How to Navigate Economic Downturns: Strategies for Small and Mid-Sized Businesses

Learning from companies that have stood the test of time

The state of the global economy has always been unpredictable, and occasional economic downturns are almost inevitable. It’s only a matter of when these downturns will happen, and how severe they will be. Large, established companies weather dozens of economic storms throughout their history, with each new crisis bringing important lessons. Small and mid-sized companies often lack the resources and experience of their larger counterparts, but they can still develop effective strategies for navigating economic downturns.

In this blog post, we explore the key factors leading to economic slowdowns, and the tools and strategies smaller businesses can use to prepare for them. We also review success stories that demonstrate the power of innovation and a resilient company culture.

Key takeaways

• Economic downturns are typically caused by supply and demand shocks that disrupt normal financial activity.
• Large companies utilize diversification, scalability, and financial reserves to weather global economic storms.
• Small and mid-sized businesses can use their own unique characteristics to protect themselves from financial uncertainty.
• Diverse sources of capital are available to many small businesses, even during downturns.
• Small and mid-sized success stories demonstrate the power of ingenuity and a strong brand identity during slowdowns.

What causes economic downturns?

In general, economic downturns are caused by supply and demand shocks that disrupt the balance of economic activity, creating a ripple effect that impacts financial markets, employment, prices, and other key indicators. The triggers behind this type of instability can develop slowly, like the increased real estate lending that reached a tipping point in 2008, or emerge unexpectedly, like the pandemic of 2020 that suddenly disrupted global operations and supply chains. Other common causes of economic downturns include:

• Geopolitical tensions or regional conflicts
• Declining consumer confidence
• Runaway inflation or high interest rates

Some economic downturns impact all facets of the economy, while others affect specific industries and companies disproportionately. For example, the global pandemic put a disproportionate strain on cafés, retail stores, and entertainment businesses that relied on in-person experiences.

The art of navigating economic downturns

Thousands of restaurants and other small and mid-sized businesses closed for good during the most recent downturn, while larger companies with entrenched reputations and resources tended to fare better. Some of these businesses survived the Great Depression of a century ago and many subsequent slowdowns by adopting strategies for:

• Diversification: Businesses and conglomerates that operate in multiple industries or regions minimize their potential risk. For example, the Walt Disney Company offset decreased theme park attendance through movie and TV revenue streams.
• Brand identity: Companies with an established brand identity tend to maintain their value in lean economic times, since customers are more likely to stay loyal to familiar products rather than seeking out new and unproven alternatives.
• Scalability: Large companies often create multi-tiered structures, with multiple sites, contract employees, and outsourcing strategies providing layers of redundancy that can be shed during slowdowns and ramped back up when the economy recovers.
• Financial reserves: Cash and other liquid assets in reserve are perhaps the best hedge against economic downturns, since they allow companies to absorb temporary setbacks without layoffs, service interruptions, and other outcomes with long-term financial and reputational consequences.

Keys to Navigating Economic Downturns for Small and Mid-Sized Companies

The uninterrupted success and longevity of industry-leading companies has created a roadmap for businesses of all types and sizes to follow. A combination of controlled growth, strong brand identity, and financial flexibility can be a winning formula for small and mid-sized companies facing an uncertain future.

1.  Adaptability

While large companies rely on diversification to weather economic downturns, smaller businesses can use their agility to pivot quickly when demand patterns or market conditions change unexpectedly. Small and mid-sized businesses are more likely to maintain low volume operations with a focus on niche markets and customization. When customer preferences suddenly change, smaller businesses can adapt quickly by converting existing lines, rather than adding new ones. An emphasis on personal relationships allows smaller companies to keep their finger on the pulse of changing customer preferences.

2. Intelligent forecasting

Resilient businesses sometimes appear to have a crystal ball that helps them see into the future of their industry, but this may simply be the result of more advanced demand forecasting tools and practices. The latest forecasting tools incorporate machine learning algorithms, predictive analytics, and real-time data inputs to forecast future demand more accurately than was previously possible. These rapidly improving tools are available to small, medium-sized, and large companies as they attempt to react to economic headwinds more quickly.

Customer loyalty

Large, established retailers and manufacturers leverage reputations built over many decades to ensure customers return, even when economic downturns reduce disposable incomes and shift priorities. Customer loyalty is also essential for small and mid-sized companies to improve their prospects in less prosperous times. Smaller companies can leverage their unique traits and offerings, such as personalized communication and local connections, to build a clientele and retain existing customers, even during downturns.

4. Capital access

A counterbalance for the deep financial reserves many smaller businesses lack is access to the capital needed to navigate rough patches. Many of the common funding options for small businesses are available to support expansion and ongoing operations, regardless of the economic climate. Traditional bank loans and lines of credit can be less attractive during downturns, since repayment obligations can hinder cash flow, but alternatives like grants and private equity investments can be viable options, with the latter including strategic guidance and industry connections as additional benefits.

Streamlined operations

What was once simply known as “belt-tightening” has evolved with the help of new methods and tools, as smart technologies and the internet of things (IoT) provide more opportunities for small and mid-sized companies to cut expenses during downturns without sacrificing quality or losing valuable employees. For example, automation, real-time monitoring, and predictive analytics make it possible to do, build, and sell more with fewer resources and less waste, thereby increasing profit margins and remaining competitive even when rapid business growth is not feasible.

Small and mid-sized success stories

Successful companies realize cyclical business cycles can sometimes take dramatic twists and turns. Rather than viewing these events with a sense of impending doom, they prepare for them proactively and learn from experience to become more resilient.

Warby Parker

Luxury eyewear company Warby Parker entered the market just as the financial crisis of 2008 was subsiding, and immediately focused their attention on operational efficiency and brand recognition to survive in a competitive niche. Streamlined manufacturing processes allowed the company to offer direct-to-consumer products for a fraction of what their competitors were charging. At the same time, they built a positive brand reputation by donating glasses to those in need and allowing customers to try on frames at home before committing to a purchase.

Ben & Jerry’s

Long before the ice cream rebels became part of British food giant Unilever, Ben & Jerry’s successfully weathered the record high inflation and subsequent recession of the late 1970s and early 1980s. Once again, brand value was key, as the company used their local ties to establish a following, then created a platform for social and environmental causes that resonated with consumers in other regions. Rather than consolidating the offerings to trim costs, they continually experimented and added new flavors as they scaled their manufacturing processes and adapted to changing customer tastes.