Earlier today I was interviewed by Fox Business Television Network regarding the impending failure of the investment banking firm, Lehman Bros.

Like anyone else I will be saddened to see a century old, once venerable business pass from a place of prominence on Wall Street to a mere foot note in history.  I will also be saddened to see 25,000 people lose their job.  But my greatest saddness will be realized when the Federal Government steps in to “backstop” the sale transaction.

The Federal Government has replaced our primary economic structure of Capitalism with  Socialism.  In a truly capitalistic environment, “market forces” - a willing buyer and a willing seller would dictate the price, terms and conditions of any such sale.   The Government is not content to let market forces work, so instead they will have the taxpayers pick up the tab for Corporate malfeasance misfeasance and non-feasance by “covering the losses” that may or may not be sustained by a prospective buyer of Lehman Bros.,

Last year, Dick Fuld, the CEO of Lehman received a $40 million compensation package for making decisions regarding Lehman.  This year, the taxpayers of America will pay billions of dollars for those same decisions made by Mr. Fuld.  

Lehman Bros., is a publicly held company owned by thousands and thousands of stock-holders, each of which assumed the risk of loss in exchange for the reward of profit.   They hired Mr. Fuld to run their investiment and he did.  These stock-holders are the only individuals who should have to bear the loss of his decision making, yet the Federal Government is quick to pass it along to taxpayers who never had an opportunity of any upside reward.

The Federal Goverment came in and bailed out Bear Stearns and most recently Freddie Mac and Fannie Mae - now they are eager again to replace Capitalism withSocialism.

$130 a barrel oil has caused the price of basic business services to surge. Virtually every business is feeling the impact, directly or indirectly.  During these times of high anxiety and panic it is important for every business to have a battle plan that will carry them through these tough times.

Focus on the right problem. Don’t try to outrun the economy – outrun your competition.

Trying to stay profitable by reducing minimal expense items is like trying to spit on a forest fire.  Stop-gap, short-term, “feel good” measure such as turning up the thermostat or shipping by slow-boat instead of overnight, rarely produce the desired result.  While such savings are never unappreciated, they will not offset a recessionary economy or sharply accelerating operating cost.  We have all heard the old joke with the punch line, “if you and your buddy are out in the woods hunting and you come across a bear, you don’t have to outrun the bear, you just have to outrun your hunting buddy”.  So to for businesses, we “don’t have to outrun the economy, we only have to out run our competition”. Your competition is suffering the same increase in operational expenses as you are experiencing.  You and your competitor continue to compete for the same customer. Here are five tips that will give you an edge over your competition during tough times.

1.         FIRE HIGH MAINTENANCE CUSTOMERS

In 1906, Vilfredo Pareto, an Italian economist, created a mathematical formula to describe the unequal distribution of wealth in his country.  His formula, commonly referred to as the 80/20 Rule, simply states that 80% of a business’ revenue is produced by 20% of its customers.  While his formula will have anecdotal exceptions to the contrary, like all economic formulas it is generally accurate to most businesses.  If 80% of the revenue is being produced by 20% of the customers, then it is the other 80% of the customers that are only producing 20% of the revenue.  Think of this 80% as unproductive or counter-productive “high-maintenance” accounts that are dragging down net profits. What would happen if a business would systematically “fire” the 80% that were only producing 20% of total revenue?

The math is real simple; the business would lose 20% of its revenue, which at first blush will scare some people, but look at what else that would happen in such a scenario.  At the very same time, that business would be able to shed the 80% of its customers who were only contributing 20% of the revenue.     If the volume of customers were to decline by 80% while only suffering a 20% decline in revenue, imagine the cost reduction opportunities that would present themselves.

When you fire these “high maintenance” customers, they will go somewhere else, probably to your nearest competitor.  Great, now you are operating efficiently and your competitor is saddled with all of these high maintenance customers, which will certainly increase his operating cost.  In modern vernacular this is called a two-fer.

