Amid the panic of investors, brokers, and analysts, world equity markets plunged 20 percent in one week. IBM presented signs of survival as the company prepares to release a full earning report on October 16 that will show a 20 percent jump in profit. The enormous impact of sickly stocks, broken banks, credit crunch, cascading consumer confidence, and the reeling real estate market will continue to affect the world economy for several more fiscal quarters. However, some companies will use this incredible period to rise to the top, gaining market share and profitability, despite adjustments in overall revenue. What can be learned from those that survive and thrive during a time of economic crises?
The Economic Crisis
Governments around the globe are investing in businesses and banks in an effort to avoid a complete collapse of affected institutions. However, the general public is not convinced that the government will be able to effectively run the businesses it has acquired with any better dexterity than existing mismanaged government budgets. Furthermore, although the infusion of funds may temporarily secure investments, it does not alter the effectively alter the transactions that instigated the decline.
Inflated values of derivatives, fueled by ambitious speculation and fortunes amassed by paper transactions rose to catastrophic levels. Derivatives are commitments to purchase commodities or financial instruments at a fixed price, with an agreement to take profits if the value of the asset rises. In recent years, mortgages sold at subprime rates were bundled into securities. Lehman Brothers and Merrill Lynch created offsetting credit derivatives to protect investors in the event that these securities defaulted. Credit derivatives benefitted from profits derived from the increased number of subprime loans and home sales during the real estate bubble. When housing prices dropped and interest rates rose, many adjustable-rate subprime mortgage owners were unable to keep up with the higher monthly payment. Mortgages defaulted, demand for houses cooled abruptly, and the suddenly above market rates of credit derivatives collapsed. AIG was the biggest investor with US $527 billion in
World markets also fell prey to a pin-stripe financial pyramid schemes, suffering similar consequences on a global scale. In the first week of October, Tokyo fell 24.3 percent, Frankfurt fell 21.6 percent, London fell 21.1 percent, and Wall Street fell 19.8 percent. What was originally dismissed as merely a problem in the United States has shaken the foundations of financial institutions around the world.
Meanwhile, a little closer to home and possibly your own personal savings, you should be aware that mutual funds commonly contain derivatives in the portfolio. If you have investments in mutual funds, then you should consider investigating to determine if your holdings contain derivatives that regulators cannot control or even monitor. You can investigate your prospectus and the listing of holdings, or switch to a safe government bond fund. If this is the case for you, it may be time to replace your regular coffee with decaffeinated.
What this means to Manufacturing and Retail Sales
Mount Gibson Iron Limited of Perth, Australia acknowledged that it has received requests to delay iron-ore shipments from many manufacturing clients in China. The manufacturing facilities in China have already realized the decrease in demand and are making arrangements to adjust production schedules accordingly. Consumers are cautious about increasing personal debt, and carefully considering many more concerns before making purchasing decisions. The automobile industry was not only impacted by credit and loans, but sales are also influenced by alternative fuels, hybrid cars, and the rising cost of gasoline. Production and sales of luxury items, upgrade items, and new technology will start to slow down. Business budgets will be slashed to reduce costs, affecting commercial channels. Consumer commerce will not stop, but it will look both ways before crossing the street. Circuit City Stores reported a US $239 million loss and has already warned investors that holiday sales are expected to be disappointing. Acting CEO James Marcum, who replaced Philip Schoonover, promised a new marketing campaign to "bolster the company's holiday performance".
Fortunately, this slow down of luxury items and replacement products creates new opportunities for other markets and innovative suppliers. Many consumers will be more willing to make a small investment on a service plan or extended warranty to maintain the life of a product, as opposed to the alternative of investing in new product. Although luxury items will loose luster during this period of tight purse strings, discount goods will have greater appeal and renewed interest. Consumers will spend a little more time to look for a better deal, and those companies that offer the better deal will have a bigger piece of a smaller pie. When entire markets slow, it is time to replace revenue targets with goals for increasing profit or a bigger share of the remaining market.
Consumer cost cutting leads to higher demand for lower cost items. There is a sense of satisfaction and personal reward associated with the ability to conduct a purchase. While transactions for expensive garments may decrease, sales of lipstick and make-up may rise. Small price items provide an opportunity to experience the sensation of a rewarding purchase, without experiencing the regret or possible return of a more expensive item. This is particularly true when there is less disposable income in the pocketbook.
Production and sales of luxury products will slow down. The Santa Claus index indicates that there will be fewer and more economically priced presents under the Christmas tree this year. While that is bad news for some industries, it poses heightened opportunity for mobile phones, gaming devices, Wii TM, and Kindle TM.
When Sales are Down, Service goes Up
During tumultuous times for production and sales, demands for services increases. Organizations are already aggressively searching for partners to outsource services. In transferring the cost for service and support off the books, organizations are looking for partners that provide best practices. This allows the client to adjust organization size, manpower, warehousing, planning, and assets by transferring the burden to a trusted vendor. The vendor provides a service to the client and uses expertise, efficiencies, or the combined consolidation of multiple clients to provide lower cost service solutions. Furthermore, really creative vendors will help the client to identify ways for the client to resell the services, thereby generating new revenue streams and shared opportunity for profit. It is by looking at opportunities to lower the bottom line and simultaneously raise the top line that vendors advocate for their clients.
