How do you manage Business cyclicality?
“Change is the only permanent law of nature.” Cyclicality is the other reality.
Most businesses are cyclical. Products and Services either become outdated or fades out for several reasons. Here are a few:
The market has moved on to better products and services (computers, phones)
Innovations in technology have replaced or are replacing current products and services (Tesla, Uber)
Things that are beyond anyone's control (natural disasters)
Predictable cyclicality can be a good thing for a business in the short term as it helps business owners plan to operate their business adequately. Notwithstanding, cyclicality of any sort for any business should be addressed for long haul sustainability of the business. Not addressing even predictable cyclicality (say business providing rental power during hurricane season) could lead to business downfall.
In the case of the rental power company, customers can move to standby power for their homes and not be dependent on rental when the economic conditions are tough, bigger companies cut smaller companies on price during these hurricane seasons and eliminate small businesses.
The key to managing cyclicality is diversification. Diversification could mean any number of things from products to customers to suppliers to markets to geographical. For e.g. a distributor of machine equipment typically diversifies to servicing the goods he sells. This helps the distributor bring in service revenue when sales of equipment are down as customers do not want to spend money on capital goods but would rather keep servicing their old equipment until the economy gets better.
Another case are Companies that do custom machine building. Custom machine equipment is profoundly valued but are long lead cycle businesses that have their peaks and valleys. Any delay in capital outlay or spend by the customer (for whatever reason) puts an enormous burden on the business due to overhead costs, employee costs as the assets are not producing returns. Custom machine builders typically have a lot of quality equipment that they can be used to level load the business. Level loading the business with small projects (elephants) from the same or adjacent industry helps the business manage cost and keep employees on board until the big projects (whales) hit the order books and the production floor.
Geographical diversification within country and outside country deserves a lot of attention in today's global business environment. E.g. having a global supply base helps manage costs due to currency fluctuations or supply disruption from one supplier for any number of reasons.
Knowledge of cycle management is more critical today than ever before. It implies making in-out decisions and long-short decisions. To do this effectively can be easier said than done. There will always be a tendency to “wait and see.” But this can typically end up becoming “too late.” In cycle management, timing is everything, and as with many other management tasks, this requires discipline.
At AR2, we have a template that we have deployed successfully to manage businesses and their cycle with an actionable plans to realize the true potential of a business. We would like to share our experience and help you realize the true potential of your business.
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