There is a lot of talk these days about how this period of prosperity cannot last forever. This is certainly a true statement, because nothing lasts forever. The fact is that many public companies have already begun to report reduced earnings. There are many explanations for this.

1. Companies that sell to Asia or Europe have already been experiencing a recession. Those with heavy investments in the Far East have certainly been having severe problems for the past few years. The Japanese stock market is down over 60 percent from its highs in the early 1990s. The strong American dollar (until recently) has forced U.S.-based exporters to make difficult choices concerning market share and profitability. The issue facing many is, given the price pressures, should they sell at reduced margins and keep the business, or is selling at low margins not worth the effort?

2. The absence of inflation on a global scale has helped some companies, but hurt others. Oil drilling companies and companies in other businesses involving the production of commodities have been in a significant recession for quite some time. Some agriculturally based businesses have been so successful at improving productivity that they have excess capacity and their production is far above what the market needs.

3. Overbuilding of capacity in some very capital-intensive industries has resulted in a Darwinian selection process among competitors. It is very difficult for these companies to adjust to weak demand and rapid technological change.

4. Companies that have a relatively fixed way of doing business have been unable or slow to respond to the new methods of doing business that have come about because of technological changes. These new business models have affected the supply chain and attitudes about outsourcing, and have redefined or actually created a relationship between the original supplier and the ultimate customer.

5. Disintermediation has drastically affected all supplier/ customer relationships. An intermediary is a middleman, someone who is in between. A traditional wholesaler or distributor buys from the manufacturer and sells to the retailer, who in turn sells to the consumer. A retail store is an example of an intermediary. Sometimes the intermediary’s only contribution to the process is buying in large quantities and being willing to sell in smaller quantities. In effect, these intermediaries are inventory managers who provide extended credit terms. Technology is permitting a direct relationship between the manufacturer and the customer. We can buy cars and airline tickets on the Internet, and we can trade stocks and bonds as well.We used to get all of these things through intermediaries—car dealers, travel agents, and stockbrokers. The reduction in the role and value of these intermediaries is called disintermediation.

Action Plans for Success

So the question that arises is, ‘‘What happens if there is a recession? How will it affect the company, and what should we do?’’

1. Don’t panic or overreact. Think strategically, with perspective. Across-the-board expense reductions are usually counterproductive. They penalize the most efficient departments, result in higher-level people doing less productive work, and exacerbate the problem of keeping your focus on the most profitable place for your investment dollars.

2. Refocus on your customers. What do they want from you, what do they expect of you, and why do they buy from you? What is the real value that you offer? Examine how technology will enable you to reposition yourself in the supply chain. Help your customers lower their inventory and reduce delivery times.

3. Enhance your marketing efforts. The best opportunity to gain market share is when your competitors are reducing their sales forces, trade show appearances, advertising, and promotional efforts. Potential customers are more willing to consider a change, and your competitors’ presence is being reduced.

4. Identify and pursue new applications for your organization’s skills and capabilities. There are many companies out there that are not perceived as traditional customers for your industry. Go after them. You may be the only one who will. Change is an almost universally accepted fact of life these days, and any organization that resists change will fail. We are all someone else’s outsource. What kind of businesses would consider your products or services valuable?

Who are your competitors? They may not all be companies that look like yours. The list of competitors may be changing constantly as companies and supply chains are redefined. Competition is defined by contribution and value added, not by the physical appearance of those who compete. The biggest threat to Barnes & Noble bookstores is Amazon.com. This is a classic concept called marketing myopia that was first identified many years ago by Theodore Levitt of the Harvard Business School.

5. Collect those receivables. Enhance your cash flow. This is everyone’s responsibility. The faster the money comes in, the more money you will have available, sooner, for reinvestment. Sell off underperforming assets, including inventory, fixed assets, and products, to raise and redirect cash flow.

6. Have your management team do a S.W.O.T. analysis. This is an incredibly valuable corporate self-assessment of where in the global economy your company currently is and where it needs to be. S.W.O.T. stands for strengths, weaknesses, opportunities and threats. Such an analysis enables the company to identify and focus on all of the positive and negative issues that need to be dealt with. This should be an annual effort that precedes budget preparation.

Strategic Issues and the Global Economy

Our domestic economy has not experienced any noteworthy inflation for quite a few years. The inflation indexes—the consumer price index (CPI) and the producer price index (PPI)—are statistical averages that reflect real economic events. However, they also tend to mask divergent trends that the casual observer may not detect, but that in fact have considerable impact on certain sectors of our economy. The prime example here is the serious decline in the price of oil, and its reversal again more recently. As a result of the strength of our domestic economy, the dollar has been very strong relative to other currencies. As a result, imports have become less expensive. However, our competitive position globally is subject to very inflexible price ceilings. If the dollar weakens, the impact on the statistical averages, and also on the domestic economy, will be very bearish.

Imports will become relatively more expensive. The higher levels of inflation shown by the indexes might cause the Federal Reserve to increase interest rates, leading to a much lower stock market, declining individual net worth, less consumer spending, and more business caution—in other words, a recession. Incredible technological advances in information, manufacturing, and agriculture have improved our productive capacity and the efficiencies of our business practices to an extraordinary degree. Technology, corporate ambition, and competitive pressures have caused the business relationships in which our company is involved—its sources of supply and its customers—to be truly global. To be successful, we must revisit the fundamental, age-old business questions: How do we add value to our customers? How well do we serve them? How efficiently and effectively does our company perform?