Doing Business in Time of Recession

CAIRO - 4 February 2021: A crisis or a change in the business ecosystem can alter how an enterprise functions and can even terminate industries giving rise to others. The COVID-19 pandemic hit hard various industries, businesses of different sizes, and developing countries in specific. Given that adaption is key to survival, the following article highlights aspects to consider while adjusting, and takeaways of the behavior of firms one year through the crisis.

Expert Perspective

BP Endowed Chair and Associate Professor of Marketing at the American University in Cairo (AUC) Hamed Shamma tells Business Today Egypt, "during times of recession, some businesses face difficulties and others face opportunities. It is really up to each business whether they want to treat the difficulties as threats that cannot be addressed, or turn them into opportunities. For every threat there is an opportunity. Consumers will always have needs. Their needs change at different points in time. This is the case with recession."

With regard to difficulties a business encounters in time of recession, Shamma explains they include "declining sales, inadequate cash to pay salaries, increased costs, customers default, reputation crisis, and overall business becomes more risky."  

Nevertheless, "consumer spending may decline toward one category of products and go up toward other products. The ability to be proactive to the changes is something that is dependent on the corporate culture. Innovation, agility and sustainability are key during difficult times," the professor showcases. 

Speaking of how to handle a business efficiently during a recession, the marketing expert underlines, "businesses have to always operate in an efficient manner. This becomes more critical during challenging times. It is important to review all operations to check for efficiency to eliminate any unnecessary activities and optimize all operations. It is important to review and measure all operations and operate only those that are efficient."

A major predicament a business can go through is the rise in costs in a time where raising the selling price is not an option. The marketing professor clarifies, "there are many strategies here. 1. You can keep prices as is and accept lowering your profit margin, 2. you can reduce the volume of the product, 3. you can reduce the cost of the packaging or any other elements of the augmented product." 

As for customer incentives, "it is expected that during recession to have promotions and discounts. It is important for the business to bear its share of the recession maybe in terms of decline in sales and/or profits. This shows that the business is understanding and caring about its customers," Shamma points out.  

In order to prevent the deterioration of the brand’s image in time of recession, "brands should be more humane, empathetic and show understanding during a recession. Consumers will not forget what you did during challenging times. It is important to take this as an opportunity to gain brand credibility and trust, which helps build brand loyalty and respect," the marketing professor stresses.    

Scope of Current Damage 

According to McKinsey and Company's 41st Briefing Note issued on February 3, 2021 within the 'COVID-19: Implications for Business' report, "advanced industrial companies" have been affected badly as their sales, margins, and growth were pushed down.

The sectors suffering include "advanced electronics, aerospace and defense, and automotive and assembly companies." Firms operating in those fields worldwide "employ almost 25 million people and generate about $9.3 trillion in annual revenue."

Further, the World Bank indicated in a report titled "2020 Year in Review " that micro, small, and medium enterprises (MSMEs) in developing countries struggle the most with" half of them either in arrears or likely to fall into arrears." Surveys conducted by the World Bank among such firms between May and August show that their sales fell by half, and that they had to cut wages and hours.  However, more than a half of those firms did not resort to lay-offs so they would not be understaffed during recovery. Moreover, a third of them raised their reliance on digital technology to adjust to the new reality.  

Innovation and Change in Product Mix

Surveying 100,000 firms in 51 countries, a paper titled "Unmasking the Impact of COVID-19 on Businesses" and published by the World Bank indicates that around "34% of firms have increased or started to use the internet, social media and digital platforms; and 17% of firms have invested in new equipment, software or digital solutions in response to the pandemic."

The paper published in October show that 5% of firms began producing health related goods and services. Also, 21% of firms either changed some of their products/services or introduced new ones.

Additional Tips

McKinsey and Company provides a number of tips for businesses to mitigate the impact of the crisis. A significant one is benefiting from the expansion of e-commerce as businesses that resorted to online sales achieved "five-times-faster revenue growth compared with previous levels, as well as 30% higher acquisition efficiency and cost reductions of 40 to 60% within sales."

Furthermore, KPMG gives some tips on handling precise areas of the business in time of crisis. Examples are supply chain and logistics, and customers and customer care.

With regard to the former, a business is recommended to carry out analysis of supply chain interruptions, providers/suppliers and their subcontractors, and orders. In addition, it is advised to identify possible alternative providers/suppliers, and come up with stabilization measures.

As for customers and customer care, a business should analyze customer groups, customer response to various scenarios, and pricing. Hence, the business should be able to introduce discounts if possible, and articulate "more intense customer care," and optimize marketing activities.