Businesses Don’t Fail Because of the Economy

People complain about the economy. People say that, “because of the economy businesses will fail.”

The evidence used to back this up are the high numbers of layoffs that companies make or lower of stock prices. In some cases, hundreds of people are laid off at a time. In some cases thousands at a time. Sometimes stocks plummet.

I argue that the economy isn’t the problem.

I argue that the real problem is business decisions. Business leaders make poor business decisions because they don’t understand their customers, don’t understand their vendors or just plain don’t understand their own business.

Let me give you an example that supports this.

Yahoo! / Microsoft ordeal.

On February 1, 2008, Microsoft proposed to purchase Yahoo! at $31 per share. It was a 62% premium to the, then current, trading price for Yahoo!.

Yahoo! told Microsoft no because the 62% premium undervalued the stock. The thing that is amazing is that came only 10 days after Yahoo! announced they were going to lay off “hundreds of its approximately 14,000 employees.” They ended up firing over 1,000 and they keep coming.

When Microsoft made the announcement, the stock jumped. It has steadily declined since then (http://finance.yahoo.com/echarts?s=YHOO#symbol=YHOO;range=1y). Now (as of this post), it is trading at $12 per share… less than 40% of what they were offered. Rumor has it that they want to open talks with Microsoft again… surprise, surprise. 

Bad decision after bad decision, Yahoo! is the reason it is failing. Or, more specifically, their bad business decisions are the reasons it is failing. The entire executive team should be fired for mis-management.

What does this mean for you?

Whether you run a business or an employee of a business, you have to realize that the nature of the economy changes. The nature of your consumers changes. Nothing stays constant. If you run your business today like you ran it a year ago, you will ultimately fail.

I know that the larger the business, the harder it is to understand all your costs. But, with proper reporting, good business managers and an understanding where the economy is heading, you can prevent a lot of problems. In fact, you can even prevent the need to lay off if you plan a head by having hiring freezes and offering voluntary early retirement packages.

I understand that there are elements out of our control. You aren’t graded on what others do. You are graded on what you do. When you are handed a challenge that you didn’t cause, your only choice it to make a decision and deal with it. If you make the right choices, you’ll come out just fine.