June 26 2009|11.49 AM UTC

Stan Reybern

12 Mistakes Businesses Should Avoid During a Recession

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What characterizes a recession? Panic, desperation, overreacting – in other words, the opposite of clear thinking. This is especially the case in the business world. Unfortunately, many companies fall victim to mistakes that are a result of allowing the market to wholly dictate their business moves. Because often times, what seem like good ideas at the time, simply are not. The following are some of the most common mistakes that businesses make from this paradigm, that actually end up costing them in the long run:

Sacrificing Talent to Save Money

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The first priority of every business is to be profitable. During recessions, it’s not uncommon for profits to dwindle while overhead and associated costs continually are increasing.  As a result, many executives and managers are often tempted to lay off their best-paid talent. While this may solve the immediate problem of the budget, it creates long-term headaches far worse. Without the best talent, a business would likely emerge from the recession weaker and less able to compete than before.

Resisting Entrepreneurial Culture

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Successful business owners know that achieving high productivity is not always about following a rigidly enforced system. Rather, it often emerges from eccentric, “outside the box” approaches in which employees have the freedom to experiment and go with what works best. Unfortunately, recessions often smother this type of entrepreneurial culture. Sensing that tough times are ahead, many executives revert to command-and-control style bureaucracies because it gives them the illusion that they are “in control” of the company’s destiny – an illusion that the spontaneity of the old culture doesn’t offer. But it is precisely that, an illusion. Simply put, no company ever prospered during a recession by becoming more like the DMV.

Becoming Excessively Risk Averse

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Recessions are caused by any number of things, but what usually prolongs them is fear. (Hence the saying “recessions start between people’s ears.”) In addition to throttling the economy as a whole, risk aversion puts companies at a disadvantage, too. Rather than clamming up and adopting a conservative, defensive posture, most businesses would be better off taking Warren Buffet’s advice to, “…be greedy when others are fearful.” By all means, do your homework and calculate your risks. Do this instead of avoiding risk entirely.

Abruptly Halting Development and Expansion

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The following is another idea that seems to make sense: stop new product development and focus squarely on holding on to the turf you already have. However, a deeper look at the situation (and at history) reveals how wrong this may be. The one thing every recession  has had in common is that they all have ended. When they do end, it does a company no favors to re-enter a good market without having progressed beyond where they left off at the time of the depression. Besides, as a Code Synthesis article explains, there are several advantages to expanding and developing new products during recessions:

“Office space becomes cheaper as the demand slows. It is easier to negotiate better deals with suppliers and partners as they become dependent on the revenue your business brings. Tax incentives for R&D, starting new businesses, and hiring people are often introduced during recessions to revive the economy.”

Dramatically Halting Advertising Expenditures

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Direct marketing guru Perry Marshall has an interesting take on the trend of cutting ad spending during recessions. “If advertising is truly the means by which the business acquires new customers”, Marshall says, “…then wouldn’t you do more of it during a recession?” The fact that most businesses don’t, is an indictment of how ineffective most advertising is. Rather than cutting ad spend across the board, try cutting ad spend on flashy, “image” advertising that is not accountable for results. Focus instead on ads that direct people to take specific action and that deliver quantifiable results.

Price Gouging

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Like firing top-paid talent, slashing prices solves an immediate problem, but can impose long-term consequences that are far worse. Sure, if sales are sagging, the quickest way to get a quick boost is lowering prices. But this can also change the way your customers perceive you – you may even be inadvertently conditioning customers  to hold off buying until the next price cut. This can place businesses in a perpetual struggle against itself – as each boost in sales is accompanied by thinner and thinner profit margins. One way businesses can offset the desire to lower prices is by positioning products and services as ones with a solid value and quality – rather than being “budget”.

Changing Suppliers for Negligible Savings

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Every business owner knows that the right suppliers can make or break a company. The role suppliers play in the success of a business transcends the prices they charge, and includes such things as how reliable they are, they support they offer, etc. Unfortunately, this value is somewhat intangible, not easily accounted for on paper. Unless the new supplier is equally reliable and supportive as the old, the true savings could be a lot less than they appear (or even non-existent.)

Retracting Credit Lines or Terms

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It’s perfectly understandable to prefer cash payments, during recessions and good times alike. It’s easier to spend, easier to document, and most importantly, it is timely. That said, a customer who wants to pay with credit is still a customer. Provided they do not already owe delinquent debts and do not have a history of non-payment, turning “perfectly” business away is a huge mistake. The last thing a business ought do is make it difficult for customers to give them money. Deciding to remove or reduce credit, should always be reconsidered.

Believing The Media Too Much

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Who is being hurt the most by the recession? Journalists? Politicians? Is it any surprise, then, that these are the people spreading negativity and pessimism throughout the nation, hitting the airwaves day after day with depressing stories about how bad the entire economy is? Well guess what – the entire economy is not hurting. Some sectors (like Internet commerce and direct marketing) are actually thriving. Ditto for counter-cyclical businesses such as storage companies. These businesses aren’t letting cynical doom-and-gloom stories keep them down, and their examples are also a nod to the entrepreneurial spirit and risk-takers willing to help develop new industries.  While no one should live under a rock, and hide from the media – it should not be the primary, driving force behind a dynamic business plan.

Failing to Adequately Plan

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It’s easy to scoff at planning, and point to all the pie-in-the-sky forecasts that sit on shelves without ever having a true impact on what the company does. However, planning is critical during a recession. Now more than ever, business owners should not be content to sit idly by and let the random gyrations of politics and markets happen against their will. Furthermore, most would agree that a recession would merit multiple plans – say, a best, worst, and likely-case scenario plan – that you can use in whichever case arises. The key is to plan in a rational way, without allowing planning to replace action.

Failing to Adapt

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History is filled with companies and even entire industries that failed to adapt. (The RIAA’s much-belated embrace of digital music sales is a recent example.) And, it’s only human nature to avoid change until it is absolutely necessary. But few things are more dangerous during recessions than clinging to the past. Chances are, the market most company’s routines and practices were forged in is much different than the market we find ourselves in today. The  executive who refuses on principle to make any adjustments is courting disaster.

Ignoring Weaknesses

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A strong economy can disguise a company’s weak spots with the good news and high profits prosperity provides. But when a recession strips these things away, problem areas are exposed – to customers, employees and competitors. Business owners cannot control this, but they can control how to react . The recession can be perceived as an opportunity to address weaknesses that have long gone ignored. Businesses that take advantage of this time, and if they make the right moves, emerge stronger and less vulnerable than before.

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{ 4 comments… read them below or add one }

John June 26, 2009 at 2:42 pm

Good stuff… very informative.

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Moneymonk June 26, 2009 at 4:10 pm

Good article

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Jon Winthorp June 26, 2009 at 9:10 pm

Lot’s of great points here especially about layoffs and resisting the entrepreneurial spirit. Too many large corporations are doing just that. sometimes it’s best to subscribe to the law of contrary opinion.

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Marco June 29, 2009 at 10:40 am

Good article – I especially agree with the closing paragraph. Recessions force upon everyone what Just-in-time inventory management had forced upon manufacturers–exposing the companies’ weak spots that need addressing.
Marc (http://domusinc.blogspot.com)

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