Maintaining Brand Stature in a Crisis

From The Core: (This is a produce industry blog, but the point made here has application to the green industry.)

If you’ve been living under a rock or don’t have access to television, radio or the Internet, you might have missed the recent news about Toyota. First, they announced depleting sales due to the recent recall of eleven vehicle models following the malfunction of a floor mat entrapment and sticking gas pedal. Then, as if things couldn’t get any worse, came the question about the functionality of the brakes on all of the company’s hybrids, including their famous Prius model. Ouch.

Toyota’s public relations crisis worsens on a daily basis, yet the company continues to push through each blow by responding apologetically and sincerely through several media vehicles to reach their target audiences – current and potential owners of Toyota automobiles.

As if they wrote the book on “crisis management,” Toyota started with a massive public relations campaign with press events in both the United States and Japan featuring politically correct statements from top executives for television, print and digital media hunters to push. On YouTube, the President and COO of Toyota North America posted a heartfelt apology video to Toyota owners promising to “fix the problem.” On the company’s website, a page is devoted to the recall and provides customers with a “Customer Experience Center” phone number.

Taking ownership for its problems, Toyota has exhibited a concentrated effort to own responsibility, taking control of its story and communicating with honesty and regularity directly to consumers. Toyota’s response comes across as apologetic and believable. But have they done enough to sway public opinion amidst the media storm? To find the answer, I sought consumer conversation on Facebook and Twitter. What better way to gauge consumer attitude? The disparity in reaction on the social media sites surprised me.

On Toyota’s corporate Facebook page, proud Toyota owners posted photos of their beloved automobiles and convey their undying faithfulness to the company, no matter what. With a quick Twitter analysis of conversation surrounding #Toyota, I find exactly the opposite, with statements that are primarily negative in nature discussing the company.

As a marketer in the fresh produce industry, I think about the public’s reaction to the spinach and tomato crises that occurred over the past few years. What if the spinach crisis hit today? Would it be a one-sided media story? Are we fully engaged in consumer conversation through the available media like YouTube, Facebook and Twitter to educate consumers, increase awareness and tell our story?

So what? In an industry where food safety is paramount, I wonder if we can all learn something from the Toyota crisis. Are we prepared for a major food safety crisis and recall from a public relations perspective? What will you do if your company’s name is making headlines and changing consumer perception for the worse about your brand? Or even if it’s not your company, but rather a commodity that you provide? Does your company have a crisis management strategy in place?

Fire Yourself Today

From today's Harvard Management Tip of the Day:

Management shake ups, while disruptive, can be good for a company. They bring in fresh perspectives and require that leaders take a hard look at their own performance. Don't wait for your company to get in trouble. Instead, fire yourself. Not literally, but think about what you would do in your position if you were to start anew. What would you do differently if this was your first day on the job? Taking this step back can help you evaluate the strategies and approaches you are currently using, see things that are too difficult to see when you are entrenched, and re-energize you for the challenges ahead.

What a difference a value proposition makes!

From today's Harvard Business Daily Stat:

76% of frequent fliers would switch airlines in order to have Wi-Fi access in the air, according to a new survey by Wakefield Research and the Wi-Fi Alliance. 71% would prefer Wi-Fi over a meal, and 55% would change their travel plans by a day to avoid being out of touch during the flight. 94% say Wi-Fi is "the best thing airlines have done" in the last three years.

OK, admittedly these are stated versus revealed preferences, but obviously, such behavioral change in a relatively short period of time requires a value proposition that is compelling and relevant.

Makes me wonder what value propositions we are putting forth in the green industry that would cause similarly stark behavioral change??? Could it be emphasizing the quality of life enhancements that we offer???

As usual, feel free to weigh in with your own thoughts...comments welcomed.

The Success Trap

From the latest BNET -- Stanford professor Jeffrey Pfeffer warns against the dangers of making it big:

Recently, my wife and I went to one of our favorite restaurants in Half Moon Bay, California. The experience wasn’t what we remembered; we waited 30 minutes past our reservation before we were seated, and another 15 minutes for bread and water to appear. I started to reflect on how common such experiences are - and not just in restaurants.

