Managing businesses during industry and economic downturns

by Hemal Dias

Market Analyst Food Products

Economic downturns in many parts of the world would be the worst nightmare of business managers and this situation is no different in Sri Lanka as well.

In all our business progressions in today’s context, attention to economic elements such as inflation, interest rates and business-cycle evolution lie at the heart of all of us in the businesses either manufacturing, exporting or any other business strategy.

There is an universally accepted truth that, today’s a well thought and successfully executed business strategy can easily become tomorrow’s lethal poison if we fail to understand the changing conditions locally as well as internationally.

This, incidentally is the worry of most businesses today and the majority of us still fail to see through the basic problems involved, like lack of understanding the market changes during the last couple of years or so and looking at the life cycle of the products and services they sell, checking for their suitability with the changing environment, trading practices for generations and resort to short-term profit maximising steps which are mostly operational in nature.

When businesses experience a slower growth, one is a witness to total output, income, employment, and trade exhibiting chronic slow growth for a year or more.

The strongest symptom looked at by businesses is a stagnation or even a decline of turnovers over a series of quarters across diverse sectors.

The existing industry downturn and economic recession can be the worst nightmare, more so in these times of globalisation when markets move together.

Marketing of products and services during the economic slowdown

During an economic downturn, several companies have difficulty identifying future growth opportunities because of uncertainties about business environment, macro-environmental variables and future trends in other businesses, especially those with which they have linkages.

Since the available opportunities and changing factors show extreme volatility, businesses adopt a “wait and watch” policy rather than making any efforts to convert the present situation to an absolute opportunity which no doubt might have long-term implications.

As a result of this, most strategic decisions are put on hold. Consequently, when the situation improves, the company might not quite have the flexibility or agility to make speedy moves.

Strategic planning for downturns

The problems faced by companies during a downturn can be classified as either strategic or operational.

Most decision makers and businesses (entrepreneurs) mistakenly view the downturn as a short-term event and prefer to address operational issues rather than strategic ones. What we might ideally emphasize is that a business can continue to reap profits during slowdowns if its strategy is formulated to account for the possibility of a future downturn.

For example, currently we are facing a severe shortage of coconuts as a raw material for manufacturing in this country and this crisis is not new to our manufacturers as every other five years Sri Lanka goes through this situation but unfortunately how many of our Companies or the governing institutions in the coconut industry have realised the gravity of the current situation and introduced and implemented any strategic directions.

It’s all evident that most of our businesses refuse to see beyond the current task-oriented environment. They should instead stop to evaluate economic elements such as inflation, interest rates and business cycle progressions and formulate a strategy that prepares the business for any tough times ahead.

While the existing strategy may work fine at that point of time, its effectiveness under adverse circumstances should also be examined before deciding on whether to alter it. A prescription for today’s success can easily become tomorrow’s poison if the changing conditions are not considered.

What happens to those businesses that had not earlier formulated a strategy for handling industry or economic downturns and find themselves in the middle of one such disastrous situation? What can the management do knowing that once a major decision is taken, there may not be a second chance?

Move into the new environment

If a firm finds its core products losing their markets during a downturn, then it can try to identify new markets or segments into which it can move.

Since building a business from scratch is a painstaking process, mergers, strategic partnerships with established players is a quicker method of achieving this target. Intelligent managements, in fact, use downturns as opportunities to expand into other sectors where core competencies can be built.

Well focused businesses and their core managerial teams should build the ability to anticipate the beginning of an economic and industry downturn by keeping an eye on the indicators by way of understanding the simple basics such as raw material supply, demand and supply situation in the industry, new opportunities and marketing of their products and services.

National economic indicators are important, but by the time they point to a recession, it has already begun.

The more important signs are found at the business level. Have collections slowed? Are lenders becoming more interested in the firms financial standing? Are customers ordering less than usual?

To be continued