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How
to Manage Your Business in a Recession
There's
no script for running a company in this historic downturn.
So what the heck do you do? Here are ten ways to weather the
storm.
By
Geoff Colvin
February 12, 2009
Exciting as it is to be living through historic
economic drama, you can't just stand by and watch. You have
to act—yet you have no script.
So much of today's
turmoil is unprecedented that we can't find much guidance
by looking to the past. For managers across the global economy,
as well as for Team Obama on its way to Washington, today's
great question is, What do we do now?
Managing in any
recession is difficult; managing through this one is especially
hard because it's different from previous ones in multiple
ways. Most immediately significant, employment is plunging
more steeply than in a long time—by more than two million
jobs last year, more than during the previous two recessions,
and this one is far from over.
 At
the same time, U.S. consumer spending is falling sharply.
In the third quarter it sank at a 3.1% annual rate, the steepest
decline since 1980—meaning that managers who have made
it through the past four recessions have never confronted
anything like it. Best Buy president Brian Dunn said recently,
"In 42 years of retailing, we've never seen such difficult
times for the consumer."
The drop is worrisome because consumer spending is more than
70% of America's economy, and while it may rise quickly or
slowly, it almost always rises. During the whole of the last
recession (2001), consumer spending never declined at all;
its growth only slowed.
Compounding the
problem, consumers are more deeply in debt than ever, an immediate
concern for companies that lend to consumers; American Express
CEO Ken Chenault calls this "one of the most challenging
economic environments we've seen in many decades."
Longer term, consumers'
balance sheets are so ugly that many executives believe this
recession may linger as people slowly rebuild their finances.
Dunkin' Brands chairman Jon Luther says, "This downturn
will not have a typical V-shape, where it bounces right back.
It could be a couple of years before consumer spending goes
up again."
Consumers aren't
the only ones deleveraging. Companies are too, and on a more
massive scale than ever seen before. That means business-to-business
firms are also suffering. Cisco CEO John Chambers predicts
that his company's sales will decline for the first time in
five years.
Deleveraging is
typical in a recession, but because boom-time leverage had
reached unprecedented levels, the reverse process may become
particularly violent. Deere CEO Bob Lane cites current deleveraging
as a main difference between this recession and previous ones:
"The U.S. economy has never been through anything like
this, and we don't know what the effects will be."
Yet another important difference—the credit crunch—affects
even those companies that are reducing debt, but especially
those that aren't. Virtually all firms depend on a constant
flow of credit to carry them smoothly through the ups and
downs of business fluctuations. While it's entirely typical
for lenders to get more cautious in a downturn, the near freezing
of credit is something else again. Even companies able to
pay higher interest rates may find that credit isn't available
from the usual sources at any price.
Making this recession
unique above all is its sheer interconnected complexity. Consider
this sequence: The U.S. housing bubble bursts, pushing U.S.
consumer spending down, leading to less demand for imports
from China, causing slower growth of the Chinese economy,
thus decreasing demand for copper, pushing copper prices down
to their lowest levels in almost three years, causing big
problems for you and your warehouse full of copper. You can
conduct pretty fancy scenario planning and still not be ready
for that—and it's safe to say we've barely begun to
see the rippling effects of a recession in an information-based,
truly international economy.
Don't
wait
Yet that's the
environment in which you must manage. How? Insights and practices
from global executives, consultants, and others suggest several
steps you can take now.
As usual in these
situations, much will depend on how quickly you move. It's
human nature to avoid confronting bad news and to imagine
that today's troubles will pass more quickly and easily than
they really will. Virtually everyone Fortune spoke to recommends
the opposite: Assume conditions will be worse than you actually
expect.
"You identify
areas where you think you can be more efficient by assuming
the worst-case scenario," says Intuit CEO Brad Smith.
"Then you end up saying, Why don't we just do that anyhow?"
Facing the coming reality before your competitors do can make
a big difference in which of you stays healthy or even who
survives.
It must be said
that some of the most effective moves you can make for prospering
through a recession are ones you established a long time ago.
In times like these the strong get stronger and the weak get
eaten. In the tumultuous third quarter, while Washington Mutual
and IndyMac Bank were failing, Bank of America—which
got out of subprime mortgages in 2001—attracted $21
billion of new consumer deposits as consumers ran to safety.
When the Wickes furniture retailing chain filed for bankruptcy
earlier this year, more than 100 truckloads of furniture were
on their way to its stores; a Milwaukee retailer that had
remained financially solid, Steinhafels, bought the contents
of several at bargain prices.
Remember that for
next time. For now, what's done is done. No matter what shape
your business is in, it will benefit from following these
ten recommendations.
It's hard to be
upbeat in a recession, but it truly is an opportunity. Marathoners
and Tour de France racers will tell you that a race's hardest
parts, the uphill stages, are where the lead changes hands.
That's where we are. When this recession ends, when the road
levels off and the world seems full of promise once more,
your position in the competitive pack will depend on how skillfully
you manage right now.
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