A recession can be challenging to predict, but it doesn't have to derail your long-term plans. Discover seven key strategies that can help your business thrive in any economic environment.
It’s true that recessions sink many companies, but they also launch a few top performers. How can you prepare your business to be among that top echelon of companies that uses difficult times as a springboard?
That’s the subject of Donald and Charles Sulls’ long article in the MIT Sloan Management Review drawing on their research. A good place to start getting a handle on their thinking is their useful list of sources of resilience businesses can tap when a recession hits.
1. Aim for a strong balance sheet.
This is perhaps the least surprising suggestion on the list. We all know stockpiled cash and less debt help companies weather economic storms, but the Sulls explain that’s because a strong balance sheet “allows leaders to avoid short-term choices—such as layoffs or cutbacks in R&D or marketing expenditures—that impair their organization’s long-term performance.” Highly leveraged companies lay off more staff and are more likely to raise prices in a recession, losing them talent and customers they need to succeed long term.
2. Secure access to external financing.
The goal here is for companies to be able to “invest for the future while competitors tighten their belts,” the Sulls explain, adding that “for small and midsize companies, a strong relationship with a healthy bank decreases the odds of layoffs during downturns.”
Diversification can look like lack of focus in good times, but its advantages really come to the fore during a recession: “Diversification of business units, regions, customers, technologies, and markets provides a greater variety of options for potential growth. These growth options are more valuable in volatile markets, because turbulence increases the odds that events will unfold in a way that allows some of the options to pay off.”
Or in everyday English: Putting all your eggs in one basket is a particularly bad idea when the ride is likely to be extremely bumpy.
4. Lower fixed costs.
“Low fixed costs enable companies to easily scale back operations in the face of declining demand and to remain profitable, even if prices drop,” explain the Sulls, who mention strategies such as outsourcing activities, hiring freelancers, or moving IT infrastructure to pay-as-you-go platforms.
5. Don’t overlook noncore assets.
Is selling off noncore assets such as brands, patents, and real estate the ideal way to get through a recession? Definitely not. As the Sulls note, “Companies that sell fixed assets recover only about one-third of their book value on average,” but in a tight spot such sales can be the difference between going belly up and survival.
6. Seek out recession-resistant customers.
These are customers who “generate reliable sales through the business cycle,” the Sulls explain, and one place you might want to look for them is industries that have resisted recent downturns such as education, health care, government, and utilities.
7. Consider layoffs.
No one likes layoffs, but as the recent wave of downsizing makes clear, job cuts remain a tried-and-true way to build resilience in the face of an impending recession.
“Layoffs are an unfortunate, but in many cases necessary, step to align costs with revenue during a downturn,” they claim. Just be sure not to cut too deep. “Layoffs in companies running with limited slack cut muscle and bone rather than fat and impair rather than improve performance,” they add.
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