Recession Makes Traditional Strategies Irrelevant

by Rene T. Domingo

Imagine one of these happening to your company:

• your sales rapidly drop by more than 25%

• your top customer shuts down and files for bankruptcy

• more than 50% of your accounts receivable suddenly become past due

• market prices of your products plunge by at least 20%

• your bank does not renew your main credit line

• your main bank is closed down, more than 40% of your company’s cash and investments are trapped inside

• more than 50% of the value of your company’s investments in securities and other instruments vanish overnight

The recession is not a question of if or when, but how it will hurt or destroy your business and industry. Are you ready for the inevitable? Will you take these lying down as they start to wreck your business, or will your management remain in blissful denial stage (“these can’t happen to us because they have not happened before” or “we’re too big to fail” attitude)? I recently asked the marketing head of major firm if she is willing to present to management a forecast of a 25% decrease in sales. She said “never”. I asked why. “I’ll get fired for doing so” was her frank response. It seems that self-preservation and mutual destruction are two sides of the same coin.

Media and politicians are now focusing on how to bail out Wall Street and Main Street or their counterparts in other countries undergoing recession. In the limelight are big financial institutions, select industries with lobby power, and homeowners. What about those in the Side Streets? Nobody is talking about helping legions of similarly threatened and distressed companies and industries around the world – big and small – which are not high-profile and whose demise has no immediate or obvious political and social consequence to those in power. Many are now at a loss on how to swim in uncharted waters. Who will help them? Actually no one but themselves. Right now they are just waiting to be clobbered or hoping the asteroid that hit faraway Wall Street will not affect them. Flying boulders will not, but the dark dust clouds that are spreading rapidly from this impact point will, as they cool and stifle economies world wide, spreading gloom and doom. These businesses, big and small, will never get bailout money and will never be in the news except as part of the statistics of casualties.

Traditional strategic planning models will not be very useful and relevant during a recession, wherein companies fight for survival in two fronts: dwindling demand and sales, and dwindling cash – both thanks to dwindling credit and confidence. Unless strategies are quickly and correctly aligned, both good and great companies can tumble in a meltdown. Conventional competitive strategy and analysis teach how to steal market share from competitors and outflank them with so called differentiating and niche strategies, or leaving them behind to decimate each other, as you swim to your pristine blue ocean. During hard times however, oceans of all colors, red or blue, dry up with the evaporation of spending power. In a recession when the total industry pie is shrinking rapidly, maintaining as well as increasing market share or share of the pie won’t do much to maintain sales at profitable or even break-even levels. Therefore, the only way to maintain profitability and have your heads above water, is not by attempting to increase current sales but by quickly reducing break even point and slashing fixed costs or looking for innovative “crisis products” that can sell during hard times. Exceptions are businesses luckily positioned at the low end of the market, which survive with increased sales as consumers trade down from high-end to low-end products and services (e.g. McDonald’s, Wal-Mart).

Balanced scorecards would be ineffective roadmaps in a recession, if not a luxury. Postpone your balancing act for a while and focus on your weakest link and biggest leaks. Thomas Edison once said “Show me a thoroughly satisfied man and I will show you a failure." In times of crisis, we can restate this profound thought as “Show me a thoroughly balanced company and I will show you a failure (waiting to happen)." Redo your SWOT (strengths, weaknesses, opportunities, and threats) analysis. Recession changes the rules and playing field. Your current major strengths may become irrelevant, while your minor strength may turn out to be your life saver. Some of your lingering weaknesses may be magnified and mortally cripple your company (e.g. over-leveraging, bloated receivables, spiraling health care costs, overstaffing, uncontrolled overtime). Threats you normally take for granted may suddenly become real and wipe out your business, while opportunities may take new forms.

Protect your core business. Don’t starve it by having it subsidize unprofitable non-core businesses. However, if your core business gets a direct hit from the recession, (e.g. discretionary, high ticket merchandise), quickly find and nurture a sustainable non-core business into your next core business or cash generator. Meanwhile, until your primary market recovers, creatively develop crisis-products you can sell during the recession to offset the lower demand for your core products. For example, come out with low-end, affordable products and services if your current products and services are pricey and discretionary in nature. Develop and sell a new service that will support or complement the products your customers now have and can’t afford to buy more of.

Conserve cash. Cash is king in good and bad times. Maximize use of resources. Try to get as much as you can from your idle resources without spending anything. Shut down subsidized businesses that burn cash. Let go of so called “strategic businesses” that have yet to show results, and pull the plug off “incubating businesses” that burn cash. Drop cash draining loss leaders, missionary routes, and pure cost centers.

Take good care of good clients, and let go of all the bad ones. In a crunch, customers, stakeholders who are normally helpful allies and partners, become threats the moment they develop their own liquidity problems. To save themselves, they may not pay you on time or at all and may keep your money indefinitely – some hoping you fold up before they do. A report most companies do not have in spite of overstaffed IT and accounting departments, comes in handy. It’s called client or account profitability analysis report which tells us, as the names implies, how much total profit each client brings to the company every year after buying its goods and services. In a growing economy and times of prosperity, this report is deemed by many as irrelevant and a luxury (costly and complex) to prepare. What only matters is that all customers together, regardless of individual contribution, deliver the fat bottom line or net profit after tax which make top management glow and gloat, and shareholders contended with uninterrupted dividends. In a downturn however, this blindness will only serve to delay the quick weeding out of losing accounts to make a turnaround or rescue plan succeed. Unprofitable accounts may steal your profits, cash (by not paying on time), and capital (by not paying at all). Try to keep and get clients from industries that are recession-proof or recession-resistant. Past due account receivables in an economic downturn may be an industry problem, and not client specific. An industry sector badly hit by the recession may cause severe liquidity problems in all its players – regardless of their track record of prompt payments.

Rene T. Domingo is a professor and management consultant. Please send comments to



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