Every startup wants to scale, and a lot of them start scaling, but then they realize that as their top line is growing, their bottom line is shrinking. At the same time, in today’s inflationary environment, many businesses are seeing increased costs and are forced to turn to cost-cutting strategies like bulk-buying and automation while consumer demand shifts. So how should a business start scaling while adjusting to increased costs and the shift in buying behavior?
Start by looking for ways to attack the opportunity that prospective customers have become researchers looking to make smart decisions. Perhaps businesses that want to scale might become the purveyor of information that satisfies this need. Some business owners use a recession as a pretext to push change through, get closer to customers who may be ignored by competitors, make strategic investments that have long-term payoffs, and act opportunistically to acquire talent, assets, or businesses that become available during the downturn.
Your competitors are pulling back — spending less money on marketing and advertising. Some started laying off employees. Others are content to sit tight and hope for the best. All these factors make it easier for you to gain market share. You can take advantage of the reduced or weakened competition to set a foothold in the market. Position yourself to learn and avoid the errors made by the current competition to leap ahead. These strategies are designed to garner upside benefits.
But many businesses that focus purely top-line scaling develop a culture of optimism that leads them to deny the gravity of an economic crisis for a long time. They ignore early warning signs, such as customers’ budget cuts, and are steadfast in the belief that as long as they innovate, their sales and profits will continue to rise. Even as customers clamor for lower prices and greater value for money, these companies add bells and whistles to their products. They simply don’t notice that because the pie is shrinking, they must capture an even larger share from rivals to keep growing. Optimistic leaders attract employees who thrive in a forward-looking, growth-oriented environment. When positive groupthink permeates an organization, naysayers are marginalized and realities are overlooked. That’s why top-line focused businesses are often blindsided by poor financial results.
When chasing scale in today’s economic environment, be sure to not only plan to expand the unit sales market, but at the same time to reduce the company burn rate. The critical difference from a growth-only strategy is that scale is achieved by increasing unit sale revenue without incurring significant costs. Businesses need to plan for tightening finances to build a cash reserve. Remember, however, you can’t just pull cost-reduction measures out of the air, or else you’ll end up cutting corners and delivering an inferior product. Address the threat that economic experts predict…demand to wane, especially for luxury goods and services, and that the labor market will weaken. This means that businesses may find some monetary relief in the form of decreased labor costs, as more businesses curtail hiring.
A singular focus on cost cutting also causes several problems. First, owners and employees start approaching every decision through a loss-minimizing lens. This mentality leads the organization to aim low and keep both innovation and revenue growth incremental at best. Second, instead of learning to operate more efficiently, the company tries to do more of the same with less. This can result in lower quality and therefore a drop in customer satisfaction. Third, cost-cutting decisions become centralized: owners makes across-the-board cuts, paying little attention to initiatives that may be the starting point for post recession growth. Finally, pessimism permeates the company. The focus becomes survival…both personal and organizational.
Few cost-focused businesses do well after a recession. Some studies found they trail the other groups, with growth, on average, of about 6% in sales and 4% in profits, compared with 13% and 12% for progressive companies. Moreover, cost cutting didn’t lead to above-average growth in earnings.
Successful startups during a recession recognize that cost cutting is necessary to survive a recession, that investment is equally essential to spur growth, and that they must manage both at the same time if their companies are to emerge as post-economic downturn leaders. A combination strategy sounds easy to develop but it isn’t. Companies typically combine three defensive approaches—reducing the number of employees, improving operational efficiency, or both—with three offensive ones: developing new markets, investing in new assets, or both. This yields nine possible combinations, some of which are more effective than others.
To be truly successful long term, when companies add customers and revenue exponentially, costs should solely increase incrementally (if at all). Startup failure is widespread, with many failing within five years. Founders who want to succeed have to adapt with ability and flexibility as they navigate the journey from the first sparks of a concept, guided by a forward-thinking business plan that clearly differentiates what growth will look like and how scaling will be attained. While there are never guarantees of success in an arena where failure can seem destined, to be the one that properly grows and blooms into sustained scalability requires an open mind, a willingness to learn, and the ability to adapt.
If you are planning to start a business or are trying to scale an existing one, this ebook is a must read “Small Business Thoughts Real-Time Strategic Planning”. Readers rate it 5 stars on Apple Books.
Copyright ©John M. Trenary 2022. All rights reserved.