When economic recessions hit, it's time for businesses to tighten the purse strings, fire employees, take cover, and weather out the storm, right? Wrong.
For those who have eyes to see—and courage to act on what they see—recessions are times of vast opportunity. Aristotle Onassis built a $500 million fortune in the shipping industry at the peak of the Great Depression by buying freighters at bargain prices, financed using other people's money. Joseph Kennedy, who bought a large pool of stock in a liquor company, also thrived during the Depression by understanding political trends (he made millions when Prohibition was repealed in 1933).
In contrast to the common perception that the Great Depression was a time of suffering for all Americans, James Gregory, associate professor of History at the University of Washington, says,"[During the Depression] about a third of the population suffered unemployment and difficulty. About a third of the population maintained their standard of living, and another third of the population did better in the course of the 1930s than they had done before."
What is the secret of those who thrive in economic chaos and difficulty? Is it luck? Exploitation? Of course not! Those who create wealth in economic busts live the same principles as they do in booms, while those who thrive in good times yet fail in bad are often products of luck. Hard economic times provide excellent strategic opportunities for entrepreneurs who are willing to buck conventional wisdom. There is absolutely no need to panic when you have a plan. But you do have to be willing to turn from the naysayers and be different.
With this in mind, here are six counterintuitive principle-based ways for wise entrepreneurs to thrive during recessions.
1. Take Better Care of Your People–Raise Salaries
While most businesses use downturns as excuses to cut back on investments in employees, smart business owners will do the exact opposite and capitalize on the opportunity to build leaders. The principle behind this is that people are the only true assets. Another way to say this is that people have intrinsic value, while material things have none.
It's common for entrepreneurs to view employees as liabilities, especially since payroll shows up as an expense on their income statement. The smart ones recognize that their people are their most valuable asset; the liability of payroll is the price to pay to have access to the assets.
While you may identify some employees who do not produce more than they consume within the business, focus on helping, building, and inspiring your best people. Give them a raise. Show strength, vision, and most importantly, gratitude to instill a culture of production and loyalty, rather than fear, and to get the best out of your people. It's common sense that people who feel valued perform better.
2. Spend More
There are two general types of liabilities: consumptive and productive. Consumptive liabilities take money out of your pocket without directly putting anything back in,
such as clothes and food. Productive liabilities are attached to a corresponding asset that provides an increase in cash flow. For example, for a real estate investor, a mortgage could be a productive liability if she is able to earn more in rent than she pays on the mortgage.
The common tendency is to shrink budgets when hard times hit. The smart approach, however, is to identify where your money will have the most impact and increase your spending in that area—even if it means borrowing money to do so. I've already mentioned paying your employees more. Perhaps you should put more money into marketing; while other businesses in your industry are struggling and cutting back, you should be gaining market share. Invest in critical infrastructure that will help you be more efficient and increase your scale of economy. It may also be the perfect time for you to increase the scope of your economy—businesses exist to solve problems, and during recessions there are more problems to solve.
While you may need to trim the fat and remove waste from your budget, it's far more conducive to wealth creation to focus on increasing your production rather than on decreasing your expenses. Recessionary times are perfect to buy because most assets are undervalued and can be bought at bargain prices. Incurring productive liabilities and spending more can be an excellent way to increase production and market share during a recession.
3. Meet Less, Empower More
Far too many business meetings are unproductive, too lengthy, and involve unnecessary people. Frequent and unproductive meetings are a sign of poor management, an inability to release control, and a lack of systems. All of these failures are often concealed when businesses are cash rich and thriving but become readily apparent and cannot be endured in downturns.
Empower your people by setting clear expectations and boundaries and then letting them make decisions and lead in their sphere of influence. Give them more responsibility and then follow through by holding them accountable. Ensure that every individual is in a position that utilizes his or her strengths and helps him or her to shine. Replace bureaucratic friction and autocratic control with streamlined and documented systems.
4. Three Words: Liquidity, Liquidity, Liquidity
Although qualified plans are sacred cows, a recession should make you reconsider if they are in your best interest. Many businesses fail because of the classic "asset rich and cash poor" syndrome. When money is tight, and especially when you're uncertain when the situation will change, you can't afford to lock your money up in retirement plans; you need control and liquidity.
Ultimately, your business is a far better investment than a 401(k) anyway, especially since it can provide ongoing cash flow without the worry of depleting principal. Invest in yourself and in your business and keep your money available to do so.
5. Focus, Not Diversification
You've heard the common cliché "Don't put all your eggs in one basket." Whoever says this doesn't have the right basket. When times are hard and people become fearful, they will often take a shotgun approach to business, shooting as much as possible and crossing their fingers and hoping that they will hit something. The best entrepreneurs, however, pick up a rifle, identify the right target, and nail the bull's-eye.
The more difficult the economic environment, the more important it is for you to focus on your core passions, values, and competencies. I often speak of Soul Purpose, which is an individual's unique set of talents, abilities, and passions applied productively and effectively, which make tremendous impact upon the world and bring the highest levels of joy and fulfillment for the individual and everyone he or she touches. Companies also have—or at least should have—a Soul Purpose, a core reason for existing. Jim Collins, in his classic Good to Great, explains this through his "hedgehog" concept.
Put all your effort into finding and developing the Soul Purpose of your company. Eliminate any aspects of your business that do not support and complement it. Those who try to be everything to everyone often do very little for very few. You must identify who you are, why you exist, who you can serve, and what you can be the best in the world at; then bring that core to the world in the most powerful and effective way possible. Diversification is nothing but distraction; focus is the magnification of your value proposition.
6. Embrace Change Through Education
Recessions are times of great change and upheaval. Those who struggle often do so because they cling to the past, afraid to let go of the status quo. They complain about outsourcing and layoffs due to innovation. They wish that everything could stay the same. While they're wishing and complaining, the fortune-makers are learning and leading.
It's critical for you to stay on the cutting edge of innovation through a lifelong pursuit of education. The most successful entrepreneurs I know are those who are constantly reading, attending seminars, engaging with mentors, and exposing themselves to new adventures and ideas. Prideful academics who think they know everything and the unwise who think that education is but a short and mandatory period during their youth are overtaken by those who are humble enough to never stop learning. As Eric Hoffer said, "In a time of drastic change it is the learners who inherit the future. The learned usually find themselves equipped to live in a world that no longer exists."
Don't try to stop change—be the change by investing in lifelong education.
Warren Buffett once said, "A great investment opportunity occurs when a marvelous business encounters a one-time huge problem." A recession presents such an opportunity for your business. But in order for you to fully exploit it to your advantage, you must go against the grain of popular and traditional thinking.
While others are downsizing, cutting back, floundering, and desperately trying to diversify, you should be building your people, spending more money on the right things, thriving by being on the cutting edge through education, and maintaining laser focus on what you do best.