Business Cycles

By: Ryan Scholz

In the last couple of issues of this newsletter I have been discussing the implications of the current economic downturn on businesses. In November, I talked about the need for companies to rethink strategy in light of changes brought about by the current economic situation. Last month, I shared some thoughts about the positive aspects of going through tough times.

Since I wrote those articles, I’ve come across a book on the subject of business cycles that can also be of great help to business leaders in dealing with these times. The title of the book is Always a Winner written by Peter Navarro. The author reinforces points that I have made in some of my previous writings ( I always like writers who substantiate my own beliefs and biases). He does provide much more detail that I could provide in these brief articles.

Business cycles are inevitable. Some up or down cycles are more dramatic than others, but they will continue to occur. During periods of prolonged prosperity like we had prior to the most recent down turn, executives can become complacent and start to believe that we are immune to the downside of economic cycles. As a result leaders fail to develop strategies for “recession proofing” their businesses. In the book, Navarro gives a three step process for recession proofing any business.

The first step, I alluded to this in my November article, is to develop economic forecasting capability in the company. Every business should know and be able to measure the key leading indicators of demand for their products and services. Broad macroeconomic indicators may or may not be relevant to your business. Demand for some products and service may not be impacted by global economic cycles, while others may be severely impacted. I have a friend who is a president of a company that supplies equipment using in making paper and food products. This business has not been impacted by the current recession. On the other extreme is a client who sells a luxury product to high end customers. Their business has been drastically impacted because the product is a luxury and totally discretionary.

In the book, the author gives some suggestions on key indicators to use for business forecasting. He gives four relatively simple and readily available pieces of information that can be useful in tracking business activity—bond yield curve, stock market trends, corporate earnings trends, and GDP forecasts. I recognize that most companies do not have an economist on staff, but his proposition is that leaders with P&L responsibility need to have some acumen for economic forecasting and business cycle management.

The second step to recession proofing a business is to have business cycle strategies in place that respond to forecasting information the predicts key points in the business cycle. These strategies address these functional activities:

- Production, inventory, and supply chain management
- Human resources management
- Advertising and marketing
- Pricing and credit management
- Capital expenditures
- Acquisitions and divestitures
- Capital financing

There is a always a challenge in balancing the costs of holding inventory with the costs of not having enough inventory on hand. At the beginning of a downturn, the risks of having too much inventory far outweigh the costs of having too little inventory. Adjusting production downward early is key to not getting caught with costly excess inventory. Likewise, building inventory at the beginning of the upward cycle is a way to take market share from competitors who are slower to react to positive changes in the economy.

Managing the talent pool in an organization is a key part of business cycle management. Masters at this avoid excessive hiring in the up cycles that then lead to massive layoffs in the down cycle. The depths of a recession is the best time to add talent to the organization. Well timed hiring improves the overall quality of human resources in the organization.

The author argues that recessions are the best time to increase advertising and marketing. The are two reasons that he advocates this. One is that most competitors will cut advertising. This allows you message to be heard with less clutter. Secondly, advertising rates are cheaper as advertisers try to replace business lost in the downturn. The two factors result in a higher return on advertising expenditures during low points on the business cycle.

Capital expenditures should be cut in anticipation of down turn and increased in the anticipation of a recovery. Note the key word here is anticipation. I worked in the commodity chemicals industry for almost thirty years. The worst capital expenditures for increasing production were made when business was booming, and the best were made when business was terrible. The worst time to acquire a new business is when business is booming. The price is too high. The best time to acquire a new business is when business is bad. The company tends to be undervalued. One of my former employers went bankrupt because the CEO was a master of buying high and selling low.

The third step in building a recession proof business is to create a culture within the organization that understands the nature of business cycles and knows how to adapt well to them. This means having an organization structure that is lean and adaptable. Managers within the company need to adept at anticipating both sides of the business cycle and responding to it. Honest communications to people within the organization about the nature of the business allow them to be better prepared to handle the inevitable down turns that will occur.

Article Source: http://myartsubmit.com

Ryan Scholz works with leaders whose success is dependent on getting commitment and high performance from others. He is author of Turning Potential into Action: Eight Principles for Creating a Highly Engaged Work Place. For more information, visit his web site at www.lead-strat-assoc.com.