Strategies For Recession-Proofing Your Business

Some sectors, such as healthcare, are innately resistant to recessions. You may take a number of steps to strengthen your company's resilience to economic shocks if you work in more cyclical industries, though.

What distinguishes a recession-proof industry is not what it sells, as was covered in The 6 Most Recession-Proof Industries. The fundamental characteristic of recession-proof industries is that they make use of some aspect of a consumer's innate behavior demand, such as quality or necessity. As a result, there are actions that any organization may take to develop recession-proof traits in the real product or service it offers.

Recessions Build Off Narratives

Recessions are characterized as times of profound economic contraction when GDP declines and corporate activity plummets quickly. Technically, a recession in some economies begins when the GDP declines for two consecutive quarters. A panel at the National Bureau for Economic Research in the US declares a recession more arbitrary.

As is evident, the US has gone through several recessions of varied lengths and intensity. The US GDP was reduced by 26.7 percent during the Great Depression, which lasted from 1929 to 1933, but only by 0.3 percent during the eight-month Dotcom bubble recession.

A recession event is particularly concerning for businesses because of the impact it has on ongoing operations:

• Revenue: Sales decline when attitudes shift to "risk-off," and some customers eventually leave.
• Costs: From a human capital or machinery stand point, a fully running business cannot turn swiftly and shed capacity without suffering greatly.
• Operations: Supply chains may be irreparably damaged by stakeholder restructurings or bankruptcies.
• Capital: Financial stability may experience unpredictable, risky times when equity markets are closed to new issuance and debt prices rise as a result of diminishing credit lines, rising interest rates, or penalties for covenant violations.

What Causes a Recession?

There are several leading indications that can point to an impending recession because a recession is characterized by poor consumer confidence, which leads to decreased spending and economic activity. Popular criteria that are relied upon include high interest rates, declining home prices, and a bear market on public indices.

What comes to define a recession during a post-mortem is that there is usually an underlying narrative that builds up around the time that then falls apart. Times are usually good, and activity around a certain economic area keeps escalating to ever higher levels. Commentators start wondering if we are in a bubble and when it will burst. The tinderbox then catches fire in a miniscule way, which then spreads rapidly. For example, if we look at the three most recent US recessions, they all had a bubble bursting:

• 2007-09: Because of the subprime mortgage and asset-backed security bubbles, real estate values have reached all-time highs. Eventually, Lehman Brothers' liquidity position was over whelmed by defaults, leading to a spreading collapse.
• 2001: Investor trust was badly damaged by the Dotcom bubble implosion and several business scandals, which were followed by the 9/11attacks.
• 1990-91: An oil price shock brought on by Iraq's invasion of Kuwait pushed the economy into a tailspin after restrictive monetary policies were implemented to deflate a real estate bubble.

When the yield curve inverts, which implies borrowing for shorter terms is less expensive than borrowing for longer terms, this is one such indication that many rely on for hints of recessions. While not entirely accurate, it is clear that the direction changes largely coincide with the S&P 500's peak price, which is followed by a recession.

How to make your Business Recession-Proof?

A more practical strategy than attempting to defend your company is to make it recession-proof. Being defensive results in a trade-off between resilience during boom times and lower performance during busts. In order to make your firm recession-proof, you should focus on giving it the flexibility and nimbleness it needs to avoid falling off a cliff and to be ready to succeed when the economy eventually recovers.

Horizontal Integration

A company with horizontal integration can have a diverse portfolio of products that can absorb the shocks of a recession. Recalling the consumer goods firms stated in the Recession-Proof Industries article, we can see that they provide goods that touch every area of the home, giving them a greater capacity as a shock absorber.

Vertical integration is very helpful for businesses who wish to establish a competitive advantage in terms of cost or quality by carefully managing their supply chain. The disadvantage of such an approach is that in doing so in a specific area, they are putting their eggs into one distinct basket.

