Tuesday, January 20, 2009

Managing in a Recession

Take a look at a recent Fortune magazine article on How to Manage Your Business in a Recession. While the piece deals with corporate America, some of the points are still instructive for entrepreneurs. In particular, note the following and think of how this relates to your own business.

“Whole Foods Market CEO John Mackey says, "We have to manage the business differently." Economic growth used to be a tail wind that the company built into its business plans. Now, says Mackey, "one of the leadership challenges I have is that that assumption is no longer true." The new era "requires a different mindset - we have to be more frugal, to think about every expense, every capital investment - because we won't be bailed out by growth."

The article also addressed the issue of cutting prices…which is something everyone right now seems quick to do. According to the author Geoff Colvin…hold off on that notion.

“Yes, everyone would like to pay less, especially in a recession, but the dangers of price chopping are greater than you may realize. McKinsey research finds that in a typical S&P 1500 company, a price cut of 5% would have to generate increased sales volume of 19% in order to pay for itself - and that almost never happens. The implication is that while holding prices steady may cause sales to decline somewhat, that course may nonetheless be wiser. It all depends on the pricing dynamics in your business, which may be changing rapidly in this recession. For example, gasoline at $4 a gallon caused many U.S. consumers to cut back drastically on discretionary purchases; since gas today is below $2, some consumers may have more available income - but may also be more worried about their jobs. Now is the time to study price sensitivity in your markets much more closely than before.”

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