The Recession-Proof Business: Chapter 1

Rule #1: Adopt the Recession-Proof Mind-Set

The first rule of the recession-proof formula is to adopt what I call the recession-proof mind-set. For someone that’s very left-brain oriented (the logical part of your brain), I normally do not talk about “woo woo” soft stuff like mind-set and attitude. I certainly never did that when I first started coaching clients. But, over time, I’ve changed my perspective on this, after seeing many a talented business owner fail to succeed given a lousy, self-defeating attitude.

Similarly, I’ve seen successful entrepreneurs with surprisingly modest talent but with incredible levels of passion, tenacity, and aggressiveness that defy all logic. From a financial statement analysis perspective, the right mind-set and attitude makes a surprising amount of difference. Here’s why.

Creating a recession-proof business comes from two places: 1) how you think and 2) how you act. At first these seem like two different activities, but they are actually intertwined.

As you’ll discover, surviving and prospering in a recession requires you to force your company to adapt, and adapt quickly, to new market conditions – avoiding major threats while going after silver lining-type opportunities. So, without question, the ability to act quickly is essential to survival. However, if you, as a business owner and CEO, have the wrong mind-set, you will be slow to spot both the threats and the opportunities – and even slower to act upon them. Speed, both in decision making and in taking action, is a markedly essential asset in a recession, and the right mind-set helps enormously in this regard.

In short, the right mind-set leads to the right action at the right time. Here are four tips for adopting the right recession-proof mind-set:

1.     There’s still money out there, but you have to go find it.

2.     Base business decisions on facts, not headlines.

3.     Exploit the opportunities that recessions create.

4.     Adapt or die.

Mind-Set Tip #1:  There’s Still Money Out There, But You Have to Go Find It

In the typical US recession, the economy shrinks 1-2 percent from start to finish.  Based on the

information available at the time of publication, it’s clear that the “great” recession of 2008-2009+ will fall into the severe category.

For a $14 trillion economy, that means the economy will shrink by $700 billion dollars. When most people, especially people in the media, see these numbers they immediately focus on the $700 billion in economic activity and spending that’s disappearing from the economy.

When I look at these numbers mathematically, I see that there’s still $13.3 trillion in economic activity and spending left in the economy! To put things in perspective, $13.3 trillion written out as $13,300,000,000,000 has an awful lot of zeros behind it.

When $13.3 trillion in spending is floating around out there, how much of that spending do you need to capture to provide a nice living for your family? The level of spending in a recessionary US economy is still higher than the spending levels of the next four biggest economies in the world combined. More specifically, the US economy, even in its recessionary state, is still larger than the economies of Germany, Japan, China, and the United Kingdom combined.

While the actual money being spent in the economy does shrink during a recession, the vast majority of it still remains in the economy. However, the money that stays in the economy is now spent differently from before – serving the new priorities that customers have in a recession that they did not care about previously.

This is why even though economic activity may shrink by 5 percent, in some product categories you’ll see spending drop by much larger amounts, such as in new car sales. It’s also the reason why in some product and service categories spending actually goes up, such as in car repair services.

This uneven shrinkage of spending across different product categories is actually driven much more by massive shifts in spending priorities among customers than it is by actual reduction in spending in the economy. That is why new car sales can drop by as much as 50 percent in some months even though consumer income and spending has dropped only by, say, 5 percent. It’s not that consumers as a group don’t have the money, it’s that they no longer want to spend it on a new car.

This distinction is important to grasp if you want to survive and prosper in a recession. It’s vital to realize that the money is in large part still being spent in the economy. But it’s now being spent on different things for different reasons than in previous years.

The analogy I often give to explain this concept is this. Imagine you own a home that’s considered prime riverfront property. When you sit outside on your porch, you enjoy this amazing view of the river and watch the river flow by. Now imagine this river isn’t made of water, but made of money. For years you sit on the front porch of your home watching the river of money flowing by, picking up your piece of it whenever you care to do so.

But one day, somewhere upstream the river of money gets diverted. It’s no longer flowing directly in front of your home. The money is no longer falling into your lap. But, and this is important, the amount of money flowing in that river is still largely out there – it’s just flowing somewhere else.

When this happens, you have two choices. The first choice is the choice that most business owners make. They stubbornly sit on their porch staring at the dried-up river bed and wonder, “Where the heck did the river go?”

