Thriving on Recession

By Riaan Steenberg

Can your business survive a recession? It is easy to forget that
recessions have been happening since the beginning of time and that
there are well-proven strategies and tactics to get the most out of
business during these times. The more challenging question is to ask how
we can respond to them in the new world and if there are new strategies
for responding to tough times.

Most people cannot remember the recessions of the 1980’s and cannot
think of a time in which international trade nearly happened at a
snail’s pace. What if the dollar just becomes too strong and your local
currency goes beyond making a lot of what seems like commodities now and
turns them into luxury goods?

We have seen failures and major value adjustments in banking
institutions, slow down of real estate development and a massive turn
towards a buyers market, strong decline in technology sales and further
drops in sales and skyrocketing costs in many industries. Many commodity
stocks are failing and economies are becoming more service based and
less focused on own production. These are lead indicators of a deeper
recession that is about to follow.

A recent report warned that corporate debt is at all time highs which
further indicates that we will not be able to spend ourselves out of a
recession. These continuous market corrects in real estate, banking,
insurance, property, comparative values of cash, bonds and commodities
is a reflection of the movement of cash from one asset class to the next
to exploit ever dwindling returns and to support artificial market
activities to create value.

The rising interest rate cycle together with a more marked approach
to quantitative easing spells out a time that will see some predictable
cycles of change. We will see governments trying to play with fiscal
policy and creation of programmes that are aimed at creating employment,
both of which has proven to have limited success in a recessionary time.
Business credit is likely to dry up or become very expensive when on
offer, increased foreign competition, increased inflation and
unemployment rates, reduced capital formation and a massive pull back of
consumer spending.

Companies can only be tougher and leaner during these times.
Organisations that are able to harness their financial, personnel and
market resources and cut out bureaucratic and unproductive policies can
convert the disadvantage to an advantage.

The primary goal of business during a recession is to optimise its
cash reserves. The amount of cash available for discretionary use must
be increased beyond normal operating levels.

As competition increases and a lack of demand, due to price pressure
drives sales downwards, it means that less cash comes in through the
front door. At the same time prices keep rising and labour and material
costs rise. With rising interest rates there is a bigger requirement to
service debt from a smaller cash pool.

Paradoxically, when you do not have a lot of cash – you need it and
while it is tempting to think you can achieve higher cash levels only
through cost cutting – in reality you have to realise that you will
still require an operation to convert value for customers into cash.
When you do not have cash, would you sell assets, knowing you need those
very assets to generate cash? That is the hard question any business
owner is faced with when the bank is knocking for the loans to be paid
back.

Conventional wisdom holds that there are seven primary ways to
increase cash for a business:

1. Reduce overheads

2. Increase sales

3. Increase prices

4. Sell assets

5. Downsize operations

6. Outsource non core functions at a discount to current operating
   levels

7. Refinance debt

These are tried and tested methods and most managers will be able to
generate a number of savings, sales increase strategies, asset
transformation or push hard for a larger increase to more customers.

What if we look for alternative strategies? Below are more than
twenty approaches to recessions, which will assist you to think
differently around the options for survival and to prosper.

1. Enter the discount and mass based market. What most businesses do
   is to try for higher paying customers. Smart businesses work on offering
   mass based products at lower margins and leveraging the benefit of
   economies of scale. Lots of little bits of money, is still a lot of
   money, especially when no one else is selling. Low cost, no-name, no
   frills, reduction of product lines, value bundles and a million other
   strategies can be employed to address the needs of a more thrifty market
   during a recessionary time. You can even buy high value brands, at a
   discount and bring them to the discount market at lower margins. During
   recessions, brands are of less importance, as they keep on disappearing.
   If you are concerned around brand image – launch a discount brand and
   see which one makes more money.

2. Cherry pick assets that are discounted in a recessionary market
   and purchase at a discount to consolidate market share. You may not even
   have to purchase businesses during recession as the “good will” inherent
   in their valuations will most likely be of little value when the rules
   have changed and often you can just offer the existing employees that
   you wish to acquire, a job and they may migrate with clients without the
   competitor being able to defend themselves.

3. Risk adjusted debt may be cheap to buy and if you have good
   collection methods and a good pricing model for debt, there will be
   plenty of it to collect. Mezzanine financiers also do very well during
   recessions as they pick up large shares in companies for discounted
   asset values. For example, you can buy 30% of a company by financing
   their cash flow requirements for a year, while usually this would have
   been offered as a simple loan at e.g. 10%. When you have cash in a
   recession, you can use it to acquire cheaper assets and do well in doing
   so.

