This PDF presentation is designed to be used by business owners, chamber groups, and communities. The presentation details some negative economic indicators and highlights strategies and tools that can be used to grow or sustain a business during recessionary times.

O'Brien, Meghan

English

Research Papers in Economics

 
Regional Capacity Analysis Program
Tips for Running a Business 
During Tough Times
Meghan O’Brien
June 2009
Iowa State University Extension
Department of Economics
 1 / 49 
Regional Capacity Analysis Program
Bank Failures by State 2008-2009
How tough are times really?
 2 / 49 
Regional Capacity Analysis Program
Foreclosures by State
How tough are times really?
 3 / 49 
Regional Capacity Analysis Program
Unemployment Rates by State
How tough are times really?
 4 / 49 
Regional Capacity Analysis Program
How tough are times really?
Household Debt to GDP Ratio
 5 / 49 
Regional Capacity Analysis Program
Household Wealth and Real Consumption
How tough are times really?
 6 / 49 
Regional Capacity Analysis Program
How tough are times really?
 7 / 49 
Regional Capacity Analysis Program
Pretty Tough…
But things 
could 
always be 
worse
How tough are times really?
 8 / 49 
Regional Capacity Analysis Program
What does this all mean?  
o Correction in markets is necessary!  Record consumer 
spending expansion ripples through economy.
o Paradox of Thrift is not necessarily a bad thing!
o Many businesses will not survive the downturn.
o Distribution of Winners and Losers will be lumpy.
o Innovation and Adaptation will make some businesses 
more successful in long run.
 9 / 49 
Regional Capacity Analysis Program
What does this all mean?  
o Successful Businesses will view recession as an 
opportunity rather than a nail in the coffin.  
o Examples of businesses born or expanding in 
downturns:
oBurger King
oCNN
oMicrosoft
oFed Ex
oYours?
 10 / 49 
Regional Capacity Analysis Program
Management and Planning
“The social object of skilled investment 
should be to defeat the dark forces of time 
and ignorance which envelop our future.”
J.M. Keynes
 11 / 49 
Regional Capacity Analysis Program
Management and Planning
Why do businesses need planning and 
management to be successful?
Problem:  
Dispersed knowledge and uncertainty
Solutions:
Man made conventions and tools
Adaptation
Learning
Experience
Start with basics
 12 / 49 
Regional Capacity Analysis Program
Management and Planning
Six Interrelated Steps to Management Process:
Step 1:
Define and develop the firm’s mission
Answer the Who, What, Why, Where and How of the 
firm.
 13 / 49 
Regional Capacity Analysis Program
Step 2:
Formulate Objectives
Link the mission statement of the firm to specific 
targets and goals.
Management and Planning
 14 / 49 
Regional Capacity Analysis Program
Step 3:
Assess the firm and evaluate the environment
Strength, weaknesses, opportunities and threats 
analysis.
Management and Planning
 15 / 49 
Regional Capacity Analysis Program
Step 4:
Build Strategy
Managerial tasks involving procedures requisite 
to achieve expenditures.  Analyze data, policy 
and institutional framework, and relevant 
external factors.
Management and Planning
 16 / 49 
Regional Capacity Analysis Program
Step 5:
Implement Strategy
Personnel, expenditures, operating procedures.  
Involves administering plan throughout 
business.
Management and Planning
 17 / 49 
Regional Capacity Analysis Program
Step 6:
Evaluate Performance
May involve corrective actions.  Adaptability. 
Who exemplifies this in our current 
environment?
Management and Planning
 18 / 49 
Regional Capacity Analysis Program
Fundamental Goals of the Firm
Profitability
Reduction of Risk
Liquidity
Management and Planning
 19 / 49 
Regional Capacity Analysis Program
Strategies
Five Forces Analysis
Internal 
Rivalry
Entry
Buyer 
Power
Substitutes and 
Complements
Supplier 
Power
 20 / 49 
Regional Capacity Analysis Program
Why do we care about Industry Analysis?
y Tool available to facilitate effective 
management in world of dispersed 
knowledge
y Can directly impact profits
