A commentary by Mark Loschiavo
In the midst of this recession entrepreneurs may be asking themselves what role they play in the recovery of the economy, or if they even have a place. At LeBow College of Business’s Baiada Center for Entrepreneurship we encourage our entrepreneurs to embrace adversity. Adversity provides tremendous opportunity for entrepreneurs and other business owners to innovate and to differentiate themselves from their competitors. It is during times of crisis and turmoil that true character is revealed and the best leaders emerge. Like two pieces of furniture on the showroom floor of the furniture store – one made of solid maple and the other made of wood veneer – with the perfect lighting and controlled environment of the showroom, both appear to have excellent value. It is only after the two pieces are removed from the safety of the showroom and subjected to the wear and tear of rambunctious children does the real value emerge.
Similarly, the competency and character of an entrepreneurial leader is revealed once they are removed from the safety of prosperous times. Many businesses can manage to can look good during good times. During tough times, however, the veneer gets worn off, dinged and scratched, revealing the true value.
It is important to remember during times of adversity that we have been there before – and have emerged victorious. There are numerous examples of creativity, risk, innovation and opportunism thriving in times of adversity.
For example, the 1970s brought with it Vietnam, Japanese imports, race riots, an Arab Israeli war and Watergate. During that same decade we experienced 11 percent inflation, interest rates as high as 14 percent, and unemployment levels that at times exceeded 9 percent. In the midst of all this adversity, advances in computing technology were paving the way for a revolution in the way information is handled and conveyed.
At the same time the invention of transistors and integrated circuit boards along with innovations in manufacturing, miniaturization and plastics technology launched the electronic and digital revolution. Some examples of the inventions of the 1970s include the space station, email, liquid crystal displays, microprocessors, magnetic resonance imaging (MRI), the ethernet, the personal computer, Gore-Tex and the mobile phone.
Times of adversity often bring us back to the basics, requiring us to evaluate what constitutes real value. History shows us that inventors, innovators and entrepreneurs often introduce the best value during the most difficult times. During a recession there are several questions – some of them obvious, some outside-the-box – that entrepreneurs and other business owners need to consider to help evaluate their relevancy and ability to weather the storm.
Am I offering something that my customers need?
During recessions “must-haves” almost always trump “nice-to-haves.” A good place to start is by making a list of things we all must have regardless of the economy. If I am not offering a must-have, I may need to drop prices or change up my offering to make it more compelling to get a percentage of the customer’s wallet. In some cases I may have to expand my geographical coverage to find more customers who see my products or services as a must-have.
Take the thinking about what is a ‘must-have’ beyond what you usually think of. For example, we usually think of utilities as telephone, water, electric, oil and gas. But the government’s response to the banking crisis demonstrates that our financial industry is also a utility. Like oil, gas, and electricity, access to money has become a basic need for our society to function.
Am I offering an affordable luxury during recessions?
Several years ago I was doing some work in one of the more depressed areas of Appalachia. In many ways it felt more like I was in a third-world country than the most affluent country in the world. In the midst of abject poverty, with homes that sported outdoor plumbing and surrounding property that looked more like salvage yards than lawns, I saw satellite dishes. In the context of their surroundings these satellite dishes, at first, seemed like a strange juxtaposition.
On further reflection it made perfect sense. These satellite dishes, and the TVs they were connected to, provided a level of freedom to their owners, and allowed them to enjoy the luxuries of the affluent society around them, even if only vicariously. During times of economic distress most consumers cut back on nice-to-haves. At the same time, they are willing to indulge in certain “luxuries.” These have been referred to as affordable luxuries.
Starbuck’s coffee has often been referred to as an affordable luxury. During a recession, however, it may no longer be considered affordable. Can you offer something that still feels like a luxury, but is more affordable than Starbuck’s coffee? Or for that matter, can you offer a product that will be considered an affordable luxury in light of the recession? If so, you might actually see an increase in demand.
Am I able to leverage an emerging convergence of change?
A simple example of a potential convergence opportunity is portable, potable water. The last decade has given rise to the walking water bottle. The use of water fountains has been replaced by millions of individual bottles of Poland Springs, Deer Park, Aquafina, Aqua Fiji and Evian, being carried around by consumers convinced of the need for hydration and concerned about the quality of water.
But now, some of these consumers are beginning to look for an alternative. Those who are more environmentally conscious must be feeling some guilt associated with the amount of petrochemicals used to make each bottle, or the landfill impact of their waste. Others may be concerned about spending roughly three times more money for 16 ounces of water than they are spending for 16 ounces of gasoline.