It is important for companies to differentiate the financial value of services. Service vendors that demonstrate an ability to help reduce client cost, preserve client profit, and address the many related needs of a client will have an opportunity to increase business and market-share. Third Party Service Providers, logistics providers, repair, and professional services that result in lowering client costs will be in high demand. Extended Service Plans and Maintenance Contracts create opportunity for shared profit, and enable the client's customers to extend the return on investment. Organizations that leverage this economy will not only gain new business, but also has the opportunity to develop a long lasting relationship with the client. Service vendors should seek long term commitments and corresponding long term contracts. The assumptions regarding profit and associated investments must be precisely documented, and flexible enough to adjust when the temporary economic crises turns into new growth markets.
Many types of services provide a fluid environment that can be rapidly adjusted to maximize profit. The term "services" typically implies utilization of manpower resources that can be rapidly adjusted to accommodate changes in market conditions. The same can be said of software as a service (SaaS). Have you ever thought of e-Bay as a service? The online auction company provides a service for consumers to connect with one another. Some consumers benefit by generating some revenue from otherwise unwanted items. Other consumers benefit from access to lower cost alternatives for purchasing items, thereby saving money. Some businesses use the online auction to augment liquidation. The ease of this service, the value associated with lower cost alternatives, and the desire to expedite cash flow will continue to grow this online service during an economic crises. The overhead cost and relative investment expense for e-Bay clients is negligible in comparison to the number of transactions and the cash flow. Are there services that you can provide that offer low overhead, low investment, and high yield?
What did IBM do?
International Business Machines third quarter income amounted to US $2.8 billion, or US $2.05 per share. That is 20 percent higher than the US $1.68 per share as compared to the same quarter last year, and it surpasses the US $ 2.02 per share predicted by Thomson Reuters. IBM is predicting that it will achieve 22 percent earnings growth for the year.
Many will remember IBM as the company that brought computers to a global stage. From punch cards and gas tubes, to PC's and mainframes, the roots of the computer family tree invariably include IBM. Since licensing the brand name to Lenovo, a business strategy that bolstered both organizations, IBM has relinquished production and sales of computer hardware devices in lieu of a diversified portfolio of software and services. IBM emphasis on long term service contracts now accounts for more than half of it's current revenue. As the economic conditions place strains on clients, the rate of growth is expected to slow, but is not expected to negatively impact the overall percent of profitability. By growing services as a percent of the company, and by offering highly profitable software solutions, IBM has increased profit margins from 41.3 percent to 43.3 percent gross margin as compared to the same quarter last year.
What can you do?
The news about economic crises can be unsettling. However, for the creative and the courageous, there are new business opportunities.
Look for services that can augment your profitability with minimum overhead or investment costs.
Develop business opportunities that have the most flexibility of resources.
Focus on opportunities to use your business in a manner that augments the cost reduction or enhanced profit of your clients. By helping your clients to succeed, you enable them to invest in your relationship and success.
Don't be distracted by the mantel of the crisis, but rather look below it at the opportunities that are being exposed. As a trusted advocate for your clients, they will help you uncover the opportunities so you can do more than survive. You will thrive.
Consider options to use Software as a Service to reduce costs for your organization, to offer cost cutting options to your clients, or to create new revenue streams with flexible resources.
Consider how your cost cutting measures and flexible resources can be outsourced to your clients. If you successfully implement innovative responses to economic changes, how can you share these benefits with your clients, or even use the creative ideas to create new market opportunities?
You are not alone. The obstacles encountered as a result of economic turmoil present the same challenges to your competitors as they do to you. Your strategic response to protect profit, acquire market presence, and solidify brand awareness during the challenging period are the foundation for positive growth when the market returns. Rally around the core competencies and competitive values of your company. Be prepared to outsource or sell the portions of the business that do not contribute to profit, share of market, or the brand name.
Create an internal think tank of individuals specifically organized to monitor the impact of the economy on the organization. The think tank should include individuals with experience from previous economic challenging periods, as well as individuals with bold new ideas. If possible, include representation from finance, sales, operations, marketing, service, and human resource departments as applicable to create a comprehensive report on potential company impact and several suggested plans of action. Response plans should include worse case scenario planning, as well as response to current conditions, and several alternative action plans. By considering the options for response to crisis, and preparing plans to take advantage of rapid growth when the crisis subsides, the organization will be poised to respond quickly, accurately, and aggressively to each positive or negative change on the roller coaster ride.
This article is not intended to render legal or financial advice. If you require legal advice, you should seek the services of an attorney. If you require financial advice, you should seek the services of an accountant or licensed financial advisor.
Words of Wisdom
"The Chinese use two brush strokes to write the word 'crisis.' One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger - but recognize the opportunity."
- John F. Kennedy
"Too many people are thinking of security instead of opportunity. They seem more afraid of life than death."
- James F. Byrnes
"Trouble is only opportunity in work clothes."
- Henry J. Kaiser
"There is no security on this earth, there is only opportunity."
- General Douglas MacArthur
John Mehrmann is author of The Trusted Advocate: Accelerate Success with Authenticity and Integrity, the fundamental guide to achieving extraordinary sales and sustaining loyal customers. This revolutionary book applies peak management techniques and leadership skills, with common sense and practical applications to grow business, sustain loyal customers, and use personal talents for personal success.