y Self preservation
Strategies
 21 / 49 
Regional Capacity Analysis Program
Industry Analysis Facilitates these tasks:
• Assessment of industry and firm performance
• Identification of key factors in vertical trading 
relationships and horizontal competitive 
relationships
• Determination of how changes in the business 
environment affect performance
• Identifying opportunities and threats (SWOT 
analysis, step 3 in six interrelated steps)
• Assess business strategies
Strategies
 22 / 49 
Regional Capacity Analysis Program
I.  Internal Rivalry
Reflects degree of competition for market share
1. Define market:  all firms that constrain each 
other’s strategic decision making; elements 
may be spatial, categorical, etc.
2. Price Competition:  drives down price/cost 
margins
3. Non-Price competition:  drives up fixed costs 
(R& D, Image, Advertising, Branding)
Strategies
 23 / 49 
Regional Capacity Analysis Program
Price Competition:  Exacerbating factors
Can be more dangerous to profits by definition, cannot pass on to consumers
1. Many sellers in market
2. Stagnant or declining industry (zero sum game)
3. Firms have different costs (different incentives)
4. Excess Capacity
5. Undifferentiated products/Perfect Substitutes (no transaction 
cost for consumer to switch)
6. Low Transparency (when rivals cannot immediately see change 
in prices or sales terms, slower response time)
7. Infrequent sales orders/large size (may cut prices knowing it 
will be one time phenomenon to get business)
8. No history of cooperative pricing:  true competition
9. Strong exit barriers (can prolong price wars)
Strategies
 24 / 49 
Regional Capacity Analysis Program
II.  Entry: Limits to
Divides up market demand, increases internal rivalry
1. Economies of scale; must have significant market share to 
reach efficient scale
2. Government protection of incumbents
3. Consumers are brand loyal/excessively value reputation
4. Access to inputs, R&D, raw materials, location, distribution 
(patents, unique locations are barriers)
5. Steep experience curve
6. Network externalities:  advantage to incumbents with strong 
base
7. Expectations and history of incumbent behavior after entry
Strategies
 25 / 49 
Regional Capacity Analysis Program
III.  Substitutes and Complements
Substitutes reduce profits in same fashion as new 
entrants, complements enhance opportunities (big 
tubs and water heaters)
1. Availability
2. Price value characteristics
3. Price Elasticity of demand for subject industry
Strategies
 26 / 49 
Regional Capacity Analysis Program
IV & V.  Supplier and Buyer Power
Substitutes reduce profits like new entrants, complements 
enhance opportunities
Supplier Power: Takes point of view of downstream 
industry and asks what power the suppliers have to 
extract or erode profits through their negotiated 
prices
Buyer Power: Takes consumer point of view, What 
power do customers have to negotiate purchase 
prices that erode sellers profits.  Direct power refers 
to situations where buyers are concentrated and can 
negotiate, not the indirect power dictated by 
supply/demand and competition
Strategies
 27 / 49 
Regional Capacity Analysis Program
• Studies suggest that industry factors dictate about 
10-20% of a company’s profitability
• Firm specific effects represent another 20-40%
• Proper management requires analysis of firm and 
industry, along with recognition of exogenous 
factors
Strategies
 28 / 49 
Regional Capacity Analysis Program
Price Elasticity
Describes the degree to which consumer’s adjust the 
quantity demanded of a good when the price changes.  
Businesses need to understand the demand for their 
good or service to make proper decisions
Inelastic Goods (over some horizon):  Gasoline, water
Tend to be goods with no close substitutes
Elastic Goods:  Dining out, luxury automobiles, sugar
Goods with many substitutes
Strategies: Pricing
 29 / 49 
Regional Capacity Analysis Program
Menu Costs
Economic Theory suggests that it is not costless to 
change prices in response to every economic 
