Business Monthly: OVERVIEW - Cutting Costs When Demand Is Flagging

Article excerpt

This weekend a friend who runs a smallish media company is halfway through a downsizing programme. The firm had managed to hold the team together through the first year of the downturn in their industry but now it is having to do the tough things. In an ideal world the cuts would probably have come sooner, but it is a good, hardworking, honourable company and it did not seem sensible to expect two years of downturn, particularly since the economy as a whole was still expanding.

This dilemma is facing tens of thousands of businesses all over the land and in a way is part and parcel of running any business: when to grow, when to cut? The puzzle this time is that this business cycle is different from most previous experience. In aggregate it is, as far as the UK is concerned, remarkably mild. The economy has continued growing, albeit at a slower rate, all the time.

But the overall numbers conceal huge differences in experience. Communications, some sectors of financial services, media - these industries have seen a really savage downturn. For telecommunications it is the worst ever in the history of the industry and for media it is as bad as the early Nineties. It has been pretty rough for most manufacturers too. On the other hand, housing, many service industries and anything to do with government have so far been hardly affected - indeed some firms in these sectors are still booming.

There is another feature that is different from past experience. Prices are stable or falling. Again the pattern differs from industry to industry. As a general rule goods are becoming cheaper while services are still becoming a bit more expensive. But most recently even service businesses find they are coming under pricing pressure. Sure, they can put up their charges, but if they do, they find that demand flags. The world has become much more price- sensitive than ever before.

So what should businesses do? Are there any rules or is each business so different that there is no point in trying to draw general guidelines?

These are not quite rules but from conversations and cases studies a couple of general principles do seem to emerge. One is that, faced with a potential downturn, businesses should look at the possibility of a worse outcome than they actually expect. …