By combining the perceived need for hydration with concern for the environment, and the recent health concerns over the dangers of chemical leaching from plastic bottles, we can expect to see the sales of BPA free plastic water bottles and stainless steel water bottles continue to rise during these difficult economic times. Companies like Nalgene (BPA-free plastic) and SIGG (stainless steel) have an opportunity to capitalize on this convergence of change.
Another example can be found in our incubator at the Baiada Center. By leveraging a convergence of technologies, Drexel MBA alumni Chuck Sacco ‘06 and Doug Bellenger ‘06 started PhindMe to solve an emerging business problem. Two nice-to-have items of the 80s and early 90s have become utilities. Both the Internet and mobile phones have become necessities for most people, and especially for businesses.
The World Wide Web provides a vast ocean of information that most of us have come to depend on in almost every aspect of our personal and professional lives. Companies are becoming increasingly dependant on the Web to bring them business, but small businesses find it difficult to rise above the noise of the masses. PhindMe is offering a series of products to solve this problem. PhindMe mobile technology solutions are designed to ensure that a business’s mobile consumers can receive the same online branding, advertising and customer service experience they receive from their desktop computer.
Am I offering something that will help my customers “weather” the recession?
Recently two Drexel alumni visited the Baiada Center looking for advice regarding a company they are starting. Both partners work in the troubled finance industry, where they recognized a need. With all of the pending foreclosures thousands of people are looking for options to allow them to restructure their mortgages. There are plenty of financial advisors offering solutions.
Unfortunately, many of these solutions are shams, charging these troubled homeowners fees without solving their mortgage problems. These two entrepreneurs have developed a model that can help many of these homeowners restructure their loans keep their homes, taking no payment unless they are successful in solving the homeowner’s problems. These entrepreneurs are offering value by helping customers weather the recession. If you are offering something that will help folks weather the recession make sure your marketing and sales message drive this point home, and then price accordingly. If not, you may need to drop prices to get a percentage of the customer’s wallet.
Am I decidedly better at what I do than my competition?
The fundamental economics of price elasticity will continue to hold even in difficult times. The more an entrepreneur can differentiate his or her products or services, the more customers are willing to pay. At the Baiada Center, entrepreneurs building their businesses are often strapped for cash. In addition to long hours with little sleep, many of them maintain a steady diet of Ramen Noodles. Even though they are not willing to indulge in a more appetizing cuisine because of their need to conserve cash, many of them will pay a premium to solve their IT needs, because they are convince the premium solution is better than the lower priced alternative. It is important to keep in mind that there are limits to this logic. Regardless of differentiation, there is a point where the price/value trade-off will drive the market to the lower-priced alternative.
What kind of information is a must-have during tough times?
The value of information changes with conditions. Take for example the Social Security Act of 1935, which was born out of the Great Depression and yet created the need to record the employment records of 26 million people. This was a “must have” that then-IBM President Tom Watson Sr. was positioned to offer the government.
There is a percentage of the population that loves to track the weather regardless of the conditions. These are the folks who watch The Weather Channel for entertainment. But most of us, are only interested in the weather when we are dependant on the outcome. The minute a snowstorm hits the Mid-Atlantic states, the value of weather information increases exponentially - so much so that TV networks often delay the shift from local to national news. Unless we think it is going to rain on our parade, the value of weather information is limited.
What are the different ways people access information?
The value of electronic access to information goes up when gas prices rise from $2 per gallon to $4 per gallon. During tough economic times the demand for access to electronic information dealing with acquisition or preservation of cash increases. For example, if I am offering access to information regarding mortgage options to avoid foreclosure, or information regarding ways to save money by switching to more efficient energy sources, I may have a solution of value in tough times. For example, the desire to access information via hand held devices is growing. As long as you can offer a solution that meets such a need at a price the customer can afford, your product or service will always be in demand.
Regardless of economic conditions it is important to remember that the laws of macroeconomics still apply. Over the long-term there is no substitute for a clear understanding of supply and demand with regard to the products or services you are offering. Rather, it is all about finding customers who have a demand for the products and services you offer, and providing more value than your competitors.
Times of adversity provide a wonderful opportunity for the most skilled entrepreneurial leaders to weather the storm, and to thrive when others are shutting down. As the Roman poet Horace said, “adversity reveals genius, prosperity conceals it.”
©Mark P. Loschiavo