situation due to transaction costs.  
Standard example:  Restaurants have to print new 
menus to change their prices which is a costly 
endeavor.  This coupled with the relevant elasticity 
can lead to huge consequences for overall revenue.
Strategies: Pricing
 30 / 49 
Regional Capacity Analysis Program
Consumer Segments
Pricing strategies can differ amongst your customers 
to maximize revenue if they are heterogeneous or 
easily identified in distinct groups.
Can be identified in various ways:
•Demographics (age, sex, etc.)
•Geographic
•Behavioral (readiness to buy, brand loyalty)
Strategies: Pricing
 31 / 49 
Regional Capacity Analysis Program
Consumer Segments
Can also be used as a retention tool by asking:
1. Is this customer at high risk of cancelling service or 
enlisting competition’s goods or services?
2. Is this customer worth retaining?
3.  What retention tactics should be used with this 
customer?  Discounts and lower prices are often 
strategies here.
Strategies: Pricing
 32 / 49 
Regional Capacity Analysis Program
Anticipating Competitive Response
Knowing your customers is important but so is knowing 
your competition.
• Pricing wars can be costly for the smaller firm
• How much transparency is there in your market?  Are 
prices readily apparent?
• Consumers choose on a bundle of attributes, not just 
price.  Service, convenience, and loyalty can all lessen 
the impacts of prices.
Strategies: Pricing
 33 / 49 
Regional Capacity Analysis Program
Strategies: Pricing
Inventory
Willingness to adjust pricing to manage inventory 
can maximize revenue and control inventory costs
• Discount older merchandize not selling, sunk cost 
theory.
• Reduce inventory and operate with a leaner 
approach, focus on major sellers and must haves. 
Do not be induced by lower prices to over order.
• Offer lower price substitutes within your business 
to avoid losing business to competition.
 34 / 49 
Regional Capacity Analysis Program
BE INNOVATIVE
Marketing tends to be one of the first cuts businesses make 
when times are tough.  Is this not counterintuitive?
Strategies: Marketing
• Try lowest cost options 1st:  Use customer database as 
a tool, offer workshops or seminars in house, partner 
with other businesses. 
• Don’t eliminate your marketing budget, but stick with 
the tried and true.  Spend money where its been most 
effective.
• Use the WEB and Local business resources for 
networking.
 35 / 49 
Regional Capacity Analysis Program
REINVENT YOURSELF
Upgrade and enhance your image as a marketing tool.
Strategies: Marketing
• Retail businesses can inexpensively update the 
appearance of the store by changing signage, moving 
around inventory, updating fixtures. 
• Service based businesses can enhance logos and 
branding, update uniforms, change appearance of 
front of business.
• Remember that consumers are looking at a bundle of 
attributes and some are on soft dimensions.
 36 / 49 
Regional Capacity Analysis Program
Overall Strategy 
Economic 
Profitability
Value created 
relative to 
competitors
Benefit Position 
relative to 
competitors
Cost position 
relative to 
competitors Market economics 
(bigger picture than 
industry and firm)
 37 / 49 
Regional Capacity Analysis Program
• Produce at lower unit cost than your competition.
• Minimize overhead, operate leaner.
• Sole proprietors may have to work more and lean 
labor costs.
• Offer lower prices than competitors.  Cost savings 
must offset loss in quality.
Overall Strategy
Cost Advantage/Leadership
 38 / 49 
Regional Capacity Analysis Program
• Try and command a price premium for superior 
quality and service.
• Offer more upscale mix of inventory or more 
services.
• Requires strong knowledge of customer base 
and their demand.
Overall Strategy
Benefit Advantage/Leadership
 39 / 49 
Regional Capacity Analysis Program
• Offer a narrow set of product varieties or 
serve narrower set of customers.
• Can include customer, product, or geographic 
specialization.
• Can insulate a firm from competition.
Overall Strategy
Narrowing Focus/Niche Markets