Few businesses are able to avoid the “success ruins everything” syndrome. Some firms overexpand and fail to maintain consistent standards, a fate that has befallen numerous restaurants and celebrity chefs that have spread themselves too thin. Others lose sight of their quality and performance standards in the push to grow quickly. Toyota, which built its reputation and economic success on its quality and design processes, recently admitted that it had let those standards slip in its quest to become bigger than GM. Toyota’s newly appointed CEO promised to return the company to its roots, fixing its quality problems and reinvigorating its technical innovation.

Some companies respond to success by resting on their laurels and ceasing to innovate. Microsoft, with its dominant position in many software markets, failed to improve security and other features on its browser after it crippled Netscape. This lacuna in product development permitted Mozilla to rise from Netscape’s ashes, build a more user-friendly browser, and in the process, gain almost a quarter of the browser market.

The complacency that often comes with success provides a window of opportunity for underdogs and upstarts. Witness Apple’s recent dominance over former cell-phone kingpin Motorola and Ryanair’s profits in a European airline market where its larger competitors are losing money in the face of declining revenues.

And it’s not just companies that suffer from success. So, too, do personal relationships. When a group achieves great success, it can split apart with jealousy as individuals each seek credit and a disproportionate share of the resources from their collective accomplishments. Individuals in firms often come to feel that they could make it on their own and really don’t need their colleagues. Such is the story behind the numerous splits in law firms, investment banks, and management consulting companies. As Tommy Chong, part of the counterculture comedy duo Cheech and Chong, remarked in an interview in the Toronto Star, show business, and maybe all business, is like mountain climbing: “When you’re climbing up the mountain, that’s when you really need each other. Then, when you get near the top, it’s over.”

But it doesn’t have to be this way. The key is to understand the basis of your success, whatever that happens to be, and retain a laserlike focus. Michael O’Leary, CEO of Ryanair, has not let the airline’s success change its emphasis on cost-cutting, even at the expense of customer service. Ryanair’s value proposition is cheap fares - and if you want something else, fly another carrier. Southwest Airlines has resisted the temptation to fly planes other than Boeing 737’s and to expand internationally. I understand how important great colleagues have been to my work over the years, so I try to be as generous with credit as possible, work on maintaining these important relationships, and to always be on the lookout for those who can complement my skills.

Yes, maintaining focus and discipline in the face of success is difficult. But the companies that maintain their performance over time do what it takes to maintain what made them successful to begin with. The night before our debacle in Half Moon Bay, we ate at Gary Danko’s, one of the toughest reservations to get in San Francisco. It was our anniversary, and when I expressed some dismay that our table wasn’t as private as I had hoped, a complimentary appetizer arrived almost immediately. Maybe that’s why Danko’s restaurant has maintained its position in the ratings stratosphere while so many other enterprises - restaurants and businesses - fall by the wayside, lured by success into forgetting what made them great in the first place.

I’m sure you have examples of businesses that were able to maintain the bases of their success as they grew and over time, and some that have fallen by the wayside. Let us know those examples and the lessons you draw from them.

Jeffrey Pfeffer is a professor of organizational behavior at Stanford’s Graduate School of Business and is the author or co-author of 12 books including “What Were They Thinking? Unconventional Wisdom About Management.

Importance of social media

Much discussion has ensued lately at various green industry meetings regarding the applicability of social media marketing efforts. Is this something that you should consider for your business? Click below to find out.



HT to Stan for the link.

Warning signs that a business is in trouble

From the latest GrowerTalks: Long before the bank says NO and the final profit and loss statement bleeds red ink, there are warning signs that a business may be in trouble. Whether you’re optimistic about your future or feeling a wee-bit stressed these days, it’s crucial to monitor for early indicators of coming problems. Think of it as preventative maintenance—something you’d give your vehicle in order to fix the little problems before the engine blows....continued.

Several folks, including myself, were interviewed for the article. Click here for the full scoop.

Value never needs a stimulus

My latest pontification in Greenhouse Grower -- click here.

Top 100 Growers say the key to their success this year is the economy -- click here.

Upcoming challenges

Click on image to enlarge. Source: Bill Conerly.

Three tips for cost cutting

Almost all companies have or will need to cut costs to survive in the current environment. Unfortunately, not all cost cutting is done smartly. Consider these three pieces of advice before making cuts:

1. Put strategy first. Cuts across the board rarely, if ever, lead to effective results. Laying out strategy first helps you decide where to cut, and also helps employees accept the cuts as a step toward a goal.
   
   
2. Focus on good customers. Rather than cutting valued services to valuable customers, "fire" high-maintenance customers who cause you unnecessary complexity. Focus on serving your more cost-effective customers who are happy with your products and services as they are.
   
   
3. Keep your business simple. In a healthy economy, it's easy to overlook processes and activities that are redundant or overly involved. Simplifying them can save you money with the added bonus of increasing both customer and employee satisfaction.

Parable update...

If you recall my previous post regarding the "Parable of the Man Who Sold Hot Dogs," then you'll appreciate this real-life example of a man and his family creating their own stimulus package!

Click here for the full story.

Hat Tip to J.R. Marker, III for the link.

Which companies bounce back faster post-recession?

I thought the following research was interesting given all of the talks I have been give lately about developing a compelling value proposition:

Companies that concentrate on their core business dramatically improve their odds of success in a downturn. About 95% of the companies that qualify as "sustained value creators" — those that maintained at least a 5.5% real growth rate in revenue and profit over ten years while earning back their cost of capital — are leaders in their core businesses. They not only perform better during expansions but recover faster when growth rebounds from an economic slump.

During the last recession, for example, the average net profit margins of this group bounced back to 6.5% in 2002, only slightly below pre-recession levels in 2000. Their competitors fared much worse, with average net profit margins falling to around 1% during the same period, a drop of about 3 percentage points.

Source: Bain & Company -- click here.

Companies change strategies for different reasons

Companies change strategies for a host of reasons, external (broad economic changes, competitors' moves) and internal (the results of a strategic planning process). But two reasons stand out, a recent McKinsey survey of global executives found. Each executive was asked what drove the largest strategic initiative in his or her company during the previous fiscal year, excluding strategic shifts made in response to a competitor's move or to the current economic turmoil. Two drivers together accounted for more than half the moves: a major product innovation (31%) and entering a new market segment (22%). Click on the graph above to enlarge.

The View From 12,000 Feet

Over the weekend, I took a rare opportunity to explore the mountains of Colorado with 6 of my good buddies from church. Needless to say, the mountaintop views were spectacular and provided some needed respite from the hectic trade show and educational conference season.

Not only was it a great reminder of the majesty of creation but it afforded me a few thoughts about the importance of taking a step back and seeing the big picture.

During several of my speaking engagements over the last few months, folks have related some pretty amazing stories regarding their individual business circumstances. Some good and some, well, not so good. In asking probing follow-up questions (you can tell I like to watch Charlie Rose), it seems to me that those who are optimistic about the upcoming spring season have a good strategic game plan firmly set in place. They have planned their work and are ready to work their plan.

In that vein, I think it is important each morning to take 2 minutes, step back, and allow yourself to take in the view from 12,000 feet. In other words, create a list of the top three things that are important to accomplish that day and focus on that list. Write them down and keep the list somewhere close all during the day.

Take the free moments in your day to check on your list, not to hurriedly check your email inbox. Most "urgent" items can wait while you take the time you need to focus on these vital projects. Delegate the tasks of putting out fires to those whom you have empowered to do so.

I know this seems terribly simplistic, but I myself find that the "tyranny of the urgent" can cause me to take my eyes off the ball. It's during those times, the 12,000 view can be most refreshing and re-directing!

Marketing during a recession

How should your marketing change because of the recession? Harvard professor John Quelch has eight tips for Marketing Your Way Through a Recession:

1. Research the customer. Instead of cutting the marketing budget, you need to know more than ever how consumers are redefining value and responding to the recession. Price elasticity curves are changing. Consumers take more time searching for durable goods and negotiate harder at the point of sale. They are more willing to postpone purchases, trade down, or buy less. Must-have features of yesterday are today's can-live-withouts. Trusted brands are especially valued and they can still launch new products successfully, but interest in new brands and new categories fades. Conspicuous consumption becomes less prevalent.

2. Focus on family values. When economic hard times loom, we tend to retreat to our village. Look for cozy hearth-and-home family scenes in advertising to replace images of extreme sports, adventure, and rugged individualism. Zany humor and appeals on the basis of fear are out. Greeting card sales, telephone use, and discretionary spending on home furnishings and home entertainment will hold up well, as uncertainty prompts us to stay at home but also stay connected with family and friends.

3. Maintain marketing spending. This is not the time to cut marketing. It is well documented that brands that increase advertising during a recession, when competitors are cutting back, can improve market share and return on investment at lower cost than during good economic times. Uncertain consumers need the reassurance of known brands, and more consumers at home watching television can deliver higher than expected audiences at lower cost-per-thousand impressions. Brands with deep pockets may be able to negotiate favorable advertising rates and lock them in for several years. If you have to cut marketing spending, try to maintain the frequency by shifting from more expensive forms to less expensive forms, such as the use of direct marketing, which gives more immediate sales impact.

4. Adjust product portfolios. Marketers must reforecast demand for each item in their product lines as consumers trade down to models that stress good value, such as cars with fewer options. Tough times favor multi-purpose goods over specialized products, and weaker items in product lines should be pruned. In grocery-products categories, good-quality own-brands gain at the expense of national brands. Industrial customers prefer to see products and services unbundled and priced separately. Gimmicks are out; reliability, durability, safety, and performance are in. New products, especially those that address the new consumer reality and thereby put pressure on competitors, should still be introduced, but advertising should stress superior price performance, not corporate image.

5. Support distributors. In uncertain times, no one wants to tie up working capital in excess inventories. Early-buy allowances, extended financing, and generous return policies motivate distributors to stock your full product line. This is particularly true with unproven new products. Be careful about expanding distribution to lower-priced channels; doing so can jeopardize existing relationships and your brand image. However, now may be the time to drop your weaker distributors and upgrade your sales force by recruiting those sacked by other companies.

6. Adjust pricing tactics. Customers will be shopping around for the best deals. You do not necessarily have to cut list prices, but you may need to offer more temporary price promotions, reduce thresholds for quantity discounts, extend credit to long-standing customers, and price smaller pack sizes more aggressively.

7. Stress market share. In all but a few technology categories where growth prospects are strong, companies are in a battle for market share and, in some cases, survival. Knowing your cost structure can ensure that any cuts or consolidation initiatives will save the most money with minimum customer impact. Companies such as Wal-Mart and Southwest Airlines, with strong positions and the most productive cost structures in their industries, can expect to gain market share. Other companies with healthy balance sheets can do so by acquiring weak competitors.

8. Emphasize core values. Although most companies are making employees redundant, chief executives can cement the loyalty of those who remain by assuring employees that the company has survived difficult times before, maintaining quality rather than cutting corners, and servicing existing customers rather than trying to be all things to all people. CEOs must spend more time with customers and employees. Economic recession can elevate the importance of the finance director's balance sheet over the marketing manager's income statement. Managing working capital can easily dominate managing customer relationships. CEOs must counter this. Successful companies do not abandon their marketing strategies in a recession; they adapt them.

Let me add to his wise remarks my own thoughts:

The biggest changes in market share occur at economic turning points.

I don't have data to back up this claim, but I believe it. Consider two scenarios:

A firm decided to downsize the sales staff during the recession. The remaining sales people became order-takers, answering calls from repeat customers. They had little time for outbound calls, and when they did call on new prospects or former customers, they had little success. So they stopped trying.

At the same time, a competitor had some (probably young) sales people, too new or too stupid to realize that nobody buys in a recession. They made the sales calls. They followed up a month later. They stayed in touch with their prospects and former customers.

When the economy turned around, who do you think got the business?

How will the current retail environment affect green industry sales in the spring?

Quick overview of some of yesterday's December retail data (no real surprises):

Wal-Mart cut fiscal Q4 earnings target about 10%.
Costco posted a 4% drop in December same-store sales.
Family Dollar gained 8%; Same store sales gained 6%.
BJ’s Wholesale had 1.6% sales growth; the lowest in a year.
Sears (the largest U.S. department-store) sales fell 7.3%.
Target same-store sales fell 4.1%.
Macy’s December sales fell 4%.
Gap stores sales fell 14%.
Abercrombie & Fitch fell -24%.
Neiman Marcus reported a 28% drop off.
Limited Brands reported a 10% drop.

Also, a recent DJN press release states:

Food retailers are girding for a "battle" with vendors in the first half of the year as grocers push for lower prices to help shoppers through the recession and food manufacturers resist, Supervalu Inc. (SVU) Chief Executive Jeff Noddle said Wednesday.

With commodity and ingredient costs falling sharply in recent months, supermarket chains have been pushing for lower prices on everything from coffee to soups to help increase sputtering sales. In recent months, both Supervalu and competitor Safeway Inc. (SWY) have switched to a pricing strategy that sells more products at "everyday low prices" rather than relying on coupons or other promotions.

But food manufacturers have been reluctant to roll back their price increases, taken to offset higher input costs, despite some consumer product categories experiencing declines in sales volume of between 3% to 5%, Moody's Investors Service said in a recent report on the sector.

Lastly, from Wednesday's Business Week:

Shoppers are getting used to those 75 percent off sale signs, and that's bad news for merchants who worry they will also have to quickly slash prices on spring goods to attract customers.

Anxieties about how rampant discounts have affected shoppers' psyches and stores' profits are running high...The deep price cuts are making shoppers question the true value of items.

My Commentary:

Obviously, all of the trends above begs the question of whether or not we are "training" consumers to be more price (discount) oriented that they have been in the past. Or, as a friend of mine put it...what is the longer-term psychological impact of the drastic price reductions of the holiday and post-holiday sales periods going to be on the going-forward consumer expectations and purchase behaviors?

Obviously, people are currently spending less than normal; certainly less than justified according to their actual incomes (they are saving more which is good in the long run but bad for the economy in the short run). They are also shopping smarter, focusing on the "value" they derive from each precious dollar spent. So as we have discussed before on this blog, those retailers that have their value proposition clearly delineated will be in a much better competitive position than those who don't.

Without a doubt, several leading lawn & garden retailers are already positioning themselves for price-oriented competition this spring. We have always had a segment of consumers that are price-conscious shoppers and this will obviously bode well for them. Today's economic environment may increase the number of these price-oriented consumers and the real question is by how much.

But the majority of our core lawn & garden consumer base have other things besides price in their value equation. The question is whether or not retail firms have successfully identified what THEIR key customer base truly values and are differentiating themselves accordingly.

Another key point to remember is that even though unemployment is at 7.2% (from today's labor report), we'll still have 93% of the workforce earning a wage. The monies not being spent now will eventually burn a hole in people's pockets (if historical behavior holds true). It will probably take a few more months of spending declines for this hole-burning to take effect, so the economy will likely hit its low point this spring.

The key question then is whether "spring fever" will induce our core customer base to let go of those discretionary dollars burning a hole in their pockets. And, if so, will they be willing to pay the prices we must charge to cover the cost increases we've incurred in the last 2 years? Again, they are much more likely to do so if we appeal to their value equation.

It will also be very interesting to see how President-elect Obama's yet-released-but-being-revamped stimulus plan is eventually structured and even more interesting to see how much of it is actually spent (historically only 20-40% of a stimulus is spent -- the rest is saved or used to pay down debt). But fortunately, many folks will be receiving their tax returns about the time spring season kicks off, which means another influx of funds to burn a hole in their pockets!

Ok, now that we've discussed the retail environment, what does all of this mean for green industry growers? The tougher selling environment at the retail level this spring translates into a need to develop more intensive and collaborative relationships with your customers in meeting the needs of the end consumer – particularly in terms of their value proposition. During the downturn in 2008, those growers that proactively worked with their retailers (and usually these were pay by scan sales) to more closely provide landscape solutions for consumers were the ones who were most successful.

If any of you attended the recent industry webinar entitled, “It’s a Great Time to be in Business” you probably heard lots of great ideas. One of the best quotes that I wrote down during the webinar was “These are the times during which great companies are made.” Bearing that in mind, recall also that there are plenty of companies that have survived the last 50 years, which means they have gone through 11 such recessionary periods. How did they do it? By relentlessly focusing on and emphasizing their value proposition to their key customer base. There's a great lesson there. What is yours?

Trade shows are for building relationships

Given that we are embarking on the trade show season, I thought this would be a timely post. Last November, I was asked at a regional nursery meeting “Are trade shows still a viable marketing tool?" As a good economist, I answered the question "It depends." If you are seeking to generate large amounts of sales leads from going to a trade show, then the answer is no. Let me explain.

The nature of trade shows has changed dramatically over time. It used to be folks went to trade shows to book sales and to generate leads. Not anymore. Today, trade shows now are business marketing opportunities. They are a place to close hot leads and meet prospective buyers you’ve had contact with but haven’t met face-to-face. They’re a place to set yourself apart, to market yourselves as industry leaders, and to reward your best customers.

