“Leaders are made, they are not born. They are made by hard effort, which is the price which all of us must pay to achieve any goal that is worthwhile.” - Vince Lombardi
Recessions affect businesses in several ways, influencing various aspects of their operations, financial health, and strategic planning.
Declines in consumer confidence can lead to decreased demand for products and services, impacting sales and profitability. Additionally, recessions can prompt shifts in consumer behavior, with preferences shifting toward lower-cost alternatives.
Companies may face challenges in obtaining financing or credit, hindering their ability to invest in growth initiatives or cover operational costs. Tightening credit markets can exacerbate liquidity concerns, especially for smaller businesses.
Employee layoffs and wage freezes may seem like necessary measures as companies strive to cut costs, impacting workforce morale and productivity. Amidst these challenges, companies that navigate recessions successfully often prioritize strategic cost management, diversification, and innovative approaches to adapt to changing market dynamics. It becomes crucial for companies to maintain financial resilience, foster adaptability, and strategically position themselves to endure the economic challenges that recessions bring.
Are We in a Recession?
While the U.S. economy did experience some tumultuous events last year, such as the failure of three U.S. banks, according to a traditional definition, the U.S. is not currently in a recession*, but there is now an 85% chance of a recession happening in 2024, according to economist David Rosenberg. This prediction comes despite the fact that the economy is actually in pretty solid shape, with inflation heading closer to the Federal Reserve's target. However, there is a risk of a recession caused by the Fed’s choice to keep interest rates high for now.
*What is the Definition of a Recession?
According to the traditional definition, a recession is when we have two consecutive quarters of a generally slowing economy. In the first six months of 2002, there was a shallow economic decline when the economy shrank 1.6% in the first quarter and then 0.6% in the second quarter due to lower inventory spending, housing investments, and government spending at both the state and federal levels. Since then, the economy has been growing. The Bureau of Economic Analysis estimates that as of the fourth quarter of 2023, the economy grew at an annual rate of 3.3%.
Companies Cut Spending in Anticipation of a Recession that Never Happened
In 2023, we saw companies hunkering down and holding back on spending, acting on fear of a looming recession. The focus has been on reducing costs instead of investing in research, improved leadership, and marketing, hampering these companies’ ability to grow and market to consumers who didn’t get the memo that they were supposed to cut back on consumables. Old, established brands benefited, while newer companies saw their market share shrink. Opportunities to attract and retain top talent were lost as negative company cultures were allowed to take hold.
In fairness, pulling back on spending wasn’t entirely irrational. A Reuters poll of economists in October 2022 found that 65% thought a recession would occur within the following year. Then, in December 2022, a Harvard CAPS/Harris poll revealed that 80% of Americans believed the country was either already in a recession or would be in the following year. This doom and gloom attitude is hardly surprising considering how the media and politicians have been beating the recession drumbeat for ratings and political points.
As we know now, the recession never came. Instead, we had a year of steady growth driven primarily by consumer spending. Consumers still have plenty of disposable income, and the percentage of Americans who think the country will avoid a recession has almost doubled in the past 12 months.
The lesson for 2024 is to resist cutting back on marketing and other investments, such as developing their people and teams that can help drive growth. As of their latest meeting in January, the Fed is holding rates steady but has signaled that they are open to lowering interest rates as the year progresses, which will spur growth.
Leading During a Recession
Leading a company during a recession requires strategic thinking, adaptability, and effective decision-making to navigate challenging economic conditions. Here are key strategies to lead a company effectively during a recession:
1. Financial Planning and Monitoring
Conduct a thorough financial analysis to understand the company's financial health. Create realistic budgets, monitor cash flow, and identify areas that could be cut without compromising essential operations, stifling growth opportunities, and crushing morale.
2. Scenario Planning
Develop various scenarios that anticipate different economic conditions. This allows the company to be prepared for a range of outcomes and facilitates quicker decision-making as the situation evolves.
3. Cost Management
Implement cost-cutting measures judiciously. Evaluate non-essential expenses, renegotiate contracts, and identify areas where efficiency can be improved without sacrificing quality or customer satisfaction. Beware of cutting essential investments such as leadership training. A tough economy requires even better leadership!
4. Diversify Revenue Streams
Explore new markets, products, or services to diversify revenue streams. This can help the company become less reliant on a single market or industry that may be particularly vulnerable during a recession.
5. Customer Focus
Maintain a strong focus on customer satisfaction and retention. Understand customer needs and adjust products or services accordingly. Building strong customer relationships can provide stability during economic downturns. But remember: happy employees treat your customers better. They are a big part of the customer satisfaction equation.
6. Employee Engagement
Communicate transparently with employees about the company's situation and plans. Engage employees in finding solutions, encourage their input, and provide support to maintain morale during uncertain times. Show them that they are more than a number through your actions.
7. Talent Retention
While cost-cutting is necessary, strive to retain key talent. Employees are crucial assets, and losing skilled professionals can have long-term consequences. Instead, consider alternative arrangements like reduced hours or temporary furloughs to avoid layoffs. If employees need to be laid off, furloughed, or have their hours reduced, show them respect by having their direct manager tell them face-to-face.
8. Strategic Investments
Identify strategic investments that can position the company for long-term success. This may include upgrading technology, investing in employee training, or acquiring complementary businesses at lower costs.
9. Foster Team Alignment
During downturns, companies need to improve efficiency to survive. High-performing teams give businesses a competitive advantage by working together more effectively to achieve organizational goals.
Ask us about our Team Alignment services to align teams to your organizational vision—and to each other.
10. Adaptability and Innovation
Foster a culture of adaptability and innovation within the organization. Encourage employees to propose and implement new ideas that can help the company stay agile and responsive to changing market conditions.
11. Marketing and Branding
Maintain a visible and positive presence in the market through strategic marketing and branding efforts. Emphasize the company's strengths and value proposition to differentiate it from competitors.
12. Leverage Government Assistance
Explore available government assistance programs, grants, or stimulus packages that can provide financial support or incentives during challenging economic times.
13. Communication Strategy
Implement a clear and consistent communication strategy. Keep all stakeholders - including employees, suppliers, customers, and financial partners - informed about the company's situation, plans, and any changes to operations. Transparency builds trust and confidence.
Leading a company through a recession is a complex task that requires a combination of financial acumen, strategic planning, and effective leadership. Flexibility, resilience, and a focus on long-term sustainability are fundamental principles for success during challenging economic periods.
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Warmly,
Lori & James
Lori Heffelfinger & James Jackman
Sources:
Mark Penn. Companies Cut Marketing as If a Recession Was Coming. It Didn’t. 11/27/2023. https://www.barrons.com/articles/companies-marketing-recession-consumer-spending-86e3d8e6. Accessed 2/11/2024.
Lauren Schwahn and Hal M. Bundrick, CFP®. Are We in a Recession?. 1/31/2024. https://www.nerdwallet.com/article/finance/are-we-in-a-recession. Accessed 2/11/2024.
Elisabeth Buchwald, CNN. The worst of inflation could be behind us. A recession may not be. 12/30/2023. 12/30/2023. https://www.cnn.com/2023/12/30/business/recession-chances-2024/index.html. Accessed 2/11/2024.
