“Man plans; God laughs.” —An old Yiddish saying.
What do you do when the only economic certainty is uncertainty? Many say the Fed’s unrelenting low interest rates, the many regulatory invasions and the government’s stratospheric spending will destroy the country and its businesses. They claim it will cause depressed sales, runaway inflation and a much weaker dollar. That can’t be good for business—can it?
But business people are not economists—thank God. Business people are competitive pragmatists, who must figure out how to “play the game,” under whatever conditions and rules that exist. That’s what I will focus on here. Even though God may laugh at man’s plans—making those plans is both prudent and necessary. The secret is making them with alternatives that allow them to be adapted to changing circumstances. Uncertainty can be your friend; or it can be your enemy. If you are prepared for it, and plan to accommodate it, you can gain a competitive advantage on your competitors.
When inflation looms, planning for it is prudent. When deflation is a possibility, a different set of plans is in order. When the dollar is strong, one strategy is appropriate; when it’s weak a different one is needed. Then there are the capital markets, which have been devastated by the financial crisis. Financing is nearly impossible to get—and costly when it is available. How do you grow a business without working capital? What can you do when capital for new products is scarce? Markets and spending are down double digits; how do you sustain the top line (revenue) when the available business is down so much?
Let’s take five difficult economic issues one at a time and see how businesses might adapt to the “new rules of the game” circa 2009-2010.
1. When inflation looms, planning for it is prudent.
2. When the dollar is strong, one strategy is appropriate; when it’s weak a different one is needed.
3. Financing is nearly impossible to get—and costly when it is available; how do you grow a business without working capital?
4. What can you do when capital for new products is scarce?
5. Markets and spending are down double digits; how do you sustain the top line (revenue) when the available business is down so much?
The first key to dealing with inflation is to follow this rule: “If there is inflation, we choose not to participate.” Resist it. Make sure your suppliers realize that you don’t just accept “inflation” as an excuse for price increases—especially large ones. Next, understand it, in detail. In many cases, inflation is used as justification for price increases larger than the underlying cost components are going up. Take your costs apart, down the individual commodity level.
Evaluate possible material substitutions. Consider sourcing changes to less costly suppliers or lower cost countries. Get that “stiff-arm” ready and use it. Even if inflation is pervasive, resisting it vigorously will usually put you ahead of competitors. If deflation happens, your must reverse these strategies, to get ahead of that insidious condition.
One of the typical causes of inflated costs is the weakening of the US Dollar vs. the currency of a supplier country. When its currency is strong vs. the dollar, each dollar buys less. But don’t accept that as an isolated cost problem, because the supplier’s stronger currency also buys more material from its suppliers. Once again, break information down into the exact transactional details. Get down to where your suppliers buy their material, and for how much. You can also use hedging strategies to protect your purchasing position against currency fluctuations—but these are just “bets,” so understand the upside and downside of hedging. The best strategy is often to simply insist that you buy in the currency of your choice (yours or theirs). Assume nothing. Insist on hard data to support every change in costs. And if currency exchange rates fluctuate, understand that what you give up in one direction, you must get back quickly if it reverses. Accept lag times when they work to your advantage, and not vice versa.
Tight Financing & Scarce Capital
These are two sides of the same coin. The simple, best answer is “use less.” Hoard your cash. Pay slowly and collect fast—whenever you can. Don’t pay down debt unless you must; you may not be able to replace it. Spend your capital very, very carefully. Don’t waste it on “nice but not necessary projects like “dressing up” plants or offices, or new company cars. Stretch the life of equipment and tooling by performing effective and timely maintenance. It is almost always cheaper (in the near term) to fix up old machines, vehicles, etc. than to buy new ones. Wait until financing becomes looser or capital more readily available to buy new. Consider renting or leasing (time frame being the difference) something you don’t need to buy, or is variable in how much of the time you need it. Do without whatever you don’t really, really need. Postpone such expenditures.
Growth in a Down Market
The key here is to identify your winners and losers—both customers and products—and concentrate on the winners, while deemphasizing or dumping the losers. Consider sales and profits both. You only have so much time and money. Spend it where history has shown it gets you the best results. Next, figure out where competition has faltered and rush into the gap with a new program, product, or proposal. In down times, you want to gain market position. It may not lead to increased share right away, but when any upturn comes, that new position will pay off in increased volume and revenue.
Next, plug the leaks. Once of the biggest leaks is “sales deductions. Most companies get “nit-picked to death” in this area, often costing them 6-8% of gross sales. Cutting flagrant and unjust deductions by 1% is the same as getting a 1% increase in sales. Finally, innovate. Seek out unmet needs, pet peeves, and “wishes” of your customers. Enlist the help of all employees to contribute ideas—sometimes the best ones come from totally unexpected places and people. Thing big but try them small, and then adjust. Innovations seldom come out exactly right the first time, but don’t kill a good idea because the first try didn’t quite work out.
There you have it. A few time-proven approaches to adapting to the toughest market conditions in recent history. Will all of them work, right away? Probably not. But many of them will—they have been proven over and over. It takes determination and persistence to prevail in tough times. However, when you win, you usually win big during the upturn, while competitors who have been “singing the blues,” suffer from how “the down market” crippled their sales and profits. Victims choose to be. They are your lawful prey.
Old clichés are often true, as is this one: “When the going gets tough, the tough get going.” What are you waiting for? Get out there and take advantage of these tough times and uncertainty. You can do it—now.
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About the Author: John L. Mariotti is President and CEO of The Enterprise Group — Time-shared Executive Advisors. He is the author of a number of business books on Partnerships, Marketing and Strategy. His latest book, THE COMPLEXITY CRISIS was chosen as one of 2008’s Best Business books. His Web site is Mariotti.net.