Five Mistakes to Avoid When Navigating an Uncertain Market
Uncertainty is a constant companion in the business world. Whether it’s a soft market, an uncertain market, or an impending recession, these cycles always test the resilience of business owners and leaders.
Very few businesses worldwide are strategically or financially set for a recession before it arrives. Over the years, I’ve seen business leaders make the same avoidable mistakes when the economy turns unpredictable, I’ve made a few of them myself when faced with an uncertain horizon. This fear of the unknown often leads to reactive decision-making rather than strategic planning. Understanding how to navigate these times can mean the difference between growth and decline.
I’ve observed five common mistakes:
1. Timing
Timing is considered one of the most crucial aspects of a business’s strategy, particularly when the markets have become uncertain. Timing impacts everything from workforce adjustments to product launches to capital investments.
To put timing into context, we need to consider the phases of the economic cycle.
An economic cycle has four phases:
- Down – the market softens, and demand falls
- Stall – the market hits the bottom but stalls for a while
- Release – the market initially falls again, but then it releases into the next phase of growth
- Grow – the market moves back into a confident growth-focused market.
Example: Many companies waited too long to cut costs or make their organizations more efficient during the 2008 financial crisis. Everyone hoped that a recovery would come quickly and strongly. Some denied it was happening. Unfortunately, the recovery didn’t come soon enough and dragged along for some time, pushing many companies out of business. By the time many of the survivors took action, their financial positions had deteriorated significantly.
Actionable Advice: To avoid this mistake, business owners can proactively prepare for the next phase of growth rather than wait.
Most leaders start looking at efficiency once they see the signs of a release or early green shoots of growth. They have often deferred this because it can cost money to implement.
Focusing on efficiency is best when the markets are going down and stalling. This is similar to preparing everything for the next spring during the late fall and early winter.
Examples of efficiency focus include:
- Redefine roles and responsibilities to handle the impact of reduced or increased staff during the economic winter and prepare your staffing needs for the next spring and summer.
- Implement systemization, digital transformation, or automation.
- Ensuring equipment, systems, and tools are all in tip-top condition.
Similarly, most businesses wait until they see the market growing before they invest in growth. By investing in growth at the end of the stall (Winter) and as the release (Spring) occurs, you can also get the resources for your future growth at discount prices, similar to the Buy Low/ Sell High philosophy in the stock markets.
Examples of growth focus include:
- Entering new markets.
- Hiring staff.
- Product or market launches.
Establish key performance indicators (KPIs) as early warning signs of market shifts. Tools like scenario planning can be invaluable for anticipating different outcomes and preparing responses to handle the various factors that can work against or for your business. A study published by McKinsey & Co., reviewing the impact of the 2008 recession, found that companies that acted swiftly and strategically outperformed their slower counterparts during and after the recession.
2. Changing Their Risk Profile
In uncertain markets, it’s common for private business owners to significantly alter their risk appetite. This can be observed as a knee-jerk reaction from the owner or leadership that involves either taking on too much risk or them becoming overly risk-averse, neither of which is ideal.
Example: During the dot-com bubble, numerous companies either overextended their financial resources on speculative ventures or completely halted investment, leading to missed opportunities or financial ruin. This pattern was also prevalent during the COVID-19 health crisis.
Actionable Advice: A balanced approach to risk is always advisable. Review your risk profile and understand what parts of your business are high-risk or low-risk before adjusting. The Risk Management Society has a series of tools and templates that will help you gauge, understand, and manage your risk exposure effectively.
3. Unwinding the Business Too Far
In the face of financial strain, business owners might be tempted to scale back their operations excessively, which could lead to talent loss, decreased market presence, and, ultimately, a weakened competitive position.
Example: During the 2020 COVID-19 pandemic, some retailers closed large numbers of stores and drastically cut staff throughout every function. While this provided some short-term financial relief, it also weakened their operational capacity as well as faith in the brand, making recovery challenging when conditions improved.
Actionable Advice: Optimizing costs without compromising core capabilities is essential. Focus on making surgical cuts rather than using a broad-brush approach to regaining a profit ratio of at least 10%. Retaining key personnel, maintaining essential functions, and use this time to invest in operational efficiencies that will support your future growth. Harvard Business Review highlights the importance of cost optimization rather than cost-cutting for sustainable performance during downturns.
4. Overcorrecting
Carefully consider any extreme course of action before implementing them. Actions such as drastic slashing your prices, or major shifts in quality of your products can feel like the only option in the midst of an economic crisis. These can have unintended consequences, such as damaging your brand equity and alienating loyal customers if the products now available are the same or your quality has been dramatically compromised.
Example: In the early 2000s, coming out of the dot.com recession, many technology companies slashed prices to stay competitive, this led to eroded profit margins, compromised value proposition and took many years to repair.
Actionable Advice: Guided by data-driven insights, make gradual adjustments to your strategy or operations. Collect customer data and use analytical tools to understand your customer’s behavior as well asemerging trends within your specific market, industry, or product lines. For instance, employing or tuning predictive analytics can help you forecast how demand is and will trend and support any incremental strategy adjustments, ensuring you don’t overcorrect.
5. Industry Cycle
Every industry operates within its own distinct cycle and is influenced by industry-specific trends as well as macroeconomic factors. Some industries match the macroeconomic cycle, others do the opposite, some lead, and others lag. Failure to integrate the impact of your industry cycle and how the macroeconomic cycle influences it into your strategic plans can lead to misaligned priorities and missed opportunities.
Example: The real estate sector is highly cyclical, with clear periods of boom and bust with tell tail signs of its direction. Companies that ignore these cycles often find themselves expanding during peaks and dramatically reducing during troughs, contrary to optimal strategic behavior.
Actionable Advice: Conduct an industry cycle analysis to understand your industry’s cycle and its current and subsequent phases. Recognize where you are within the cycle and adjust your strategies accordingly. Utilize industry reports and forecasts from reputable sources, such as your industry body, or well known consulting, o the big four, to inform your planning.
Navigating uncertain markets and potential recessions requires a strategic, informed approach. By avoiding the five key mistakes of timing missteps, hasty changes to risk profiles, unwinding too far, overcorrecting, and disregarding industry cycles, middle-market business owners can steer their companies through turbulent times and emerge stronger.
In summary, have a clear path to navigate, adapt to the environment without overreaction, maintain your core strengths, optimize your costs, and align your strategies and tactics to minimize the negative impact of the economic winter and prepare for the next spring and summer is crucial. Equiping yourself with data-driven insights, planning proactively, as well as maintaining a resilient mindset that this is just a cycle, and you and your organization will not only survive but thrive during uncertain times.
