Navigating The Economic Storm
Mahmoud Naggar, CMA
Group Finance Director | Future Group | Ex-Bayut & Dubizzle Group CMA Certified | MBA Candidate | ACCA Candidate
Prepare for a “long and ugly” recession, says Dr. Doom, the economist who predicted the 2008 crash. Fortune - September 21, 2022
The global economic outlook is deteriorating due to inflation-fighting efforts by central banks, the war between Russia and Ukraine, and China’s prioritization of political control over economic growth. A global recession is likely, with at least slower economic growth virtually certain. Forbes - Sep 23, 2022
No doubt that Recessions are difficult times. Many people suffer economically and change their spending behavior. But as professionals say, a recession may be an opportunity to thrive and grow.
The navigation tour starts first by understanding the economic factors affecting business, monitoring the change in people spending behavior and then exploring the opportunity.
Second by some of the factors that could be seen as business opportunities during a recession and finally a quick introduction to the main three strategies that can help in business survival during a recession.
The Six Economic Factors Affecting Business
The answer to a question on how economy affecting business can be summarized in the unpleasant economic conditions that impact people consumptions level which directly impacts businesses sales negatively and/or unpleasant conditions that stands as obstacles against businesses sustainability.
1)?????Unemployment.
Unemployment means that an?economy?is not making full use of the workers that are available in the market. The economy will not grow as quickly as it could, since people income is negatively impacted and even for those who have jobs, they might be spending more cautious.
Majority of businesses sales will go down and elasticity may be one of the indexes drive the spending directions and opportunities.
2)?????Inflation.
Inflation is a general increase in the prices of goods and services. When the general price level rises, each unit of currency buys fewer goods and services; consequently, the purchasing power of money corresponds negatively to an increase in the inflation level.
Putting inflation aligned with consumers’ incomes fall because of the unemployment, spending is likely to decrease. This means that businesses will not perform as well, and revenues will not be enough to cover expenses.
3)?????Interest rates.
This factor has a direct double impact on businesses as it impacts business finances from one side and impacts customers spending level.
*Shareholders and owners?may decide to store more money in the bank rather than investing in the business if interest rates rise. If interest rates fall, they may be more inclined to invest money in the business. For businesses finance working capital through overdraft and/ or businesses finance CAPEX through loan, will struggle in their income statements.
*Customers?may be less likely to spend if interest rates increase, as they would benefit from having money in a savings account and will be less likely to take out a. If interest rates drop, customers may be more likely to spend or take out a loan, and less likely to save money in the bank.
*Central banks are very cautious in raising interest rates as the cons here are not limited only to businesses finances and customers behavior, it has a negative impact in the government tax revenues since people and businesses are not paying according to the economy growth plans trend.
4)?????Tax rates.
Shareholders and owners?will receive higher?dividends?and profit if taxes are low. If taxes increase the opposite may happen.
Employees?will have a higher level of take-home pay if tax rates are low. If taxes increase, employees will have a drop-in take-home pay.
Accordingly, businesses struggle with the high taxation payout, and people suffer from the hit in their income.
5)?????Supply Chain Challenges.
A supply chain is?the network of all the individuals, organizations, resources, activities, and technology involved in the creation and sale of a product. A supply chain encompasses everything from the delivery of source materials from the supplier to the manufacturer through to its eventual delivery to the end user.
Supply chain issues can cause expensive delays and disruptions, impacting business’s bottom line and damaging its reputation.
While the pandemic caused major disruption to supply chains in 2020, business still suffering from the delays happened during the pandemic where sales went down, and economy paralyzed.
?A business running in a country has a hard currency supply issue, will has a supply chain struggles.
6)?????Exchange rates
Exchange rates?are the price of foreign currency that an amount of currency “EGP” can buy one US Dollar. An increase in the value of the Egyptian Pounds means one EGP can buy an increased amount of USD, meaning you are getting more for the same amount of money.
Businesses that?import and export?goods need to pay close attention to exchange rates risks as the value of goods are highly sensitive, and this will impact their prices. If prices go up, people demand will change according to the product elasticity and other economic factors.
