HOW TO “RECESSION-PROOF” YOUR SMALL BUSINESS
June 30th, 2017
It was declared that South Africa is in a technical recession and of late; many small businesses have asked how they should navigate this period of in South Africa and what it means for their business.
DEFINING A TECHNICAL RECESSION
For the lay-man like myself, it is important to understand that a technical recession is an economic term that describes two consecutive quarters of negative growth in an economy. For South African, gross domestic product (GDP) declined 0.7% during the first quarter of 2017 after contracting by 0.3% in the fourth quarter of 2016.
Why this is a big deal in South Africa is because the economic outlook even without the technical recession was bleak. In Q1’17 this slow start for South Africa contracting by 0.7% meant that ratings agencies are losing confidence in South Africa. S&P downgraded SA to junk status and Moodys revised SA down a notch.
HOW ORGANIZATIONS RESPOND TO RECESSIONS
There are a number of knee-jerk reactions to a recession as a direct result of decreasing revenues and profits.
The most relevant to a small business are
- Cutting R&D spending (no new product lines, no incremental innovation expenditure unless it returns direct value to the business.
- People get fired. In a time where underperformance has a double impact on the business, people that aren’t performing are fired.
- Market share shrinks due to reduced R&D spends.
- Processes are evaluated to look for efficiencies.
OUTLOOK & OPPORTUNITY FOR SMALL BUSINESSES
For small businesses, their sales and product planning in a recession is key and must align to the way big business is responding to the recession. Fundraising for capital expenditure is more expensive, but not impossible. It may be valuable to invest ahead of the curve to capture the emergent big businesses during this period and therefore external investment may make sense. In an increasing collaborative economy, small businesses should look to each other for partnerships and complimentary projects that cost little to assemble, but amount the great value for a big business.
SURVIVAL OF THE NIMBLEST
- Cut down. Small businesses have the ability to be nimble and move quickly to change organization structure and deliver on just in time value. This can be hamstrung by unpredictable fluctuating expenses like cell phone contracts that may vary in cost in an unpredictable way from month to month. The fewer of these costs on your books, the better.
- Sell harder – the term “always be closing” is a famous sales mantra and it is so applicable in a recessionary context. Firstly because you don’t know what they don’t know and unless you tell them – who will? Secondly, the feedback loop of understanding the concerns and actions from your customer or client can only be understood through interaction.
- Position smarter – is it clear that you are the best provider for the job that needs to be done? If not, it is important to build a stakeholder strategy that puts your business in front of the key procurement and strategy custodians. This may be a great opportunity to exhibit demo’s case studies and showcase the efficiency that you offer.
- Focus on VALUE! VALUE! VALUE! – It goes without saying that one of the key reasons anyone would consider an alternative supplier is because of the specific problem they solve, so this should be your approach in reinforcing the value you bring to the table. Repetition builds memory structure.
ONE RECESSION DOESN’T FIT ALL
It is important to understand that for smaller business a recession can have an expansionary effect in the same way the lipstick effect applies to luxury goods and services. The lipstick effect is the theory that when facing an economic crisis consumers will be more willing to buy less costly luxury goods. Instead of buying expensive fur coats, for example, people will buy expensive lipstick. A series of psychology experiments have confirmed for the first time that while tougher economic times decrease desire for most items, they also reliably increase women’s yearning for products that boost their attractiveness.
So, for a small business, the formula is simple – don’t panic, analyze your customer value chain and position your solution accordingly and then sell, sell, sell.