Firms must run hard just to stand still
Surely all businesses can cope with a 1 per cent contraction in the economy? Not if some of them try to maintain their sales at the expense of others, they can’t. It’s time for a bit of game theory.
If the chancellor is right, the UK economy will shrink by 0.75 to 1.25 per cent in 2009. That’s a blow to companies that hope for growth and those whose business models depend on continuing expansion, but even most firms with high fixed costs ought to be able to absorb the cost into their margins.
And if all firms do accept a 1 per cent cut on their top line and maintain their current market shares, they may all share the pain but survive.
But tough times bring out tough attitudes. Some firms will react to a loss of orders by aggressively seeking new sales at the expense of those businesses happy to ride the recession. For every firm that puts on an extra 1 per cent of business to compensate for the recession, another firm must thus lose 2 per cent.
If in a town with four bakers, one accepts that sales will fall by 1 per cent but the other three battle to maintain turnover then the fourth firm will see sales fall 4 per cent – and that might be fatal.
The same is true in any market from supermarkets to aircraft manufacturers or house-builders.
This is no time to sit back and relax therefore. Those four bakers may have been happy with the status quo in past years when economic growth increased all their sales by 2 per cent of more a year with no effort from management. Now all firms must switch to competitive mode simply to stand still.
Given the illegality of agreeing a cartel, the winners and losers of this recession will be those firms that prove themselves tough at winning business – and that is a skill many firms have allowed to lapse in recent years.