The main reason to attend a trade show is build better relationships with existing, major customers and ready-to-close hot prospects. And to make this happen, you need to rethink the way that you spend on trade shows. If you’re buying into the “lead generation” myth, you’ll buy a big booth and man it with plenty of marketing staff, and then wait for the leads to roll in. Wrong, wrong, wrong! There are plenty of more cost-effective, efficient and more accurate methods of generating leads.

Instead, consider putting the bulk of your trade show spending into footing the bill to send (extremely hot and near to closing) prospects and your best existing customers to the show. Limit your own personnel to your top guns and the reps handling those key prospective accounts.

Let me sum up. Trade shows are NOT the most effective mechanism for generating leads. They are, however very good tools for building relationships with existing customers. Remember, nothing beats eyeball-to-eyeball marketing. Nothing. Keep focusing on that, and you may be able to get a positive ROI out of the trade show season.

Recessionary Planning For Small Businesses

This short piece is from the "Industry Buzz" section of Lawn & Landscape's December issue. A little longer than normal posts but worth it!

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If you’re a small business owner, your list of worries seems never-ending. For starters, consumer confidence is down and your sales are starting to reflect that reality. And as experts predict a deep recession, it’s doubtful things will start looking up anytime soon. Yes, you’ve been wringing your hands and obsessing over the financial news for months, while simultaneously scrambling to keep your customers happy and your business strong. But action is the best antidote for agonizing, says Ed Hess—and now is the perfect time to create a recession contingency plan that will help you guide your business through any future rough patches.

“Too often, when the economy goes south, a small business owner is paralyzed by anxiety and isn’t able to act quickly enough to save his or her company,” says Hess, Professor of Business Administration and Batten Executive-in-Residence at the Darden School of Business at the University of Virginia and coauthor (with Charles Goetz) of So, You Want to Start a Business? 8 Steps to Take Before Making the Leap. “Having a well conceived contingency plan in place gives you peace of mind when trouble hits and enables you to act quickly.”

For small business owners, Hess says, contingency planning is one of the best and most effective preventive actions you can take in a down economy. “Contingency planning will allow you to make the best possible decisions for your business if things continue to get worse before they get better,” says Hess. “Even if you are an eternal optimist—after all, many of us entrepreneurs are—you’ll be wise to have a contingency plan in place if, say, one of your biggest clients succumbs to the bad economy, or if you have to face the difficult decision of whether or not to lay off an employee.”

If you’re unsure where to start when it comes to crafting your contingency plan, Hess explains the critical elements you’ll want to include:

A People Plan. For small business owners, employees are often like family. That means the most difficult decisions you’ll have to make will probably pertain to them. That said, it’s important that you remain objective when creating the “People” section of your contingency plan:

1. What people assets are critical for you to keep? Why?
2. Who can “afford” a salary cut?
3. Who could undertake more responsibility?
4. Who are your definite keepers?
5. If you had to cut 10 percent of your workforce, what would your severance policy be?
6. How would you treat departing people so as to engender trust, respect, and loyalty of those remaining?
7. How would you implement a people “cut”?

“By answering these questions truthfully and thoroughly, it will be much easier for you to make decisions concerning what to do with your workforce during the slow economy,” says Hess. “Sometimes cutting back on your workforce, at least temporarily, is a necessary evil. Knowing that when you do so you are simply following a plan will help you manage some of the guilt that will come if you have to let someone go or reduce employee pay.”

A Key Customer Plan. It’s likely that your customers are feeling just as much anxiety as you are right now, so it’s best to handle them with kid gloves. Fail to do so and you risk damaging a relationship that will not only help get you through these hard times but which could prove very profitable when things pick back up. Here are a few things to consider when developing the customer section of your contingency plan:

1. Who are your most profitable customers?
2. Who are the most loyal?
3. Who must you keep long-term at all costs?
4. How is the downturn affecting each of your customers?
5. How can you get closer to them?
6. Which customers have pressures of their own that will force them to ask you to cut prices? And how should you respond? Should you extend credit, put them on an agreed-upon payment plan, etc.?
7. What can you do to attract new customers?