Then the next day, they come back and do the same thing. They think to themselves, “It’s not fair. That river has been flowing in front of my property for years. Where the heck did it go?”

This type of business owner repeats that process of staring at the dry riverbed day in and day out until the business ultimately dies.

The second choice is to get out of the chair on your porch, stop staring at the dry riverbed, and start looking to see where the river of money got diverted to. Remember, most of the money in this river is still out there. But now it’s just flowing in a different place than before.

The key to the recession-proof mind-set is to realize that if you want to survive and even prosper, it’s up to you to go and find where the money went so you can profit from it.

If your business had a great riverfront location on the river of money in a strong economy but is now positioned in a poor one, it’s time to “relocate” or adapt to new market conditions. This is the essence of the recession-proof mind-set.

Mind-Set Tip #2: Base Business Decisions on Facts, not Headlines

In adopting this recession-proof mind-set, you’ll have to be careful about how you let the media influence you.

The overwhelming tone of the media is negative. This is for the simple reason that in the media business bad news sells. When markets drop or a key economic indicator falls by even the slightest amount, it becomes instant headline news. The headlines are highly exaggerated all in an effort to get you to tune in.

This happens for two reasons. First, the media industry is going through a tremendous upheaval due to the massive proliferation of alternative news sources. Before the Internet came along, there were only five places you could turn to get major national news: CBS, ABC, NBC, CNN, and your local city paper.

These five news sources had all the news viewership. As the Internet emerged, suddenly there were hundreds of news sites you could get your news from. If you lived in San Francisco, you no longer had to get your news from the San Francisco Chronicle; you could get it from the online edition of The New York Times, The Washington Post, The Boston Globe, or any number of newspaper websites.

In addition, with the emergence of blogs you could get wildly different perspectives on the news from quite literally millions of sources. This fragmentation of viewership means that traditional news media receive fewer and fewer viewers and readers. Incidentally, this is why Warren Buffet considers the newspaper business a terrible and dying business.

To stay financially viable, these news organizations have no choice but to follow the “bad news sells” rule of thumb. If CNN doesn’t cover the bad news, then MSNBC or CNBC will do it – stealing CNN viewers.

The result is an ongoing game of one-upmanship among the media to see which one can turn mildly bad news into the most dramatic, attention-getting headline possible. The kind of headline that shocks you into watching or reading – thereby increasing advertising revenues for the media outlet.

As a frequently called upon expert for the media, having appeared on Fox and MSNBC and in The Wall Street Journal, Inc. magazine, and SmartMoney magazine, I’ve gotten some insight into this. When media inquiries come to me, they come in waves. It’s feast or famine. When I’m asked to serve as an expert for the media, I’ll get requests every day for two weeks and then nothing for weeks on end. What happens is one network or magazine picks up a story idea, and then all the other competing media outlets quickly copy it. The entire media industry is driven this way.

Furthermore, the way the media gets its story ideas is very incestuous. They all watch, read, and listen to one another’s broadcasts and stories, looking for ideas. The bloggers get blogging ideas from each other. Newspaper reporters get ideas by reading what bloggers write. Television producers get ideas by reading what newspaper reporters write, and the whole incestuous cycle repeats itself.

The problem with this “bad news sells” trend is that it can very seriously skew your interpretation of what’s actually going on in the economy and how it might legitimately affect your business.

When hundreds of media sources are taking one tiny bit of bad news and covering it like it’s the end of the world, it’s very easy to buy into that line of thinking.

Psychologists call this effect the frequency bias. The assumption average human beings make is that the more often they hear a piece of news, the more severe is the problem.

For example, in the United States typically 200 people die from plane crashes each year. Usually that’s one crash of a major airliner and a number of crashes of smaller one- to seven-seater aircraft. Whenever such a crash happens, especially of a major airliner, it’s splashed all over the news for days. Based on how many stories a person hears, everyone tends to assume that a lot of people die in plane crashes every year.

In contrast, every year in the United States roughly 40,000 people die from car crashes. Factually speaking, car crashes kill nearly 200 times more people than do airplane crashes. Yet because car crashes are so common that news outlets no longer cover them, most people are surprised at the factual differences between these two different types of accidents. Even on a per-mile traveled basis, air travel is much safer.

The moral of this story is simple. Make your business decisions based on facts, not on news stories. Even in a severe recession, there’s still a lot of money out there – you just have to go looking for it.