4. Focus on attracting strong foreign investors and exploit local
   cost advantages with foreign enablement through technology and
   knowledge. One example would be retail portfolios in property that can
   offer market entry at relatively low dollar prices in premium locations,
   due to failing local retailers. The failing local retailers can leverage
   footprints and leases to build strong international partnerships while
   looking for partners that have local production capacity to lower costs.
   This opens up an opportunity in industrial property, which can leverage
   government incentives to support local economic development.

5. Look at sunk costs and package these as assets for sale. You may
   have invested in a technology solution and can now offer this as a
   privately branded solution for clients. Remember that in a recession
   your clients can benefit from smaller solutions that serve their needs
   while not having had to undergo the investment. By repackaging your sunk
   costs into saleable assets you are finding revenue where none existed
   before.

6. Determine which functions that are cost centres can be
   transformed into profit centres. Anything that you cannot make profit
   from must be considered as possibly non-essential and you must find ways
   to either do it with staff that are making your money or outsourcing it
   at a significant lower cost.

7. Turn compliance and maintenance requirements into revenue.
   Companies that focus on creating maintenance options and stretching the
   value for existing owners through the application of new maintenance
   strategies and enhancing existing offerings do well during recessions.
   Legislation also takes some time to catch up to the new realities of a
   recession and compliance becomes good business in which you can achieve
   some economies of scale over time.

8. Invest in sin stocks. The basic economic theory is that certain
   goods get bought when times are good or times are bad. Investing in
   human nature may not always be socially responsible but it becomes a way
   to keep the lights on. People keep on smoking, gambling and these
   behaviours increase when people that they feel under pressure. Candy
   sellers, tattoo artists and barbers still do business and sometimes do
   even more business during recessions.

9. When it is too hard to buy and sell, it may be possible to rent
   it out. This is a great opportunity for discount renters of all sorts to
   come to the fore. Your stock of capital goods could be turned into a
   working rental pool. Why not rent out suits to job-seekers, or cars on a
   daily basis at a very low rate? Your boardroom may be a great meeting
   place for others and your office chairs may work for the local church
   (with a drop-off and pick-up charge). The company can rent out the
   company cars to staff. If you can balance the risk with the opportunity,
   there are great renting business models that work well during
   recessionary times and because assets are scarce, it only makes it more
   value for people that do not have it.

10. It may sound bad, but people still die and have funerals, they
    still pay tax, still go to school, still have to live somewhere and they
    still have to eat regularly and health remains a priority for most
    people. It is good in recessionary times to be in businesses that speak
    to basic human needs. If you are in those businesses your task is to
    fulfil those needs and maybe there is a little less focus on outward
    innovation, while there is a lot of focus in the background on offering
    the basics at an affordable price.

11. Diversify with export led growth. During recessions the normal
    dynamics of price remain the same but it may be better for you to move
    to markets that are doing worse than you currently, and leverage the
    fact that you have knowledge and expertise to expand to areas in which
    it is relatively cheap but would have been more crowded or more
    expensive otherwise. The key is still to offer high volume, low margin
    products but you can gain an entry into these markets and possibly even
    move your production capabilities to new locations where they are
    cheaper. Trading knowledge for presence is a time honoured investment
    strategy during recessionary times.

12. Realise that not everyone is poor. There are still products that
    can be targeted at a rich niche – just because most are poor, there are
    still some that are rich. This is just a smaller pool and luxury goods
    have to be of exceptional value.

13. Invest in sales team. The balance between sales teams and
    production teams must shift heavily towards sales during a recessionary
    time. Why? There are less likely customers, it will take longer to
    convince them and production is only relevant if there are sales. Good
    sales teams and good sales team management is absolutely critical during
    a recession. It also still pays to market and you may even get higher
    returns than your competitors that cannot afford to market.

14. Unfix your fixed cost. Fixed costs are what kill a business. By
    making costs variable through contract negotiations with employees,
    vendors and suppliers you can often deliver the same or better coverage
    on a contractual basis rather than on a fixed cost basis. Contracting
    core staff will be a lot cheaper than employing them because you
    eliminate overhead and also consume the service on an as needed basis.
    Even for costs that should remain fixed, larger portions of compensation
    of management and teams should move towards variable compensation based
    on performance. During recessions it is often a good time to build
    employee share option plans where employee compensation is linked to the
    performance of the business and promotes loyalty and a sense of
    ownership. Self insurance is another way to look at fixed cost vs
    variable costs when times are tough.