 40 / 49 
Regional Capacity Analysis Program
• Weak HD:  When product is simple and only 
a few attributes matter and are uniformly 
ranked.  (Light bulbs, erasers)
• Strong HD:  When there are many product 
attributes consumers weigh and opinions 
vary widely.  (Cereal, beer, etc.)
Overall Strategy
Horizontal Differentiation
Refers to the bundle of attributes consumers 
choose a product on.
 41 / 49 
Regional Capacity Analysis Program
Horizontal Differentiation and Price Elasticity
-Modest price cuts gain 
lots of market share
Exploit advantage 
through higher market 
share, underprice 
competition
-Modest price hikes lose 
lots of market share
Exploit advantage 
through higher market 
share, maintain price 
parity
-Big price cuts gain little 
share
Exploit advantage through 
higher profit margins, 
maintain price parity
-Big price hikes lose little 
share
Exploit advantage through 
higher profit margins, 
charge price premium 
relative to competition
Cost Advantage Benefit Advantage
High Price 
Elasticity 
(weak 
HD)
Low Price 
Elasticity 
(strong 
HD)
 42 / 49 
Regional Capacity Analysis Program
Non-Substantive Product Features and 
Choice:  When consumers are faced with a choice 
between multiple products with little differentiation 
research suggests they may
Overall Strategy
a. Defer choice:  Customers may not purchase 
until they can conduct search to determine 
which they should buy. 
b. Differentiate based on packaging, 
attractiveness, and peripheral inputs
c. Choose randomly
 43 / 49 
Regional Capacity Analysis Program
Signaling Effects:
When quality of unobservable and differences between 
products difficult to discern, quality perceptions may be 
made by inference.
Overall Strategy
1. Advertising Commitment: Idea that large 
advertising budget and effort leads to idea that 
quality must be higher.
2. Product Warranties/Guarantees.
3. Position: First in market or pioneer seen to 
better quality.
 44 / 49 
Regional Capacity Analysis Program
1. Through the emotions consumers experience with 
or attach to consumption of the product.
2. Experiential Aspects of consumption:  perception 
that product is superior in absence of physical 
differences.
3. Emphasize symbolic aspects of products use,  
group membership, sensory pleasure.
Overall Strategy
Ways of Differentiating a Product
on Soft Dimensions:
 45 / 49 
Regional Capacity Analysis Program
1. Growth Strategies  (Expand)
2. Stability Strategies  (Maintain)
3. Restructuring Strategies  (Refocus)
4. Succession Strategies  (Transfer)
5. Exit Strategies  (End)
Overall Strategy
Five Types of Business Strategies
Where are you & where do you want to be?
 46 / 49 
Regional Capacity Analysis Program
1. Know and listen to your customers, it’s the oldest 
adage for a reason.  
2. Make the moat around your business deep and wide.
3. Know your inventory and your competitors.
4. Adjust your pricing if you can.
5. Remain liquid!
6. Conduct SWOT analysis and industry analysis.  
Consider your overall position, what competitive 
advantage do you have?
Conclusion
What can you do to prosper
and survive tough times?
 47 / 49 
Regional Capacity Analysis Program
Iowa State University Retail Trade Analysis Program Iowa State University Retail Trade Analysis
For more information please visit our website:
www.recap.iastate.edu
Presentation prepared by:  
Meghan O’Brien
Extension Program Specialist 
Department of Economics
Iowa State University
 48 / 49 
Iowa State University does not discriminate on the basis of race, color, age, religion, national 
origin,  sexual orientation, gender  identity, sex, marital  status, disability, or status  as  a  U.S. 
veteran.  Inquiries can  be directed to the Director  of Equal Opportunity  and Diversity, 3680 
Beardshear Hall, (515) 294-7612. 
 49 / 49

Tips for Running a Business During Tough Times

http://www.econ.iastate.edu/sites/default/files/publications/papers/p11201-2009-06-01.pdf

Tips for Running a Business During Tough Times

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics