Is the world economy slowing down? And are we entering a tech industry downturn?
Recently, technology stocks (along with the stock market in general) have dropped. Inflation has proven sticky, interest rates are higher than they’ve been in years, and political gridlock continues to be the order of the day. Is the economy headed for a long-anticipated recession? Will all of this lead to a tech industry downturn, taking tech companies drain along with everything else?
I don’t think so, but I’m not in the business of forecasting such things. Tech stocks are often affected more severely than average in an economic downturn. Public stock markets often affect overall technology industry investment and ultimately even private tech company growth rates.
So what should you do if you’re the CEO of a software or hardware tech business?
Be Prudent, But Don’t Panic in a Tech Industry Downturn
Now’s certainly not the time to stick your head in the sand. Don’t base your strategy on the hope the economy doesn’t get any worse. It almost certainly will. but more importantly, how will it affect your company? That’s what you need to ponder. Is your product a “must have” or a “very nice to have”? Obviously the “nice-to-haves” will have a tougher time in a declining economy. If a brutally honest assessment puts your company in this camp, you should plan accordingly. So take the time to analyze your situation. Make a forecast for your own business, based on the unique circumstances of your market and company. Remember, hope is not a strategy.
Look For Opportunities to Outflank Weaker Competitors
For strong players, declining economies can be a great time to pick up market share from weaker competitors. If you have the resources and can do it safely, now might be the time to run a promotion. Or selectively increase your marketing. This is counter-intuitive to most managers’ instincts and can be uncomfortable. However, aggressively improving your position vs. the competition during a downturn can lead to stronger growth when things turn back upward.
Slow Near-Term Expense Growth, But Don’t Compromise Long-Term Initiatives
In most cases, companies will want to carefully monitor, and possibly cut back on their spending. You want to make sure that you don’t put your company in jeopardy, by having expenses out of sync with flat or declining revenues. But try your best to keep intact the initiatives that are critical to long-term growth. You must continue to think long-term as well as short-term. This assumes you don’t get in a situation where your survival is at stake. Cut back on advertising and office space if you’re seeing a slowdown. But make sure you don’t cut the product development project which will lead to growth 18 months hence. These can be tough decisions. But they really separate the long-term successful CEOs from the flash-in-the-pans. Almost anyone can manage when times are good.
Limit The Growth Of Your Staff In A Tech Industry Downturn
Prudent spending can be wise during a downturn. However, aggressively increasing the size of your staff usually isn’t. There are always exceptions, of course. Opportunistically adding a key player can make a lot of sense. But adding too much staff can really bloat your fixed cost structure. This could limit your management flexibility. Unfortunately, I find that many companies are often most aggressively adding staff at the end of a growth cycle, just in time for the downturn. If this leads to layoffs, it can have a devastating effect on your company’s morale.
Although layoffs are sometimes necessary, they are always painful and hurtful to the company culture. That’s unless the company culture is already of the “Attila the Hun”, cutthroat variety. The founders of one of my early employers, Bill Hewlett and David Packard, ran HP for many years with a rule of thumb that limited staff increases to 25% of revenue growth. This simple rule helped them avoid the natural inclination to hire someone new every time a new task was identified. I believe this was an important factor in many years of smooth growth without layoffs. This particular metric might not be right for your company. But something similar could prove to be a useful damper on excessive hiring.
Make Sure That You Have Money For A Rainy Day
It’s no time to panic. But it IS time to make sure that you have the financial resources necessary to comfortably cruise through a downturn. Availability of funds and terms will only get worse if the stock market heads down further and a credit crunch develops. So stockpile some working capital and lengthen the runway to your next round of funding. Also, make sure that you have available the largest line of credit possible with your bank. It may cost you an extra few thousand dollars a year, but it’s excellent downside insurance. If you’re in bootstrap startup mode and financing yourself on credit cards and home equity lines, maximize your future access to these as well! Whatever your sources of funds, the message is the same. Make sure now that you’re as financially well-prepared as possible for whatever the future holds.
Be Poised For The Next Upturn, Whenever It Happens
I mentioned earlier that you should try your best to keep long-term initiatives alive. In that same vein, your thought processes should constantly focus on the next upturn in all of your decision-making. Again, this assumes that your survival isn’t in question. For example, while massive hiring isn’t usually wise during a downturn, you want to always be open to unique opportunities that may not come along often. Say there is a talented executive who becomes available, only because of the downturn. If you can safely afford him or her, snap them up now, before a competitor grabs them. Or retain a talented consultant to position your company with a new technology direction or target market segment for when growth inevitably climbs. Downturns often present opportunities to improve your business when the next growth cycle occurs. But you need to be “looking ahead” and making good decisions now, to take full advantage of the upturn when it finally does.
Once again, now is not the time to panic. But it is an important time to plan. Anyone who can predict what will happen with the economy should go to the nearest casino. No need to waste your time with a software or technology company! So I suggest that it might be wise to do a “best-most likely-worst” 2-year forecast now. Then try to plan as best you can for the two extreme cases. That’s my advice on strategies for a tech industry downturn. Post a comment and let me know your thoughts on how the economy and the tech industry will fare in the coming months.
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