fear of short-term market reactions. Of course, investors want good quarterly results, but not at the expense of long-term damage to the company. With every decision you make now, whether it concerns hiring, inventory levels, or borrowing, you must account for questioning and doubts. Obviously, you do not want to burden the company with an unnecessary number of employees or excessive debt, but the worst decision you can make is not to do what you should, due to the current mood of investors.
Do not shy away from decisions that are unpopular with investors and analysts in the short term, but be confident in the value of those decisions in the long term. After all, that is what managers are paid for. Now is, therefore, the time to return to the fundamentals of the economy. Companies that focus on a timeframe longer than the next quarter are the ones that will survive.
Never Lie to Investors
For investors, the key question is – have you lied? As long as investor confidence in corporate reporting and management is not fully restored, a complete recovery will remain out of reach – visible, but distant – says Nancy Kimelman, chief economist at the American asset management firm SEI Investments.
Excessive Caution
The next common mistake is the assumption that the best way to prepare for shocks is one that involves caution and gradualness. Conventional wisdom, which holds that a shallow recession means a shallow recovery, is wrong, say economic experts. At any given moment, there is a fundamental long-term and a fundamental short-term trend in the economy.
– The recession of 2001 was a declining cycle of a high-growth trend – says Brian Wesbury, chief economist at First Trust Advisors. In such circumstances, ‘a cyclical decline is not so bad, while the rise is then a rocket. That is why managers who underestimate the capacity for possible growth make a mistake, and those who take more risks today could benefit from it tomorrow.’
Excessively cautious companies often do not want to expand until they see convincing signs of a turnaround, which can sometimes cause them to lag behind others. Two ways to take the initiative during a recovery are to bring in new employees and attract customers from competitors. After a recession, the thinking of the most successful resembles that of a patient in a hospital who has pulled through: ‘Now that I have survived, I will improve the quality of my life.’ This means you must take care of your best workers, but also keep an eye on what is happening outside. On the other hand, it is necessary to take advantage of any potential weakness of the competition and win over its clients. There is no need to be shy and not launch an offensive at a time when there are some very specific opportunities.
Transition to ‘Resilient’ Business
The third mistake is the excessive desire to secure the company’s position by transitioning to a recession-resistant business. Identifying recession-resistant businesses, those that remain strong even in a weak economy, is everyone’s dream worth pursuing, but it is not always feasible. However, knowing what you are good at and, more importantly, knowing how to expand your core capabilities and make them flexible are tasks that can always be executed. A company that heavily relies on manufacturing should consider entering services that align with existing capacities. For example, a company that produces industrial products can help its clients improve operational efficiency by offering maintenance services, monitoring, or outsourcing all operations, say Adrian J. Slywotzky and Richard Wise, vice presidents at Mercer Management. You can help clients reduce risk by offering insurance or guarantees. Most industries offer a significant number of opportunities and possibilities that extend beyond the product itself and can relate to anticipating the next generation of demands.
The automotive parts manufacturer Johnson Controls seized these opportunities by expanding from ‘producing high-quality products to addressing the needs of large orders from manufacturers,’ the vice presidents point out. Today, Johnson not only earns more revenue per vehicle but also reaps higher margins through the value it offers through specialized design, consumer research, testing, and supply chain management. The achieved shift will not only help compensate for losses in other sectors but can also lead to establishing exclusive relationships with customers, which is certainly profitable in the long term. In this way, the possibility of switching to the competition is reduced, even when they offer lower prices, but without such additional guarantees. Sometimes it is easier to differentiate your company through the service it offers than through the products it manufactures. Another striking example is that of Charlie Tragesser, who transformed Polar Systems from a company focused solely on manufacturing into a service-based company. Founded in 1993, the company generated only five percent of its revenue from services, while today they dominate its business.
