Business Strategy for the Economic Recovery

Advertising and Quantitative Analysis: The Trial and Error Economy Comes to Madison Avenue
By Bill Conerly, Businomics, Conerly Consulting LLC

The economic recovery is coming, but not all businesses will gain from it.  Some executives will step outside to smell the sweet aroma of economic growth, only to find that half their market share has been taken from them.  More successful managers will enjoy earnings growth hugely disproportionate to their industry’s profits.  The difference will be due to tactical steps taken now to accentuate the recovery’s benefits.

On the sales side, companies should first tend to their core markets and customers.  This is not as easy as it sounds, but it offers great potential for gaining market share.

Growing Market Share in the Economic Recovery

Plain old fashioned sales effort dwindles in a recession.  Sales representatives get discouraged.  Oftentimes sales staff have been cut so much that the remaining people become order-takers, answering calls from repeat customers but not cold-calling or contacting past customers.  I believe that the greatest swings in market share happen at economic turning points.  Fire up your sales reps.  Hold a sales contest.  Those luxury Las Vegas rewards trips that corporations have been criticized for having?  They are cheap now, so offer special incentives to your sales people.  Celebrate every last sale—and every unsuccessful sales call.  The business will come, and when it does, it will come to the sales reps who have been making the calls.

Inventories are very light in many industries.  Some of your competitors will not be able to serve their loyal customers—and nothing kills customer loyalty like not being able to serve them.  A few months ago I spoke with a fastener distributor, someone whose business is providing nuts and bolts to manufacturers and contractors.  He was located in a dreadfully overbuilt part of the country, so construction was particularly bad in his market.  Manufacturing was garden-variety bad.  Yet he told me his sales were up.  “How did you manage that?” I asked.  His simple answer: his company maintained their inventory as his competitors cut theirs.  In my book, Businomics, I counsel businesses to not let their inventory get bloated as the economy turns down, and that’s still good advice at the beginning of the recession.  But companies have to maintain enough inventory to serve their customers.  This may be an area of opportunity for you.

If your cash is too thin to keep inventories stocked where you’d like them, consider whether some parts of your business are peripheral to your core market.  For example, an auto parts dealer might make most of his profit selling parts to repair shops, and the rest of his profit comes from selling after-market accessories directly to the public.  The after-market business is secondary to his core market and can be cannibalized (financially speaking) if necessary to keep the repair parts in stock.

After you have made sure that you’re serving your core customers, only then make sure your secondary lines are well-stocked.  At this point, ask yourself if you have the capacity to sell a little bit more.  Don’t be so sure that you can, because you may have laid off some critical people, and your banker may not be keen on providing you with enough credit to carry greater inventories or receivables.  But if you do have the means to boost your sales even more, then look around the periphery of your core market.

Core Markets

A company that has been selling in Texas may want to look into Oklahoma, Arkansas or Louisiana.  A company that has been selling aluminum extrusions could consider copper and brass.  A business that has sold only through manufacturer’s representatives might try selling to wholesalers.  And a company that has served the consumer market may want to branch into small and home-based businesses.  The specifics will vary from company to company, but the truths of the recession—that sales people are discouraged and inventories have been over-cut—apply to these neighboring market segments.

Management that is eyeing an adjacent market will be tempted to wait until the economy fully recovers, the firm has built up its cash reserves, and is generally breathing a little easier.  That, however, is exactly the time when the competitors in those other segments are serving their customers well, able to withstand new competition, and not inclined to cede market share easily.  Now, while the competitors are worried about survival, is the time to strike.

Cutting Costs in the Economic Recovery

Gaining market share is only half of the opportunity in the recovery.  The other is the ability to acquire critical resources at bargain basement prices.  Let’s start with real estate.  If you are renting your space, ask for a rate reduction.  Don’t bother coming up with a reason, just ask—everyone else is.  If your lease has only a year or two before it expires, ask how big a rent concession the landlord will give you to extend your lease now.  It looks much better for him to have long-lasting leases, and you lock in a very favorable rate.  If you’re in a position to buy land or buildings that you may need in the future, do it.  Nobody knows exactly where the real estate market bottom is, but we’re close enough to it that it’s almost a no-brainer to buy if you can.

Thinking about new equipment?  Don’t.  Look for good used equipment.  Check out the auction sites, get to know dealers in used tools, and listen to the gossip at industry meetings.  Two-year old machinery at 35 cents on the dollar beats a 15 percent discount for brand new.  With capacity utilization at very low rates, there should be plenty of stuff available.

Another alternative to grow capacity at a low price is to buy an entire competitor.  That has two benefits: it adds to your capacity while reducing your competition.  If one of your competitors is having trouble with his bank, or has been closed out of trade credit by his suppliers, you may be able to step in and buy the equipment at a steep discount to new pricing, while gaining a book of business at no additional cost.  Before buying new equipment, think carefully about your alternatives.

What about raw materials or other inputs to your business?  Be cautious before you lock yourself into a long-term supply agreement or buy a large volume of material.  Prices certainly have dropped in the last year and a half, by 15 percent for the average industrial commodity (as of September 2009).  However, many prices are still above 2006 levels, so it may not be much of a deal.  Use your cash and willingness to take risk elsewhere.

The recovery brings not only opportunities, but also headaches.  One that will be coming up is vendor performance.  Many suppliers are barely holding on, with a skeleton crew and minimal working capital.  They may not be able to handle a larger order when your sales turn up, which could leave you unable to deliver product to your customers.  Take some time to understand your critical vendors, at a level deeper than chatting with the sales rep.  Ask about their finances and their critical staff.

Human talent is still abundant in most fields other than health care and government, though this will change in a year or so.  Need a new IT guy, bookkeeper or human resources person?  Pick them up now while they are still unemployed.  It will be tempting to hire them real cheap (at least, I would be tempted), but be careful.  When the rest of the economy bounces back, skilled people will be short supply once more.  If you do start your new hires at low salaries, be ready to give them above-average pay raises for the first year or two, to bring them up to market.  That saves you money initially, and nothing promotes loyalty like an unexpected pay raise.

For less skilled workers, look at who you’ll want working for you five years down the road.  You can be picky now, but you may not be able to be too picky then.  Look especially for people who have taken temporary “scut jobs” to tide them over during the recession.  They have the kind of work ethic that will help you when you get busy.

The turnaround in the economy offers the potential for savvy companies to grow market share while lowering costs.  It’s not time for business as usual.