Business Conditions During an Economic Crisis

Financial Crisis Ahead

I am certain that there will be a global economic crisis very soon. Economic crisis or not, a business owner needs to be able to adapt to the business cycle, since each phase of the business cycle offers opportunities and threats. The aim of this brief is to explain how an economic crisis can provide benefits for the business owner and what to do to take advantage of the economic crisis situation.

It is beyond the scope of this brief to discuss the reasons for my belief that the world is on the verge of an economic collapse, instead, the focus is on what the consequences of such an occurrence will be for business and the business community.

For the purpose of background information it is important to detail the characteristics of an economy that is in crisis mode. An economy that is severely depressed is characterised with high unemployment, negative consumer and business sentiment, low level of spending leading to an overall decline in business conditions and profitability.

Quite clearly such economic conditions provide a very challenging environment for the entrepreneur and business owner. However, as with most things in life, those who are better prepared are able to best take advantage of such conditions. On the positive side from the perspective of the business owner and entrepreneur, is that a depressed economy has an increasingly large labour pool of qualified and eager candidates for employment. This is due to the higher level of unemployment which is a characteristic of a depressed economy. This provides the opportunity to access highly motivated (in some cases desperate), talented and experienced employees who would otherwise be employed somewhere else under normal economic conditions. As the labour pool that is available to employers increases it causes downward pressure on wages as there will be a greater supply of labour available. This is also true in cases where there is a minimum wages law in place. A minimum wage is the lowest legal wage that can be paid to an employee in a particular market. Such wages will often be paid to the most unskilled workers. In most other cases where specialist skills are needed or certain qualifications are a pre-requisite, or in industries where there tends to be labour shortages, the market wage will generally be higher than the minimum wage. As the pool of available labour increases the increased supply of available workers who are now competing against themselves for work will tend to drive wages lower. This means that an organisation will be able to access top-quality talent during a depressed economic climate at a price less than would be the case when economic conditions will be better.

Rivalry amongst competitors is also different during economically challenging periods. In the short term, there is greater intensity of competition as organisations more aggressively search for customers. However, not all organisations are equally prepared for difficult economic times, and as the economically challenging time passes more organisations will see themselves being forced out of business. Those organisations which are able to see through the difficult economic conditions will find it much easier competitive environment as economic conditions once again become more prosperous. Economic downturns are a form of filtration system which cleans out the less competitive, less adaptable, least efficient and most poorly managed businesses out of the industry. This fact provides additional motivation to see through challenging economic conditions in order to be able to access greater profits and a larger market share is business conditions normalise.

Other opportunities also become available thanks to the bankruptcy and decline of some of the existing industry participants. For example, there are an increasing number of supplies and goods available for purchase from failing firms. There are auction sites such as GraysOnline (www.graysonline.com) which offer heaps of industrial products for sale from failed or businesses which are scaling down, in all product categories. A few examples of product categories available include catering, office equipment, transport equipment, mining, manufacturing and warehousing. It is possible to buy furniture, fixtures and other equipment for your business at a fraction of the normal cost because some organisations are being liquidated and their assets are hurriedly sold off to the highest bidder.

An economic crisis hits consumers hard with high unemployment and poor job prospects which result in a lower incomes and spending power. An increase in crime is the result. The most obvious form of crime felt by businesses is shoplifting and theft. This increases business costs and makes operating more difficult. Business owners and managers need to be more vigilant and more sensitive towards this type of behaviour. Additional precautions need to be taken such as the installation of security cameras, employment of security guards and additional staff training with a focus on loss prevention. Of greater concern is more hardcore crime such as burglary where individuals or groups damage property to enter the premises to steal. A good example of this is “ram raiding” where criminals steal a car and use that car to ram the store front to smash their way in and steal what they can. Not only does this result in a larger amount of product loss, but it also causes property damage which can be quite expensive.

An economic crisis will also necessitate a rethinking of business operations. With consumers being more price sensitive they will be more interested in price than quality. Business owners will need to respond to this by offering lower priced goods, or at least lower priced substitutes. For example, people will still want to travel, but overseas holidays may be a little extravagant. Travel agents and tourism websites will need to alter their offerings to include considerably more local holiday offers which are cheaper instead of a wide portfolio of overseas options. Doing this will ensure that sales declines will be minimised. Supermarkets should find supermarket brand items seeing the greatest growth in demand at the expense of the higher priced manufacturer labels, so manufacturers should be more focussed on supplying supermarkets with supermarket brands instead of tying resources to produce their own brands. Car manufacturers should see greater demand for their lower priced budget models and less demand for their premium and more optioned vehicles, and so forth and so on. In short, an economic crisis requires businesses to respond to demand characteristics, and those characteristics will be represented by greater price sensitivity and focus on low prices ahead of quality.

So what are the lessons learnt from this brief? The first is that one needs not look at a potential economic crisis as being simply a vision of doom and gloom, but rather as a different type of operating environment which offers challenges but also opportunities which are not available at other stages of the business cycle. Challenges can be overcome with preparation and strategy which requires foresight and planning. This means one should be sensitive towards signs which show a potential economic slowdown on the way. I am telling you now that an economic slowdown looks like it will be upon us, so consider this and prepare.

Peter Solanikow
Peter Solanikow
Peter Solanikow is a tertiary educated and qualified business consultant and options trader based in Melbourne, Australia.
Peter founded A1 Tuition, an education resource provider, in 1997 at the age of 23. Peter has written a number of educational books as well as presented seminars in accounting and economics.
Over time Peter developed an interest in business management and has assisted hundreds of clients from various countries around the world in management, marketing, strategy and finance matters.
Peter travels to Europe annually and has knowledge and experience in business matters relevant mainly to Poland.

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