Nature has a place for some of the most destructive forces. Forest fires are a great example. A powerful clearing blaze wipes out so much, but in doing so it cleans up debris. The short term pain creates an ecosystem that benefits those that remain.
Recessions are like forest fires. In the short term they do so much damage, but in the long run they are good for capitalism. Resources are more efficiently allocated, priorities are reexamined, and skills required in the new marketplace are sought. Perhaps most important is the change in leadership that occurs. Confident individuals and intelligent business plans prosper when the economy changes because they were well prepared and saw an opportunity.
James Surowiecki in the New Yorker writes a piece called Hanging Tough. In it he describes the different strategies used by Kellogg and Post during the early 1930s. Post pulled back their spending and starting looking for cost saves. Kellogg on the other hand increased their advertising budget and diversified their reach (using radio ads). Snap, Crackle, Pop was born and lives to this day. More impressively, Kellogg saw their profits rise almost 30%. The Great Depression propelled smart companies like Kellogg.
The first question an entrepreneur or business executive needs to ask themself is whether they believe they are prepared? But being prepared is a relative question. You need to look at the value your good or service provides, the marketplace, and your cash flows and cash reserves. Each will be variable in importance over time as well.
After feeling satisfied with the first question, and really, it only requires you to be satisfied, the second question to ask is what are your competitors doing? If they are retrenching then it is a great chance to reach audiences you haven’t been able to tap into. And a side benefit is the cost to do so should be reduced because demand had dropped remarkably.
There is a human element to this though. You can analyze it all day and see the benefits of moving your resources aggressively, but it takes a confident leader to execute on this plan. The payoff can be big, but the downside is there too. No one wants to get burned.
Working Thoughts 4/14/08