Businesses that trade domestically must also be aware of changes in exchange rates as they will have an opportunity by virtue of the wider economy.
Four Factors Create the Business Opportunity during Economic Downturn
Businesses move in difference directions and not all businesses and industries feel the same pain during economic downturns. Even a recession can provide opportunity for growing a business and some businesses even can benefit from the economy downturn according to the below six main factors:
Business ideas could result from non-availability and sometimes scarcity of existing
product.
1)?????Consumer segmentation.
A business can understand demand on its product through doing a customer segmentation. It’s a simple process of classifying consumers into segments that share common characteristics.?These characteristics can be "hard" variables such as age, gender, place of residence, educational level, occupation and level of income or "soft" variables such as lifestyle, attitude, values and purchasing motivations.
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Following to the identification of the segmentation that your business target, you can easily define if recession will be impacting your business or be as an opportunity. It’s not always about targeting segment A “upper class income”. Below examples will show you opportunities that can be created from segment B & C “medium and low-class income”.
Ex1: Financial Advisory or Property Management businesses: are concerned by segment A who has the least impact from the recession and will be in a big need for services that are concerned by hedging their investments.
Ex2: Maintenance and Auto Repair businesses: are concerned by segment B & C who can’t buy new products and will be keen to keep their current devices working efficiently. Classifieds businesses as well since trade of used products may boom if the new is very expensive or not existed because of the hard currency or supply chain issues.
2)?????Pricing model.
Business models that are built on mass subscriptions with a very low pricing can survive. The wider range of customers you have and lower pricing you offer, the better numbers you will achieve.
Or simply implement a dynamic pricing strategy. Implement "premium," "standard," and "economy" pricing. Premium customers receive extra value with minimal discounting whilst economy customers get minimum value for a discounted price.
A dynamic pricing strategy presents for customers different prices according to time, location, or purchase quantity.?
The objective here is to keep sales numbers going using a tool that let business monetize as much as it can from each customer segmentation.
3)?????Elasticity.
The elasticity of demand refers to?the degree to which demand responds to a change in an economic factor. Price is the most common economic factor used when determining elasticity. Other factors include income level and substitute availability. Elasticity measures how demand shifts when economic factors change.
Inelastic goods may include items such as tobacco and prescription drugs as demand often remains constant despite price changes.
During recession, the more your business submits a value that is tends to the inelasticity direction, the better opportunity you will have.
Ex: Investing in health care industry and grocery stores.
4)?????Investing in Emerging Markets
While unemployment, people low income and exchange rates are economic threats as explained, they could be an opportunity for business to invest / manufacture in emerging markets and gain from the better purchasing power of USD and the high operating margins.
Ex: Web engineers’ costs are much lower in Africa, South Asia and Latin America in comparison to Europe and North America. For software businesses, it is better to recruit and run business from countries that have currency devaluation, benefit from the high marginal profits and export it’s services abroad.
Three Main Strategies Help Existing Business Sustainability
During the economic downturn, existing businesses have the potential to survive and be ready for the after-crisis period through changing their strategies as follow:
1)?????Clients’ centricity.
Customer service is about providing customers with what they want when they want it. If your business provides quality?customer service, you are likely to retain your existing customers. This also means you have a greater chance of keeping and?increasing your client base. This may mean pivoting your business towards new markets or products and services.
2)?????Marketing strategy.
Reviewing your?marketing strategies?can help you come up with new ideas to increase sales and find better ways of using your marketing spend. You should focus on communicating?your competitive advantage.
Marketing your business can be an expensive exercise, and during an economic downturn it's especially important to explore free marketing tools available to you, including?social media?and word-of-mouth advertising.
3)?????Encourage innovation.
Developing?innovative practices?may help you adapt to changing market conditions and stay ahead of your competitors. As part of this process you should review if using technology will increase efficiency, reduce costs and make your business more competitive, for example, installing a customer management system, or?doing business online.
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