More than One Way – How to grow from Good to Great in a stalled economy

More than One Way – Good to Great

In a poor global economy most companies are required to stand back and reflect on the situation that they find themselves in and how that situation will change with the volatility in the market (be it local, regional, national, or international). When doing this analysis many companies will be in one of the three following categories:

  • Static – We have made the efficiency changes in our operational infrastructure to withstand market volatility and maintain our primary sources of business. In these cases management likely has formulated the necessary plans to support operations if shifts occur (i.e. sales fall by 15%, or the credit markets freeze up, or costs increase); furthermore they likely have the resources to support operations if the worst should happen as these companies generally have good liquidity levels; manageable debt and expenses, and have the ability to make cuts as necessary risking overall operational efficiency. While these companies won’t make major additions and won’t likely invest in costly growth initiatives they are in good position to whether the storm.
  • Struggling/Obsolete – There are also companies that, whether they know it or not, were heading down the path of obsolescence before the economy began to falter and now must quickly and a way to improve their position or they will cease to exist. These are the companies (like those in U.S. Automobile Industry) that have ignored efficiency issues such as high labor cost, increased development costs, and overdependence on fad products/services (i.e. Sports Utility Vehicles) and have also allowed their quality and brand to falter in the process. A major economic calamity such as the one we are currently experiencing will make a bad situation worse, and those within this category will need to make expeditious changes or face the end of their existence.
  • Volatile – Volatile companies can be either successful or unsuccessful, but since they would need to be successful to be material in this discussion we will assume that they are successful. Similar to many dot com companies circa 1999, and many real estate related companies circa 2006 this category is populated with successful companies who forgot that diversification is vital for a growing company. Overdependence on things such as credit markets, increasing real estate values, online content, or any other technology or “bubble” is extremely dangerous. If a company doesn’t quickly use its success to grow and diversify it will then be inherently exposed to the volatility of the market place which if the market drops (as markets do) then these are the companies that can not only destroy themselves but can destroy markets (think Lehman Brothers).

When the economy stalls, you will find that many companies will be in the above categories; however this article focuses on the ones that fall into a fourth category, the Pro table and Sustainable Opportunist. With all of the “Doom and Gloom” that exists when a major market collapse occurs; people tend to forget that there are significant opportunities available in a down market for those companies that fall into this category. When attempting to categorize those companies that are Pro table and Sustainable Opportunists I believe they must meet the following criteria:

  1. The Company must be Profitable –

While the profits don’t have to be rolling in prior to the market collapse, the company      should have stable earnings from sustainable sources that are likely to continue into the market collapse.

  1. The Company must be Sustainable –

When markets collapse, so do revenue sources, and the companies in this category must have sustainable sources of income that are not likely to collapse. An example in Real Estate (as it was one of the industries that fell the hardest) would be a Real Estate Investment firm that had a sizeable inventory of Government supported (or State supported) low-cost rental units. No matter the market the government is still more than likely (depending on your setup) going to fit the bill.

  1. The company must be efficient – Whatever the source of operations; the infrastructure platform must be efficient; otherwise it may fold under the pressures of the market. If you are a bank, then you are more efficient from an operational standpoint if you have a strong portfolio of sensible mortgage paper than if you have a large portfolio or risky paper (Even if the risky paper is more pro table now, you know that the risk adverse paper is more likely to stay strong if the market stalls.) Efficiency would also relate to how your key indicators are managed; for example, if your leverage position is at a point where it could become a problem if revenue decreased by 10 or 20 percent then you may not be considered efficient.
  2. You must be in an industry or a related industry where horizontal growth is potentially lucrative – To be in this category you must be able to grow both vertically and horizontally; and since most vertical growth is stunted in a down economy, then you must depend on horizontal growth which could come in the form of acquiring smaller competitors; taking away clients from competitors, or simply purchasing defunct or distressed businesses.
  3. Capitalized – The final indicator for companies in this category is their level of capitalization; to take advantage of opportunity a company must have the cash to finance these initiatives. Companies in this category either have strong debt positions that provide capitalization or they have strong capital reserves.

For companies in this category; a market collapse is just like Christmas; in that the opportunities are plentiful and they are ripe for the picking (as the saying goes).

Some of the most likely ways to build success in a down market is as follows:

  1. Research and Development – Seems simple right; companies finance research and development initiatives to create or maintain a competitive edge in the market. The problem is that when the market crumbles; many of your competitors won’t be able to finance research and development. Since your company is flush with cash not only can you finance internal research and development initiatives you can purchase it outright from smaller companies (or you can simply purchase the company for its product capabilities).
  2. Horizontal Growth – Horizontal growth relates your company’s ability to grow and develop by other means than simply increasing your customer base directly. The most common methods of this type of growth is acquiring other companies (whether they are struggling or not), diversifying into other industries (i.e. a accounting firm that acquires an accounting software company), or developing strategic partnerships to gain direct access to another client base (i.e. expanding internationally). All of these become substantially easier in a down economy because companies are sold for less (because many times the owners don’t have a choice), innovative businesses that have potential are stalled because of failed credit and investment markets, and companies are looking for any way to develop partnerships with companies that have the financial capability to assist them.
  3. Through the development of strategic partnerships – One way to grow is through the development of strategic alliances; if you are performing well and you have a strong cash position then there are companies (many of whom have the resources to assist you greatly) who are interested in partnering with you. When the economy is down, these companies are more lax on terms and are willing to work out offers that may be in your best interest (even if it is not in theirs).

The bottom line is that opportunities are plentiful when the market collapses but since there is such despair most people don’t notice it. If you are one of the companies fortunate enough to be in the aforementioned Opportunist category, then you would be well served to go back over your corporate strategy and find out what opportunities are out there for you. Remember, there is no better time to take a $10M company to $100M than in the middle of an economic collapse. You were lucky enough to be one of the prosperous ones in the midst of disaster, so use that luck to make yourself prosperous.

 

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