Thursday, February 21, 2008

The Dynamics of a Recession

The old saying is; “A Recession is when your neighbor is out of work and a Depression is when you are.” Keep in mind that during a recession over 95% of the employable working population is still gainfully employed. They may modify their spending, which has a trickle down affect, but they don’t stop spending. Here is an indicator; the Consumer Electronics Association trade group forecast industry revenue would grow 6.1 percent over 2007 to $171 billion -- despite rising energy costs, a slumping housing market and the subprime lending meltdown. Television displays are to make up the largest portion of projected sales at 16 percent. Shipments of TVs will grow 13 percent to more than $29 billion, the trade group forecast. Does this sound like a serious recession or is the old saying still true?

The International Monetary Fund projected in December that the U.S. economy would grow only 1.9 percent in 2008, its slowest rate in six years. So what’s up with this? The electronic entertainment industry is going to grow three times the U.S. economy and we’re in a recession. Economic downturns are like the weather. Forecasting a 40% chance of rain in your city doesn’t mean you’ll see rain. It follows Heisenberg’s Uncertainty Principle. We can predict with almost 100% certainty that there will be a downturn in the overall economy, but we cannot predict with certainty what the impact will be on any one industry, business or person. It’s just too granular and elastic.

The amazing thing is that each person, business and industry can take steps to mitigate the impact. The larger the group involved the harder it is to coordinate the effort required to be successful at making this adjustment. Individuals can react very quickly to change their habit. Businesses, with strong leadership, need more lead time to turn the ship because of the mass. Industries require way too much inter-competitive cooperation to be successful. Some business will use the downturn in the economy to sabotage competitors within their same industry making it even harder for the industry to adjust. The point is that each has a decision to make concerning the degree and length of the impact of an economic downturn.

So what are you doing? Are you going to be buffeted by the winds of change, or take the helm and use this wind to go faster? Now is the time to rethink strategies. In an economic downturn the focus must be, more than ever before, on hard dollar benefit to the buyer. Can you make money or save money by using my product? Discretionary spending will dramatically decrease, not go away, but decrease. At the individual level people will put money in things that they can get the money back out of if needed. Can I reduce the heating bill; can I increase the value of my home? Businesses will spend money to reduce the overall cost of operations. Can they automate an operation saving the need to hire additional people? A note here, very seldom will a company intentional set out to downsize their workforce. Downsizing, right sizing and outplacement are almost always the result of a lack of cash flow. It’s a by-product of events, not the objective. Your strategy should be to leverage existing people to do more.

If you use a reseller channel, what incentives are you providing your partners to help their customer buy more from them? Most suppliers provide incentives (typically through discounts) to the partner hoping for a trickle down affect to their customers. Be a little more obvious and intentional. An example might be to provide a payment plan for the end-user through the reseller. The interest on the money won’t be more than the original discount and the ultimate buyer see a direct benefit.

Get away from the victim mentality. Take control of your destiny. Put in place intentional strategies to protect yourself over the next few months. The more you can encourage the market to buy your offerings, the shorter the “recession” will be. It’s good for all of us.

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