15. It may pay to pay your customers to stay. If you need to cover
    the fixed cost of an operation and your customer claims that they can
    get something at a better margin it may be possible to offer them deep
    discounts and even produce at zero margin to keep the lights on. Small
    advantages can then be exploited to keep your assets in production and
    to make margin profits, while focusing on finding new clients and new
    product areas. Some money is better than nothing and as long as we keep
    moving forward we will get better returns in the long run than the
    person that refuses business at low or no margins. You may be able to
    work on a margin share agreement with your supplier in which you give
    him stock at no margin and share in the margin when he sells it to the
    end customer.

16. Consider loan financing as a way to build a balance sheet. During
    a recession the one thing that people do not have is money. They may be
    able to use financing to build returns that fund your future pay-backs.
    Although you may not get all your money back, it may be a constructive
    strategy to sell using loans and then to manage the fall-out when
    customers default. As long as you have a good loan book management
    strategy – you may be able to build a strong asset base that benefits
    from a turnaround.

17. Consider compassionate pricing. When there are tough times the
    better question to ask is “how much can you pay” and to shape the
    services that you offer to the needs of the customer. During recessions
    price determination is often hard as more competitors chase after
    smaller pools of money. Rather take the cash and match it with what you
    deliver.

18. Build in-house capabilities for market focused action. You may
    have used external agencies for software, marketing and essential
    services that can be better deployed in-house at a lower cost. Talent is
    also cheaper as companies cut staff during this time – so you may be
    able to bring in real skills and expertise for growth in the short
    term.

19. Consider survival-selling tactics such as teaming up with your
    suppliers to offer larger end-to-end deals that can also be marketed at
    the same time. Why sell only the steak when you can sell the steak and
    the chips? If you and your supplier combine budgets you may be able to
    offer a better product in the market while bringing down costs on both
    sides. Consortium formation can be keep the business within a small
    circle of buyers and sellers and ensure maximal support of each other’s
    businesses and keeping clients “in the family”.

20. Involve staff in the solutions. By pulling in daily short
    meetings that give relevant information on cash flow, business coming
    out and where we are at – you can both inspire people to come up with
    new ideas and remove the negative rumour mill that can easily destroy
    your business. Some people may think this is likely to scare staff more,
    but human nature is to work yourself out of a crisis, especially if you
    feel that you are part of the family. If times are tough, people will
    work to get you out of the tough position according to their abilities.
    By sharing the burden you will create a more focused management culture
    and involvement by people that can affect the outcomes of the process.
    It will also create less stress on the top.

21. Tackle issues early on and make sure you ask for help. If things
    are tough and hard and do not seem to work out – socialise the issues
    with your bank, suppliers, customers, employees and even competitors.
    Look for ways to improve or get out of situations that does not make
    sense. You are going through a tough time and history shows that in
    tough times it works better to collaborate to get ahead. Growing losses
    and debts and stock piles are not going to go away – you need to find
    ways to work on enabling these and turning them into cash. Sell off your
    debt, cut your losses and clear the stock at cost so that you can use
    the cash to trade into a smaller but more effective situation.
    Tactically surviving a recession is about making the most of what you
    have and not to get stuck in losing what you hope to realise in the
    future.

22. Another strategy is to wait it out. Recessions have been
    relatively short in recent years and if you are in an industry that
    performs well during a recovery, it is important to scale back but
    maintain your capabilities so that you can be ready for the upswing. The
    challenge with this strategy that it is never clear when the horizon
    will clear and it is better to act to be more nimble when the markets
    are changing.

Conclusion

Recessions are tough and scary times in which businesses need to
rethink their business models and basic ways of moving from cash to
cash. It does not have to be a time in which we do nothing and in fact
many big companies were started and grew when recessions were strong.
Take the challenge and do not waste a good crisis.

There are many strategies and tactics that can prove useful the
business that is prepared to keep an open mind and seek opportunities to
optimise rather than to cringe and go lie down in a corner, waiting for
it to be boom times.

About the author

Riaan
Steenberg holds an MBA, is a certified Project Management Professional
(PMP) and Six Sigma Master Black Belt. He is currently doing his PhD
research on Innovation and Entrepreneurship. He is an action-learning
expert and facilitates programmes aimed at embedding organisational
change.

He writes extensively and lectures and speaks on request.

Riaan is part of the management team of the institution and as a Director
has played a key role in the school internationalising and become one of
the top business schools in South Africa. Riaan regularly lectures on
innovation management, scenario planning, strategy, critical thinking,
cognitive processes, leadership, financial management and management
accounting, business process re-engineering and any other topics that
require out of the box thinking or a critical understanding of complex
business interactions.

Riaan has been a management consultant that completed more than 300
assignments, and a global manager and executive with more than 20 years
experience in both local and international environments. He is
constantly involved in complex financial modelling, large-scale change
and transformations and delivery of complex projects.