“You and your customers are in the same boat,” says Hess. “They face the same struggles as you. In your dealings with them, it’s important that you strike a safe balance between managing their best interests and managing your own. The contingency plan will help you do that and help you make decisions that will allow you to strengthen your customer relationships now. When things pick back up, your customers will remember the way you treated them and will want to do even more business with you.”

A Cost-Cutting Plan. When deciding where you could cut expenses, it’s important to consider what you could do to cut costs immediately by 10-15 percent. You should also go through your expenses line by line and consider which expenses are not necessary for your survival. Be sure to involve your employees when creating this section of the plan. Because they are on the front lines every day, they may have a better idea of what can be cut. For example, maybe they’ve noticed that you have an incoming paper supply that could be reduced. You should also include in your plan what to do if the amount you pay to lease office or warehouse space becomes unmanageable.

“Naturally the decision to cut certain expenses will be easier to make than others,” says Hess. “Just remember that now is the time to get back to the basics. You don’t need lots of bells and whistles to run a successful business, and taking a look at your expenses will help you separate the necessities from the frills.”

A Cash Flow Plan. Cash flow is key to running any small business, and managing yours is never more important than in a tough economic period. That’s why you should include cash flow management in your contingency plan. There are two specific groups to consider: your customers and your vendors. First, think about how you can get delinquent customers to pay up. Talk with your customers and help them set up a payment plan with you so that you know you will be getting paid when you need it most. Also, consider giving a discount to those customers who agree to pay in cash. You should also think about how you can defer your cash outflows such as payments to vendors. Ask if you can go to a 60- or 90-day payment cycle.

“Keeping up a healthy cash flow is vital during a slow economy,” says Hess. “You might have to have tough conversations with customers who need to pay up or a vendor who you’d like to defer a payment to, but if these conversations help you keep cash in your business when you need it most, they will be worth it.”

A Financial Safety Net Plan. So what do you do when all of your customers have paid up and you’ve extended your payments to vendors, and you are still having cash flow problems? Quite simply, you consider more drastic ways of putting cash into your business. It’s time to fall back on the financial safety net that you’ve created for your company. What will your safety net be? Will you draw on your home equity? Stop taking a salary? Ask friends or family for a cash infusion? Sell off some of the company’s assets? Reduce employee salaries? Apply for a small business loan?

“You don’t want to be making these decisions when you are already in desperate need of cash,” says Hess. “While you are still in good shape, plan out the first three ways you could immediately increase your cash flow. And do everything to ensure that you are protecting your credit so that if you do need a small business loan you can get one. Make certain to pay your bills on time. Don’t let anything fall through the cracks. If you are having trouble making a payment, let the company or bank know why. If there is a dispute on a payment, get something in writing that says you aren’t to blame. Being turned in to a collection agency will tank your credit score. You absolutely can’t risk it.”

An Exit Plan. There are some situations you simply can’t plan for. You can’t know for sure how your industry will be affected by the down economy. It’s possible that no matter what you do the slow economy will make it too difficult for you to keep your doors open or too difficult for you to navigate on your own.

“The exit plan is the hardest for any small business owner to put together,” says Hess. “No entrepreneur wants to give up on a venture, but sometimes you have to face reality. So, think about what lengths you are willing to go to in order to keep your doors open. If you are open to taking on a partner, what kind of person is going to add the necessary skills to the business to help you keep the doors open? Or if you decide to sell the business, would you want to stay on and keep working for the company or would you want to go your separate ways?

“Of course, keep in mind how long these transitions will take to make,” he adds. “As a small business owner you naturally have a strong attachment to your business. When you put so much blood, sweat, and tears into your business, it can be difficult to pull the plug at the right time. If you decide what your exit strategy will be before you are experiencing serious problems, you can take your emotions out of the decision-making process and come up with a clear-headed solution that protects your best interests.”

Creating a contingency plan will help you minimize the risk of any surprises that pop up—and they will!—during a slow economy. But keep in mind there are some basic things that you absolutely can’t lose focus on during a recession.

“You should be aggressively going after new customers, marketing your business nonstop, and giving your customers world-class service,” says Hess. “Yes, these are trying times for small business owners, but the obstacles are not insurmountable. With the right plan in place, you can create strong, long-lasting relationships with your customers and a business that can weather any storm.”

