News headlines reporting on a likely recession have cast a long shadow across the globe, and many economists have been predicting that there will be an economic downturn in 2023.
The technical definition of a recession is less important than how and when it will impact our lives, livelihoods, and businesses. As a business, we want to know how much we should prepare and how.
If we have a robust business growth engine and are profitably gaining share from our competitors, then a recession will likely be less traumatic - missed growth targets. If we are competitive and neck-to-neck with our competition, then a shrinking market will directly hit the bottom line.
However, we are not powerless against the winds of change. There are many things we can do to survive and thrive during a recession, and we can also conservatively prepare ourselves to take the lion’s share of growth in the recovery.
What is a Recession, and How Does One Happen?
Traditionally, a recession is defined as two consecutive quarters of GDP contraction.
In layperson's terms, if your country produces less stuff for six months in a row than last year, then the country is in a recession.
The triggers of the current recession are high inflation and high-interest rates. Still, the mountains of debt borrowed by governments and businesses during the pandemic have made economies more vulnerable to increased borrowing costs.
While many blame the conflict in Ukraine for higher interest rates, rates aren't very high by historical standards. Rates were lowered dramatically in 2020 to cushion economies against the impact of the pandemic, so they were expected to rise after the pandemic anyway.
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Unless there is a crisis of pandemic proportions, rates are unlikely to reach the pandemic lows again in our lifetime.
What tactics can we use to sail upwind effectively?
The 4 Tips to Survive & Thrive During a Recession
1. Take a Defensive Stance
What do we mean by a defensive stance? A recession is not the time to spill money on big bets. Instead, take an Agile approach. If you have an investment idea that could pay off big, bootstrap the initiative (people, process and the minimum tech available) and test your hypothesis. Then slowly build on your successes, investing only where the investment will significantly impact business results.
2. Make Everything You Do Count
Spearhead low-tech / performance improvement initiatives that leverage existing or low-code work management tools to simplify, streamline, automate, auto auto-assist processes. Look for opportunities to eliminate waste, bottlenecks, handoffs and manual re-keying of information.
This is an opportunity to hone your ways of working to ensure everything you do is aligned with your highest priority objectives. In a recession, your people should not spend time on "nice to have" results.
3. Cut Unnecessary Costs
Look across the cost of goods sold, management, administrative expenses, and products and services that are non-core. Analysis should focus on activities that divert resources and attention from your money-makers. Examine all your supplier contracts looking for opportunities to renegotiate or find lower-cost providers.
Take care when negotiating with suppliers. With lower costs, you can expect a negotiation that explicitly or implicitly downgrades the quality of the product/service provided and the supplier's levels of responsiveness. Not all suppliers should be treated equally, and procurement should consult the business before proceeding with any renegotiations.
4. Take Advantage of Opportunities
Watch your customers, competitors and emerging trends closely. When customers experience challenges, you have the opportunity to provide them with support or solutions. When competitors stumble, moving quickly to fill their gap can reap benefits. Finally, developing plans around emerging trends will allow you to execute quickly if one of those trends gains traction.
5. Know Your Team's Strengths and Weaknesses
Whether it is your internal team or it is your team of partners and suppliers. Build an inventory of what they are bringing to the table, their weaknesses, and their vulnerabilities.
Make sure you're getting good value from their contributions, that you have coverage for their weaknesses, and that you have plans in place to address any vulnerabilities.
You'll want to know, in a data-driven way, who your top-performing staff are and who are not meeting expectations. Don't allow relationships and "visibility" to cloud your judgement. In a recession, you might be required to right-size your staff levels, and you need to make sure you're keeping the people who are most productive and have the capacity to develop others. Eventually, the recession will end, you will be growing your team, and you will need role models and coaches to help develop the new joiners.
Of particular importance in a recession is to make sure you don't have too much supplier concentration risk. If you rely on one supplier for mission-critical services or materials and that supplier ends up in financial difficulty, they could pull you down with them. Even a well-funded supplier with a long history can encounter trouble in a recession. Not necessarily because they're unprofitable or poorly run, but because one of their other big customers has become insolvent. If one of their big accounts doesn't pay them, it could spell trouble because borrowing the shortfall will be difficult in the current rate environment, and raising investor capital will be difficult too.
Finally, look to your partners. If your smooth operation relies on your partner's success, then ensure you have the right partners to ride out a recession and look closely at concentration risk.
How to Position Your Business for Post-recession Success
Too often, during a downturn, businesses become reactive and defensive. While cutting costs is important, these businesses are neglecting the chance to use a downturn as a springboard.
A recession is a great time to launch an initiative to become a lean and agile organization.
A McKinsey analysis of 2,000 companies between 2007 and 2017 shows that roughly 10 per cent of companies achieved much higher sales growth and profits than their peers during the recession and recovery. When the economy extended into the growth phase and the competition heated up, they still performed better, but their lead was much smaller.
So the best time to gain market share is in the downturn and the early recovery period.
Conclusion: Here's What You Must Do When an Economic Downturn Occurs
In the simplest terms, you will want to begin with a focus on defence, establish a stable foundation, and then quickly pivot to develop, or acquire, capabilities that will help you spring past competition.
A quick word of caution. Capability building needs to be aligned with your purpose and strategy - not driven by FOMO. Building new capabilities for the sake of having them or because you heard someone else has them often leads to waste. Identify the problems you're trying to solve first and then seek capabilities to address them.
Tactics for building capabilities:
