Running a business during a recession is hard. Rules that applied before, no longer do. There’s general panic everywhere around. Decisions often have to be made quickly. Yet, making wrong decisions during these hard times can have a significant impact on “if” and “when” the organization recovers. While in no way complete, here’s a list of the top 5 mistakes companies often make during a recession:
Pushing forward without a strategy
“We don’t have time to strategize now. Let’s do it and see.”
Easily the most critical mistake companies do. Ideally, companies should strive to create a recession strategy upfront. People are naturally reluctant to risk and change. If you ask your employees to change drastically, without reason or strategy, it will most probably backfire.
However, if an upfront strategy wasn’t possible, take the time and create a fact-based one now. Put it in place and you communicate it to the team correctly. There’s a much higher probability of their support. Your employees understand that the situation has changed. They need to know how this change affects them, whether that’s for the better or worse.
Cost-cutting across the board
“We’re losing 30% of our revenue. Therefore we are asking all the departments to decrease their budgets by 30% as well.”
Striving for profitability amid declining revenues is the correct approach. However, just cutting expenses across the board may create more long-term costs than benefits. While some essential projects and investments may be lost, other unimportant projects may stay and cause unnecessary expenditures in the future.
Instead, companies should rethink their entire budget allocations, look at every individual product line, project, or department. Some may lose importance, and you will have to cut them dramatically. Others may become crucial for the company. You will have to fund these appropriately. For example, during a recession, you need to adequately support your product department, to develop new products quickly. Otherwise, you are risking becoming irrelevant on the market by losing product-market fit.
Unsystematic lay-offs, letting outstanding talent go
“We’re forced to close our operations in this country and have to let everyone go.”
Similarly to budget-cutting, many companies feel the need to let people go. While anticipated, the costs of unstructured lay-offs can have more substantial negative impacts, when done incorrectly. Important roles may be neglected or filled by less competent employees. Those remaining may be given too many responsibilities, and, as a result, the quality of their work may drain. As an outcome, morale will suffer and may cause vital employees to leave, in search of a stable environment.
Instead, similarly to budgets, managers need to rethink their org structure entirely. Which jobs are no longer necessary? Which ones grew in importance? In this structure, who are the best people for those jobs?
Overly pessimistic (or optimistic) approach
“We don’t worry. This recession will only take two months. Customers are bound to come back quickly.”
“We need to close the shop. This recession is closing our segment. There’s nothing we can do.”
Keeping your emotions in check during this period of uncertainty is hard. Don’t let anything cloud your judgment. A thriving business isn’t for the faint-hearted (or the life-long optimist). Selective vision and uncalculated risks are just as dangerous as not taking any steps at all.
You will never be certain that you’ve made the right choice. Collect all the information you can, analyze it, and make an honest, hard decision about the next steps. What is the approach with the highest probability of success at that moment? Take it, and don’t look back.
On the other hand, only fools don’t learn. If the situation changes, new data comes in, re-analyze, and rethink your decision. In a crisis or recession, this re-analysis/rethink process should be done twice as often!
“Our sales are down. Let’s discount everything to boost revenues.”
In essence, a recession is a ripple effect of declining revenues and margins. Unless you do business in a recession-proof industry (i.e., parts of healthcare), the declining revenues will most probably hit you. However, the real danger lies in letting your margins drop. What’s the point of working like crazy and maintaining massive cashflows, when the result is negative or net-zero?
Instead, you should focus on re-finding the value that your product can bring to a market. That may mean changing the product, applying your existing product to a different need and target group, or both of the above.
In our next article, we’ll look at exactly which industries will most probably be booming during the 2020 COVID-19 crisis and subsequent recession! At Oppido, we believe in strategic and data-driven decisions. We believe that, although it may sometimes be tough, every company can reinvent itself and survive the recession, coming out thriving.