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Firms can manage their way through recessions, expert says

Steven Michael
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L. Brian Stauffer

Business administration professor Steve Michael says that firms can survive a recession if they make that possibility part of their business strategy, just as they plan for growth when the economy is strong.

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10/6/2009 | Jan Dennis, Business & Law Editor | 217-333-0568; jdennis@illinois.edu

CHAMPAIGN, Ill. – Recessions leave a gaping crater in the U.S. business landscape, sinking an average of more than a half-million firms during each of 10 economic slumps between World War II and the early 2000s.

But companies that plan as carefully for bad times as good not only can weather downturns, but also emerge ready to exploit recovery when the economy rebounds, a University of Illinois expert who studied recession-fueled business failures says.

“If there’s a message, it’s that recessions can be managed,” said Steve Michael, a professor of business administration. “Firms can survive if they make the possibility of recession part of their business strategy, just as they plan for growth when the economy is strong.”

Michael and Villanova University management professor John Pearce II developed a four-pronged plan to help businesses navigate recessions in a 2005 study that combined academic theory and successful real-world tactics.

The plan provides a road map that can help steer firms through even the deepest recessions, Michael said, including a still-lingering downturn that sparked a 64 percent jump in business bankruptcies during the first half of 2009.

“When recessions hit and how deep they cut are obviously beyond a firm’s control, but there are things they can do to survive and to prosper when recovery begins,” he said.

Michael says the strategy centers on making firms less prone to recession, developing contingency plans before crisis erupts and monitoring economic trends so those plans can be invoked sooner rather than later.

The components:

Positioning. In booms or busts, firms are best served by cultivating varied product lines, customer groups and geographic markets. During recessions, Michael said, that balance helps prop up cash flow because downturns typically hit some industries and regions harder than others.

For example, he says equipment-maker Deere & Company weathered a 2008 construction slowdown better than rival Caterpillar Inc. because Deere also sells a large line of farm equipment, which held steady amid growing demand for ethanol.

“Maintaining cash flow helps businesses weather any recession, but was especially important during this one because credit markets collapsed,” he said. “So firms with diversified cash flow had the advantage of internal financing when capital markets literally dried up.”

Planning ahead. Recessions often go unnoticed until they’re deep, leading to budget cuts driven by panic rather than reason that can leave businesses at long-term risk. As a result, Michael says firms should carefully map out contingency plans in advance, and then closely watch for sharp sales declines that may foreshadow a recession.

“Our current recession has been dated to the summer of 2007, yet it was not acknowledged as a recession for over a year, which proves that if you aren’t watching you don’t know you’re in trouble until you’re well into trouble,” he said.

Companies can get a jump on recessions by carefully analyzing sales declines to determine whether the cause is specific to their firm or rooted in a broader economic downturn, Michael said.

When contingency plans include layoffs, he says companies should consider cuts carefully, such as retaining managers or foremen at the expense of less-skilled workers who will be abundant in the recession-ballooned job pool once recovery begins.

“You don’t want to lose your institutional knowledge,” Michael said. “When recovery begins, you need someone in those positions and new people have to be trained. You’ll be losing an opportunity because a lot of money is made in the early stages of recovery.”

He says businesses typically devote little time to planning ahead for recessions, even though they have occurred every six to eight years since World War II.

“My sense is that executives on the whole are optimists, and think more about growing their businesses than about bad times,” Michael said. “Plus, you tend to worry about things you can control more than about what you can’t control.”

Promote the business. Firms should maintain spending on marketing and advertising because recession-strapped customers re-evaluate their buying choices during tough times, offering a rare opportunity to build business.

“Recessions are a time to be out there in front of customers, telling them why they should be looking at your firm as their new choice,” Michael said. “It’s wise to maintain marketing spending and if possible amplify it during recessions to attract new business.”

Prepare for recovery. Recessions soften the economy overall, yielding bargains that well-run businesses can use to grow during recovery if they manage their way through the downturn.
Failed or struggling companies are available at cut-rate prices, along with product lines, customer lists, intellectual property and highly skilled workers, Michael said.

“It’s a time to engage in bargain hunting,” he said. “My sense is that a lot of money is made in the early days of recovery, and the most prepared firms are going to get the lion’s share of the benefits.”

Editor's note: To contact Steve Michael, call 217-265-0702; e-mail: smichael@illinois.edu.

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