Mind-Set Tip #3: Exploit the Opportunities that Recessions Create

In advising my clients on how to run their business during challenging economic times, I always tell the following joke. In a recession, your competitors expect to lose business. I suggest that you don’t disappoint them!

It’s like going to the Olympics when all your competitors are aiming for the bronze medal. It doesn’t take that much more effort to win gold when everyone else isn’t even bothering to try.

One of the big reasons that recessions create opportunities for savvy business owners and CEOs is the massive lack of competition. Your competitors are pulling back, cutting back, hunkering down, and generally waiting passively for the storm to end.

While this is one approach, and even a valid approach if you have tons of cash reserves on hand, it doesn’t guarantee survival or success.

When others are hunkering down to ride out the storm, I see an opportunity to get out there and profit from the storm. Go out and sell umbrellas! Or sell sandbags, food rations, fresh water supplies, flashlights, or the many other things that customers really want during a difficult time.

A recession is not the end of the world. It is just a massive shift in priorities and spending patterns. At the end of the day, life still goes on. People still need products and services to continue going about their everyday lives.

People may freeze their spending temporarily in a moment of panic, but eventually they still need to live. Kids still need to eat breakfast. Businesses still need electricity to run their operations. Life goes on – just a bit differently than before.

The Lance Armstrong Story

Many years ago, I read the biography of Lance Armstrong, seven-time winner of the Tour de France bicycle race. I remember this one story that sort of stuck in my mind. Apparently, in some legs of the Tour de France the riders ride up into the mountains where it gets quite cold.

At certain points in the race, the weather will take a turn for the worse and it will start to rain. What makes this rain especially punishing is that it’s in near-freezing temperatures. So the riders are drenched, freezing, and still have to race.

As recounted in the book, during times like these, the riders in the front of the pack would all groan about the miserable conditions.

Guess what Lance Armstrong would do?

When conditions got miserable, he would immediately ride harder and start to sprint ahead of the pack. His logic was simple. He felt he could tolerate misery more than the next guy. And he reasoned that since everyone else was thinking of slowing down, it was precisely the time to speed up, as each surge would get more “bang for the buck,” so to speak.

It was precisely at these times that these otherwise aggressive competitors would retaliate and try to keep up or leave him in the dust. But under these miserable conditions, it would break their spirit to see Lance surge ahead. Lance Armstrong is the seven-time winner of the Tour de France for a reason. When others expected to slow down, he opted to speed up.

Flawed Economic Thinking

Most people assume that a recession always means that business gets worse. The assumption is that all businesses are hurt and they are all hurt equally. This is simply not true factually.

In any economy, there are always “winners” and there are always “losers.” The competitive nature of our economy is one where the stronger, better-run businesses tend to do better and the ones that are weaker and mismanaged tend to shrink and ultimately go away. This is true regardless of how well or poor the economy in general is doing.

However, it’s my point of view that a recession creates many opportunities for the savvy business owner to exploit. Here’s why.

Most people see a recession as an overall reduction in customer spending. While this is true, this overly simplified view masks a much more fundamental change, which, if you notice, you can really profit from.

As I mentioned earlier, even though a severe recession might see the economy shrink overall by 5 percent, you’re very likely to see spending drop by 50 percent in some categories and spending increase by 10-25 percent in other categories. The overall 5 percent shrinkage is just what happens when you “settle up” all the various changes across the hundreds of sectors of the economy.

It’s the underlying shift in spending patterns, not the shrinkage in overall spending, that is the key thing to pay attention to. It’s these shifts that can kill your business or save it. Forget the overall macro economy numbers; look for where the money is flowing to and position your business to piggyback off it.

The Rules of Success Get Rewritten

This shift in spending completely rewrites the rules of what it takes to be successful in business. While there are some timeless business principles that are always true, you want to position your business to follow the money.

This shift in spending is very disorienting for most business owners. At first it’s hard to tell what sectors of the economy are shrinking, holding steady, or even growing modestly. But if you look carefully, you will see these trends emerge. But unlike the loud headlines broadcast by the news, these trends announce themselves with a whisper – loud enough to hear if you’re listening for them, but not loud enough to be noticed by someone who expects a recession to be the end of the world.

To illustrate this principle, imagine that you are in a running race. Somewhere in the middle of the race, the race organizers decide to change the rules of the game and turn it into a poker competition. What it takes to be successful in a running race compared to in a poker game is very different. The key to success isn’t so much being a good poker player as much as it is realizing that the rules of the game have changed and adapting quickly to the new rules.

