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The upside to a downturn.

No business owner wants to deal with an economic downturn, but I've found the process to be cleansing because it can force a business to become more efficient or fail.

With declining revenues, companies instinctively turn toward the expense side to maintain or improve profitability. With a stagnant top line, since 2008 Fortune 500 and S&P-type companies have met earnings targets by paring expenses and increasing productivity.

This isn't necessarily a positive for employment, but that is the reality of operating a business. Payroll is invariably the largest expense, thus it--along with marketing--represents low-hanging expense reduction fruit. The end result is that successful companies come out of downturns leaner and stronger than when they entered.

Downturns also have a habit of "culling the herd." This creates further opportunities for the survivors. Although downturns force companies to focus on expenses, it shouldn't take a downturn to get into an expense reduction frame of mind.

Companies should constantly be diligent about expenses. This may sound trite, and it is. But as trite as it may be, there are tendencies in human nature that go contrary to this obvious philosophy.

History is replete with examples of companies--and nations--that became complacent and failed. You also see it in sports. That's one reason it's harder to repeat as a champion than to become a champion.

During my career I've worked with many industry leaders, and the behavior at those companies was consistent. With success comes the tendency to enjoy the spoils: become more lax on expenses and take larger risks.

There's nothing wrong with enjoying success. That's the point of achieving success, but doing so needs to be balanced with ensuring the company's future well-being.

Marketing dollars

The more dangerous tendency is to lose sight of expenses. Face it: in good times, if a little money is wasted here or there, who will notice or care? Well, everyone who runs a business should. Unnecessary expenses are a waste of resources that can be applied to making a company stronger or socked away for a rainy day.

Of course, marketing dollars are typically the easiest expense cut when times get tough. A phone call can cancel advertising placements and nixing a promotional campaign takes little more than a memo. But my advice--as a biased marketer--is that you should think long and hard before cutting marketing.

I say that for two reasons. First, during a downturn it's important to maintain a presence in the market--and continuing marketing campaigns shows strength. Second, if you are able to sustain your marketing effort through hard times, you'll be in the best position to take advantage of the upturn.

Of course, having the resources to continue to allocate marketing dollars is the key. Refer back to my comment on staying aggressive on expenses during the good times.

Author, professor, entrepreneur, radio and TV commentator, Tony Paradiso of Wilton is a marketing, management, and macroeconomic expert. His website is at tonyparadiso.com.

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Title Annotation:Economic Indications
Author:Paradiso, Tony
Publication:New Hampshire Business Review
Geographic Code:1U1NH
Date:Mar 9, 2012
Words:491
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