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November 17, 2008

Five Things That Entrepreneurs Should Do In The Current Economic Climate

Scott Shane

Small Business Trends

Summary

Sorry, entrepreneurs, the economy is not good. You can't do anything about that. But you can do some things to help your business weathe

Sorry, entrepreneurs, the economy is not good.

You can't do anything about that. But you can do some things to help your business weather the storm. Here are five suggestions:

1. Take advantage of decreasing costs. If you run a business, you don't just have customers; you have suppliers too. If demand is decreasing for your product, chances are that your suppliers are facing slackening demand too. So you can take advantage of the current situation to strike better deals with your suppliers.

2. Provide more value to customers. When you start losing customers, the natural response is to cut prices to keep them. Price cuts stimulate demand, but they aren't the best way to deal with declining demand. If you cut prices to try to preserve sales, your competitors are likely to follow your lead, leaving you with lower revenue and a still declining customer base. A better response to wavering demand is to provide extra value to customers. This will help you to maintain your customer base in a way that is harder for your competitors to copy.

3. Recognize that your competition is increasing. In a recession, competition accelerates because more businesses are chasing less total demand. In addition, when unemployment rises, people start businesses because their opportunity cost of doing so goes down, further increasing competition. So now is the time to make sure that you have a sustainable competitive advantage that will let you succeed in your battle against other companies.

4. Find your counter cyclical products. When customers cut back on their spending, they often substitute one product for another. For instance, in a recession, people might still eat out, but cut back the number of steak dinners that they buy. As a result, they increase demand for pasta dishes. To respond, to bad economic times, you need to come up with your counter cyclical products  the ones that people step down to keep buying from you but at a lower cost.

5. Avoid doing things that demand raising money. All categories of financing are down right now; and the cost of the capital for those who can get it has gone up. That means that right now isn't the time to pursue the projects that require raising money. You are going to burn up a lot of time trying to get money that you'll never get or that will come in at too high a price to make your projects viable. Since there's a cost to spending time on things that fail, if you have the choice, focus on other things right now and put off the activities that require raising capital until capital is more freely and cheaply available.

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About the Author: Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of eight books, including Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By; Finding Fertile Ground: Identifying Extraordinary Opportunities for New Ventures; Technology Strategy for Managers and Entrepreneurs; and From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Company.

Scott is a member of the Small Business Trends Expert Network.