How to Maintain Profitability in Times of Economic Downturn

Surviving challenging business cycles is never easy. Maintaining profitability takes an abundance of discipline and creativity. Your most important task will be redefining your strengths and weaknesses. Small businesses have the luxury of agility; they can respond faster to changes in demand. Larger organizations can bring more agility to business operations through the Internet. Both must learn new ways to reduce costs and/or increase revenue.

Instructions

1. Discover the optimal business model. The difference between Netflix and Blockbuster is not in their size or product, but in the business model. Netflix capitalized on the Internet and local distribution centers while Blockbuster continued with the brick-and-mortar business model. The optimal business model can only be created with the customer in mind. Is there a way to get closer to your customer? Is there a way to respond to demand faster?

2. Align your business model with your mission. Everyone in your organization should be dedicated to improving profitability; that is, everyone should be thinking about decreasing costs and increasing revenues while maintaining quality. Reassign resources to those projects with the greatest return and be sure to allay any employee concerns by fully explaining the transition.

3. Treat marketing as a primary asset. Digital marketing has made advertising campaigns easier and less expensive. Sites like Commission Junction (see Resources) provide advertising campaigns for Internet sales, and intelligent email service providers are making customer-relationship management a breeze. Social networks are also a great resource.

4. Maximize your financial toolkit. Tax advantages and capital markets products can help to improve your bottom line and reduce variability. Can you capitalize more expenses---that is, spread out expenses over a longer period of time? Can you improve working capital---that is, how far can you extend accounts payable and what steps can you take to reduce accounts receivable? Have you considered factoring? Can you benefit from locking in a price on currencies or commodity inventory with futures contracts?

5. Maximize Porter's five forces of profitability. Michael Porter, a professor at Harvard Business School, believes profitability to be a function of five key forces: 1) new entrants, 2) suppliers, 3) substitute products or services, 4) competitors and 5) buyers. Develop a strategy around each of these functions.

6. Learn the benefits of Six Sigma and Lean. These are both quality initiatives aimed at reducing errors and waste, respectively. You can hire a high-priced consultant or you can do it yourself. Start by pinpointing the top five most important processes in your business (supplier selection, customer requests, etc.). Map the process from end to end. Are there any redundancies? Can you shorten the process? Are the proper controls in place to ensure best price quotes on contracts?

Tips & Warnings

• Good business is defined in seconds and cents. Paying attention to pennies will add up to dollars. Don't forget to reward your employees for all the hard work. Monetary rewards are great, but so is a groupwide thank you.

References

• Harvard Business Review; "The Five Competitive Forces That Shape Strategy"; Michael E. Porter; January 2008

Resources

• Commission Junction