Enterprises are expanding their horizons and taking a more portfolio-based approach to risk management when they make abstract investments in new markets or buy businesses in unrelated industries. However, there must be a sound justification for the investment and it must have obvious synergies with the primary business (i.e., not a wave pool startup)

Scalable and Flexible Units of Production

One of the numerous criticisms of WeWork's now-failed IPO prospectus was its carefree approach to the company's fortunes amid down turns. The company believed that a recession would benefit its business since customers would demand more flexible tenancy agreements at the time. This is a strong case on its own, but WeWork neglected to address the other aspect of its business model, namely its own lease agreements with office suppliers. It is actually a very dangerous tactic that could backfire during a recession to offer short-term office arrangements while being bound by long-term lease agreements on the underlying building. WeWork wouldn't be able to immediately contract its factors of production.

A company that can weather economic downturns may easily and swiftly reduce or increase its production capacity. From its fixed asset capital to its actual human resources, this includes. Returning to the topic of horizontal integration, this is the reason why having complete control over your manufacturing chain can be risky.

Companies should make sure that their production processes are adaptable and flexible enough to be used in other projects or outsourced to other locations. The common refrain when dealing with human capital (i.e., employees) in a downturn is to raise the issue of how simple it is to immediately retrench workforces. Making ensuring that employees are multi-functional and capable of wearing various hats is a much more upbeat approach, as it enables management to quickly and effortlessly change methods as needed.

Create Inelastic Demand

You'll be in a fortunate situation to have inelastic demand features if your company authentically offers a basic need or a well-known luxury. Building loyalty is the important concept to concentrate on for others. On the most fundamental level, this may be continuously assessed by NPS rankings and constantly engaging with customer feedback. Take a closer look at loyalty programmes and incentives for ongoing service for additional practical examples. The frequent flyer programmes that airlines started offering almost 50 years ago have fostered fanatical consumer loyalty and gamification effects that have been profitable for the airlines.

Consider ways to design the service so that, with increased usage, the customer experience naturally improves. Companies build data moats by leveraging trends to improve the convenience of service for their existing consumers. Examples include algorithmic suggestions on streaming services, one-click checkouts, and special offers timed for anticipated paydays.

Don’t get stuck in the Middle

One of Michael Porter's fundamental ideas about competitive strategy is that a company must concentrate on leading through either cost leadership or quality differentiation because it cannot be everything to everyone. A company will stay on the right track and maintain customer loyalty during recessions if it has a distinct North Star pointing in the direction of one of these sides.

Finding your beachhead and mastering it instead of trying to be everything to everyone is especially crucial for businesses. Discount retailers and bespoke products are thriving despite the high street experiencing an almost constant existential crisis due to shop closures and mergers because they have a clear focus on either value (cost leadership) or quality (differentiation).

Keep Cash for a Rainy Day

Businesses benefit from having a variety of financial capital sources on hand during recessions. Although it can guarantee that runways are long enough to accommodate any decline in activity, its main benefit is that it offers flexibility. As labor supply increase and assets become more affordable (and distressed), there are more opportunities to locate exceptional people.

Having cash on hand is a fantastic approach to take advantage of a downturn to get ready for its effects and make sure that opportunities are taken advantage of. Despite the fact that the 2007–2009 recession was largely a time of protective consolidations, Amazon went on a spending binge and acquired 12 companies at that time. Some of these names, like Zappos and Audible, were particularly well-known companies that have since grown to play important roles in Amazon's product lineup.

Patience Pays Off

Comparatively more difficult for public enterprises to become recession-proof than their private counterparts. Managers may find it difficult to stomach the effort of preparing for an uncertain occurrence (that may not even occur) due to the pressure to reach quarterly targets and make shareholder dividends.

Due to their intergenerational period, family firms are frequently far more long-term in their thinking, which is one of the fundamental reasons they are so resilient and durable. Compared to their counterparts, US family businesses with revenues between $100 million and $3billion are "less likely" to fail during recessions.

In the future, it will be fascinating to watch if the rising tendency of younger companies remaining private longer will have an impact on recession-proof qualities. Even while the private investors that support hyper-growth firms are not good-hearted altruists, their investment horizons are much further than the coming quarter.

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