Recession opportunities: Finding the upside in a downturn
Economic slowdowns are no reason to celebrate. But since they are unavoidable, entrepreneurs should be prepared to deal with them and make the most out of the situation.
Here are some actions business owners can take to protect themselves, and even to get in front of the competition when a recession is on the horizon.
What is a recession, and how does it affect businesses?
A recession can be defined simply as a generalized and sustained decrease in economic activity.
It can affect businesses in a number of ways. Here are the kinds of impacts that you can typically expect:
- declines in demand, sales and profits
- curbed access to credit
- cash flow issues due to delayed invoice payments
- clients renegotiating terms and conditions
- decline in the quality of suppliers’ products or services
- pressure on prices as competitors attempt to retain market shares
During a recession, some businesses will experience headwinds; others will feel the wind in their sails. The difference may depend on strategies, like the ones below, that they implement before and during the downturn.
Reframe the situation
Organizations need to adapt to the environment they find themselves in, explains Robert Nason, Associate Professor and Director, Innovation & Entrepreneurship, Desautels Faculty of Management at McGill University.
“If that environment changes, such as a developing recession, what was working well may no longer work.” It’s then, he says, that a change in strategy may be in order.
However, change is never welcomed by most: where some will see an opportunity in a shifting environment, a majority will see a threat – especially when the change in question is an economic downturn.
Viewing change through the lens of a threat makes one more rigid, while seeing opportunities within the context of a situation leads to a more generative, beneficial response, explains Nason. “Framing is important.”
Downturns can bring opportunities, but it all depends on the industry and the particular business.
When it comes to the market itself, recessions will shift consumer behaviour by eliminating certain needs and creating new ones. As cash-strapped consumers look for relatively inexpensive alternatives, demand for luxury goods and fine dining will be weakened, with fast food joints, for instance, and other cost-conscious offerings, possibly doing better.
When it comes to your business, however, the opportunities you can reach for will depend on your resources. For this reason, it is important to identify the ones available to you—like expertise and a strong footing in your community—and determine the best way to deploy them.
If you have cash reserves, for example, how will you use them? Will you absorb a possible shock on margins, look for acquisitions and investment opportunities, or innovate?
To help your business monitor the environment, and identify opportunities, he suggests using tools such as a PESTEL analysis, a framework used to assess political, economic, social, technological, environmental and legal factors facing an organization.
“Taking some time to step back and reflect in a strategic way is not always easy,” says Nason. “But it’s the wise thing to do.”
Think ahead—but stay flexible
Failing to plan is planning to fail, so the saying goes. But overplanning has its own pitfalls.
While it is good to be prepared when a recession is on the horizon, a changing environment calls for a more flexible approach.
“We tend to glorify planning, but the research on planning is a mixed bag. It’s easy to get caught up in an escalation of prior commitments, and that will prevent you from adapting to the situation right in front of you,” explains Nason. Overly rigid plans can also channel attention and create a bias, pushing you to ignore signals that you need to change, and instead to see only those that confirm the plan’s validity.
“When the economy is in flux, overplanning can be dangerous.”
Once business owners have identified a set of opportunities, they should take small steps and adopt practices and methods that allow for them to quickly change course.
Nason suggests an iterative approach, using what you learn to help chart your direction. This follows the principles of design thinking and lean startups, which favor experimentation over elaborate planning.
“If the opportunity you identified is a new product, think about your clients’ needs, brainstorm solutions, build prototypes and refine your ideas. Don’t build the product in isolation and then hope that it meets users’ needs when you release it to the market.”
Since failure is part and parcel of innovation, business owners would do well to choose a lower-risk environment for possible failure so that they can build a better product without risking bankruptcy.
Focus first on the short term
Yohaan Thommy, National Leader, Performance Improvement, at MNP, describes the four main impacts that are most likely to accompany a recession:
- Higher cost of capital. Financial market turmoil will often limit lending by financial institutions. Downturns are also often linked to rising inflation, which leads to higher interest rates and higher cost of borrowing.
- Rising costs. In an inflationary environment, businesses will be forced to raise prices, which is then felt throughout the supply chain.
- Changes in spending schedules. Economic uncertainty will mean some companies will hang on to their machines and equipment for a few additional years.
- Lower spending and slower payments. Slower growth in GDP will tend to lower customer and business spending, leaving many companies struggling to pay their bills.
So what should companies be doing to counterbalance those impacts? Thommy suggests you focus on short-term tactics.
“Keep your eyes on your profit margins, because more margin equals more flexibility. If you have only 2% margins, you’ll have a hard time investing and developing products.”
During a recession, an important area to think about is pricing, Thommy suggests re-evaluating your product lines and services to identify those with the highest margins. He says it would benefit you to rationalize the products or services with stunted growth and low margins, especially if they are capital intensive or require a lot of inventory or space to go to market.
Finally, he recommends thinking about ways to improve cash flow. The pandemic, and specifically the supply chain problems it has caused, pushed many businesses to shift from just-in-time to just-in-case. This trend is now slowly reversing, with the caveat that inventories are now more costly to finance.
One way to improve cash flow, explains Thommy, is to improve the cash conversion cycle.
Let’s say you sell two shirts, a blue one and a white one. The blue one is made with dye that is imported and takes 20 days more to make.
“Now you have cash sitting for longer in your supply chain,” says Thommy. To shorten the cash conversion cycle, you might reconsider your procurement strategy. Or increase the blue shirt’s price.
Strategize for the long term
Recessions bring with them a number of opportunities, some challenging to undertake.
One example would be mergers and acquisition. According to Thommy, they represent a huge opportunity, as valuations have come down in most industries.
Productivity improvement is another important long-term goal for companies to keep in mind during a downturn.
Efficiency can be improved in many ways, but Thommy suggests looking into talent upskilling. He says there are many government programs available in Canada to help business owners train their workforce, such as the Canada-Ontario Job Grant (COJG). Companies have been utilizing this grant to improve employee training, which has a direct impact on productivity and organizational effectiveness. You can combat inflationary pressures with productivity improvement.
“You’ll gain a significant advantage if you can improve your productivity relative to your competitors, who may have to raise prices and lose out on market share,” says Thommy. “Especially in the current economy.”
Download the free BDC workforce efficiency benchmarking tool to easily benchmark your revenue and profit per employee against your industry peers.