About the Authors:
Ed Hess lives in Charlottesville, Va., and spent most of his business life advising entrepreneurs and financing their business ventures. His professional career was spent with firms like Atlantic Richfield Company, Warburg Paribus Becker, Boettcher and Company, The Robert M. Bass Group, and Andersen Corporate Finance, and he has built three service businesses. In 2007, Hess joined the Faculty of the Darden School of Business at the University of Virginia as a Professor of Business Administration and Batten Executive-in-Residence where he teaches courses on building small businesses and organic growth.

Charlie Goetz earned his college degree at Emory University and holds an MBA from the University of Texas. He built several successful businesses, which in total employed over 1,500 people. He sold most of his businesses and made substantial amounts of money their sales. Goetz then began teaching entrepreneurship at Emory University in the Goizueta Business School. He lives in Atlanta, Ga., and is an investor in several new businesses and consults with people starting businesses.

Michael Porter on Charlie Rose

Michael Porter’s talk with Charlie Rose on the U.S. economy is getting a lot of buzz online right now. In the 25-minute interview, Porter restates his case from Business Week for why we need an economic strategy and talks about the systemic issues America faces, and its core strengths.

Some highlights: Porter says he’s excited by the potential for this administration to put together an overarching strategy that might address our problems in

• Public k-12 education;
• energy
• high cost of doing business
• lack of a safety net for workers during job transitions (healthcare security, training, pensions).

Porter says we have some strengths to reinvest in:

• our science technology system. investment rate has slowed.
• our belief in competition. We have in the last few years become more protectionist

The silver lining of the crisis is we might get an America:

• that saves again
• with a new sense of community responsibility
• and prudence in business

Porter says this crisis will cause others to doubt this system. This is best system we know for creating economic opportunity. this does not help the cause of capitalism in Latin America.

All in all, a good lunch-time listen. Or better yet, read his piece in Business Week, linked above. It’s a more cohesive argument and it won’t take you 25 minutes. Plus you’ll see some of his underlying logic, and learn interesting facts.

Put Your Best Foot Forward

Here is my latest column in the December issue of Today's Garden Center regarding the holiday retail outlook and strategies. Click here.

Discounting can be dangerous!

During tough economic times, companies often rush to reduce prices on their products and services. That seems like common sense: People can’t afford to spend as much, so charge less to keep them buying. But discounting has its perils.

To be sure, discounting is effective when done wisely and strategically. It can get consumers excited about a product, encourage them to buy more, and help your short-term bottom line. However, whether the purchase is a hot dog, a handbag, or a stay at a five-star hotel, customers want good value for their hard-earned money. The price of something is often an important determinant of its perceived value, as Dan Ariely points out in Predictably Irrational. Often, the more consumers pay, the more value they ascribe to a purchase. If you discount prices purely to boost sales, buyers may begin to question that value.

Consider Abercrombie & Fitch, which lowered prices by roughly 15% during the 2000–2002 downturn. When the dust cleared, the company realized that it had sacrificed much of its brand’s cachet and lost significant market share. A&F didn’t recover until 2004—and then only after returning to higher prices. In August 2008, having learned its lesson, the company announced that it was considering another price increase, despite a decline in second-quarter profits. The goal: to enhance what the CEO called the “iconic status” of the brand.

But discounting is so easy that some companies simply can’t resist. Starbucks, which posted its first-ever earnings loss in July, has begun to offer lower-priced options, such as a cup of coffee for $1, with free refills. This strategy may boost sales in the short term, but we suspect that, as with A&F, it will hurt the Starbucks brand in the long term.

Discounting is not always a bad idea, though—there are safe ways to lower prices. Earlier this year, Chrysler discounted something that does not affect its core brand: gasoline. It guaranteed to purchasers of new cars a price of no more than $2.99 per gallon of gas for three years. The idea was to subsidize the fuel that a new car uses, not the car itself. It’s similar to what GM did in 2001 by discounting its financing rather than its cars. Obviously, the auto industry has more problems than brand deterioration. Nonetheless, this is smart marketing during a downturn: It couples the appeal of a discount with an implicit message about the value of the core product.

So if you’re eyeing a simple, traditional discount strategy during the present slowdown, first consider the potential for damage to your brand and then evaluate the brand insurance that a more nuanced approach may offer. If you inadvertently shatter your brand’s mystique, reestablishing the value proposition to consumers may be tougher than you expect.

Jeffrey M. Stibel and Peter Delgrosso in the latest Harvard Business Review.