Preparing for a Tightening Economy

By Anne Saita, Vistage Corporate Communications Writer

If the year’s business news has you feeling a little queasy, it’s no wonder. One week the outlook is dire; the next, things are on the upswing. But with job rates sputtering and mortgage foreclosures and fuel costs trending up, economists have expressed mounting concerns that the economy has begun a slow, possibly steep contraction.

During the next three months and throughout 2008, Vistage will devote considerable editorial resources to provide its members strategic, tactical and operational guidance on how smaller companies can best prepare for the rollercoaster ride ahead.

Vistage members acknowledge the next six to 12 months will be far from assured, as businesses big and small continually regain their bearings in the wake of yet another financial crisis. The recently released Vistage Q4 2007 CEO Confidence Index survey of 2,233 CEOs hit a low point in its five-year history. But if Vistage members are bearish on the overall economy, they are much more optimistic about their own enterprises. Sixty-six percent anticipated an increase in revenues in the coming year. Still, for Vistage-member companies and for others, credit for capital improvements will be harder to come by. In the year to come, some businesses may be forced to cut back, or even close, if they don't take proper action now.

How Are Things These Days?
Vistage members frequently turn for guidance to the New Hampshire-based Institute for Trend Research (ITR), which has served American businesses since 1948 and includes economists who are popular Vistage speakers.

ITR Economist Alan Beaulieu believes that 2008 won’t be a great year, but not as bad as 2009, when he predicts a bona fide national recession. His prediction is based on continued expansion of some leading indicators that ITR tracks faithfully. There’s still growth, according to ITR, but it’s slowing. That’s why the time is now for executives to prepare for what lies ahead.

According to Beaulieu the housing market will continue its painful plummet. High energy prices and rising interest rates will continue eating away at discretionary income. And in 2009, Congress may undo tax cuts provided under the Bush Administration, essentially amounting to a new tax that would further reduce consumer spending.

“Right now it’s like there’s pressure building in a steam pipe, but the pressure’s not enough to cause a rupture,” Beaulieu says.

What to Do Now, Before the Economy Turns
In a slower economy, companies instinctively pull back, whether through downsizing or holding off on new product launches or planned expansions. After all, one symptom of a down economy is having less business than before. Less business means less revenue. And less revenue typically yields lower profit margins.

Vistage members tend to reduce marketing expenditures as the economy contracts, mainly because they aren’t sure their marketing dollars will work. But Vistage speaker Mitch Gooze, president of Customer Manufacturing Group in Santa Clara, Calif., says the opposite approach might be more appropriate.

“One recommendation I always make to members, and especially if you believe the economy might be slowing down, is figure out as quickly as you can what aspects of your marketing are working,” Gooze says. “Because your competitors are likely to do less marketing, and if you don’t do less and instead do what you know is most effective, you’ll gain on them.”

If Gooze has just one piece of advice for chief executives, it’s focus.

“Most companies are afraid to focus on those few things they do great. One reason is fear they won’t diversify enough to survive a slowdown. But the truth is, the more you focus the more chances you’ll remain successful,” he argues. “If you don’t focus, you end up being a ‘me too’ company across the board, and the only thing you can sell on is price. And when the economy slows down, people push back on price.”

Instead, Gooze suggests, look for what makes your company different and emphasize that uniqueness to find customers willing to pay for differentiation. Take the housing market, which has been in a slump for awhile. There’s less business overall, but there also are still companies doing well because they continue to attract new business, with customers lured by unique value propositions touted within targeted marketing campaigns.

It’s also important, he stresses, to focus more on customers than the competition. Once you find your competitive edge in a market, reach out to the appropriate customer base and then be sure to provide the promised level of service or product.

“In a slowdown, it’s even more important to make sure customers love doing business with you,” Gooze says.

Unless your company already dominates its industry market, there are plenty of opportunities to gain market share in a slower economy. With less business to go around, it becomes a buyer’s market. Customers will scrutinize their current vendors and perhaps give a new company another look. Businesses can find opportunities in untapped or underserved markets when people begin looking to get more value for their money.

While growth is very much possible, some expansions may need to be delayed so companies can hold on to their cash reserves or because they no longer meet more stringent lending requirements. But what if your company is already far along in the lifecycle of a new product or service?

“It depends,” Gooze responds. “If you introduce a product in a slower economy that isn’t right for that customer in that particular economy, your product can appear to be a failure when it really isn’t. You have to look at when to introduce a product or service based on what customers need, want and demand in this economy.”

For instance, an insurance broker might want to introduce a new line of insurance during a downturn. People in general are saving as much as they can, and they’re not likely to splurge on more insurance. More coverage is nice, but it’s not a necessity.

Another thing to consider with product launches is when customers will realize its value. The quicker they see some return on investment, the better; so a new line that takes nine months to a year before value is shown may be a much harder sell in a tighter economy.

“People are more cautious about what they’re willing to try in a slowdown,” Gooze says.

Similarly, pricing should be based on value delivered. Customers typically negotiate prices regardless of economic conditions; however, “in a downturn, sellers get nervous and because they don’t focus or know what makes their value different, they use price to win customers over.”

“Even in a slowdown,” he adds, “there’s a lot more business out there for Vistage members.”

There’s Still Money to Be Made
Beaulieu agrees that there’s money to be made with proper preparation and adjusted expectations. For these strategies to work, he argues, executives need both knowledge and courage. “A lot of people like to be in the macro comfort zone,” he explains.

Changing strategies during a downturn – such as buying up inexpensive real estate when everyone else is still selling -- might seem counterintuitive. But if you’ve handled your cash and debt responsibly and better understand how slower economies can be advantageous, you will emerge a better business leader.

Beaulieu equates recessions to naturally-generated forest fires, which ultimately help keep woodland healthy by clearing dead wood and laying groundwork for future growth. – and are part of a natural cycle.

“A recession cleans out excesses and restores balance and growth,” he says. “There’s plenty of time for Vistage members to prepare and keep from getting burnt, and to remember this will be good in the long run.”