Mind-Set Tip #4: Adapt or Die

The key to economic survival and even prosperity is to adapt quickly to new market conditions or risk your business dying. This is, frankly, one of those times where business experience, especially memory of the good times, is a liability.

To make a twist on an old story, there’s no sense in crying over spilt milk. Instead, go looking for a new cow!

This theme of “adapt or die” is essential in a recession. While it is possible for many companies to ride out a minor recession, that approach becomes less and less likely to succeed the more severe and longer the recession.

Adaptation is the key to survival.

Speed, Not Size, Matters

When the rules of the game are changing rapidly, being a big company is not always an asset. Speed is the key asset. The ability to adapt to fast-changing circumstances provides security (relatively speaking) for your business.

During times like these, you will see big companies fail for the simple reason that many of them make decisions too slowly or are so bogged down by their physical assets it makes being nimble impossible. The US auto industry comes to mind. It takes five years to take a new product from concept to being available for sale. So even if automakers pick up on change today, it’ll be five years before their decisions will be evident in the marketplace.

Similarly, it’s not easy to shut down factories and sell them off. Sure, they may sit idle, but the automakers still have to pay loans taken out to finance them.

While physical assets can be a legitimate limitation to making and executing decisions quickly, a slow decision-making process can be lethal in a severe recession.

Decision-Making Cycle Times

Sometimes you find the most useful ideas in the most unusual of places. This is the case when it comes to making business decisions quickly in the midst of a fast-changing economy.

It turns out business owners aren’t the only leaders who have the need for fast decision making. In the US military, commanders face the same need during times of war.

I was reading an interesting theory on decision making written by a very insightful former US marine. I forget his name but remember the main idea. If your decision-making cycle time is faster than the enemy’s, you have an enormous advantage. The enemy gets confused, can’t figure out what to do, reacts to old information, and basically is poised to lose.

Apparently, this is what happened in the deserts during the first Iraq war. Saddam Hussein insisted on making all major military decisions himself. Front-line commanders were not permitted to make major decisions on their own. They had to radio back to headquarters to report new information and to await decisions from Saddam.

So when a tank commander in the Republican Guard saw some US troops somewhere they weren’t supposed to be, he would radio back the news and wait to be told what to do. Sometimes it would take an hour or more for headquarters to get back to the Iraqi commander. Of course, by then the rapidly evolving situation had changed and the information used to make the decision was now outdated.

The decision-making process among US field commanders was very different. Clear objectives were given to leaders on the front line. However, those on the front line were encouraged to adapt to rapidly changing battlefield conditions and do whatever was necessary to achieve the overall objective.

So a US tank commander could see a situation develop on the battlefield, assess it, make a decision to adapt, and issue new orders within 20 seconds. Meanwhile, for his counterpart in the Iraqi Republican Guard, the same decision would take minutes or even hours.

US military leaders deliberately kept up the pace of change in the first Iraq war in order to be faster than Iraqi decision-making processes were designed for.

This was one of the reasons why the first Iraq war was won so quickly and decisively.

How to Survive a 100 mph Economic Tornado

When you have a severe tornado bearing down on you at 100 mph, here’s a simple survival rule. Get in your car and drive 120 mph in just about any direction, and you’ll survive.

In a severe economic “tornado” the same rule applies. In an economic crisis, the rules of the game change so much that the risk of doing nothing is often much higher than doing just about anything else. In other words, if business is lousy, doing nothing ensures that the business dies. But trying to adapt at least gives you a chance of survival. Doing several things to adapt to new conditions ups your odds even more.

The lesson is simple. If your speed of adapting is faster than the speed of change within the economy, you have a good chance of making it. If your speed of adapting is slower than the speed of change within the economy, your business is very much at risk of dying.

In short, remember these two things: 1) adapt or die and 2) speed matters … a lot.

From Mind-Set to Action

Hopefully, through my various stories you can see the value of adopting a recession-proof mind-set. To recap, the key elements to remember are:

1.     There’s still money out there, but you have to go find it.

2.     Base business decisions on facts, not headlines.

3.     Exploit the opportunities that recessions create.

4.     Adapt or die.

Once you have the right mind-set in place, lets move to Rules #2-#4, which involve making the right decisions

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