2.         REDUCE NON-ESSENTIAL STAFF.

If you have followed step #1, with a reduced customer base you will be able to operate with fewer employees.  Re-assess your staffing needs based on the new reality. As unpopular as this may make you, it is crucial that you make the hard decisions required of every responsible business owner.

3.         RAISE YOUR PRICE:

Someone once said, “a rising tide floats all boats”.   Your customers read the same newspapers and watch the same TV News shows, they have already heard pundits proclaim, “the price of everything is going up”.  Good, what a great time to raise the price you charge for your product/service.  In such an environment, customers EXPECT prices to rise.  Airlines and gas stations are not apologizing for passing the increased costs on to their customers, nor are the providers of the basic business services that are causing you to increase your price.  Why should it be any different for you and your business?

Assuming your business was operationally profitable before this recent uptick in expenses, a price increase proportional to your newly increased expenses will continue to produce net profits.  Some business people are afraid to raise prices out of fear it will decrease their volume of business. Will increased prices cause you to lose a few transactions? Probably, but so long as the overall increase in margin offsets the loss, it is a positive trade

4.         FOCUS YOUR MARKETING ON YOUR NEW CUSTOMER:

The rising prices that are affecting your business are also changing the buying habits of your customers.  Most businesses make the mistake of continuing former marketing campaigns, even when the market has changed.  Revise your marketing campaign to reflect the new economy.  Focus your marketing budget where it will find your desired customer.  When a reporter asked hockey legend, Wayne Gretzky, why he was such a tremendous hockey player, he simply responded, “I don’t skate to where the puck is, I skate to where the puck is going to be”.  We shouldn’t market to where our customer was, but instead where they will be.

5.         INCREASE YOUR MARKETING BUDGET

This sounds counter-intuitive as in lean times the natural reaction is to curtail spending.  While reducing expenses is always important, increasing your marketing during a time when your competitors are cutting their marketing budget gives you an opportunity to grab significant market share. If you have fired high maintenance customers, reduced non-essential staffing and increased your price, you will have marketing funds available to increase your marketing budget.

In our world there are certain things that remain inviolate; laws of physics and laws of economics. These combined with the law of unintended consequence have created a whole new world.

The most basic law of physics is the Law of Gravity. It doesn’t matter whether we like it or dislike it, agree with it or disagree with it, and no matter how much we wish it could be different, an object will always fall to Earth. So too with the most basic law of economics, the Law of Supply and Demand. When supplies shrink below the level of demand, prices rise. Likewise when demand increases above the level of supply, prices rise. When shrinking supply occurs simultaneously with increased demand, prices rise exponentially.

Welcome to the 21st Century where the environmentalists of America have unnaturally reduced the supply of oil. By shutting down virtually all domestic drilling (offshore and ANWR) and creating a myriad of regulations that has effectively made it impossible to add new oil refineries, they have reduced the world’s supply of oil. To make matters even worse, they refuse to allow alternative energy sources, such as nuclear energy, and have even prevented installation of wind turbines to protect the birds.

While the World’s supply was being systematically reduced, two new world class oil-consuming customers emerged; India and China. Their respective rapidly accelerating appetite has created a demand that would have been difficult to satiate even with normalized supply. In a world with unnaturally restricted supply the problem exacerbates dramatically.

As the economies of India and China expand, their need for a continuing and dependable supply of oil will create within their political psyche the same forces that resulted in US policies in Iran (remember the Shah?), our “liberation” of Kuwait, and our regime change in Iraq. In each of those instances, as the dominant world power, the rest of the world stood back and let us “have our way.” In the immediate future, our position will be replaced with either or both China and India. They will have the same need to maintain a continuing supply of oil, as the US has exercised in the past, and they will possess the military and nuclear capacity to insure their citizens will not be the ones to “freeze in the dark.”

We are locked into a global game of “musical chairs” and the number of chairs have been reduced, and we no longer are the only “big kid” in the game. Since the environmentalists have made it impossible to increase supply, the only solution will be to reduce demand. Eventually one of the prime players will conclude it is easier to reduce an entire country of competitive consumers than it is to reduce internal consumption.

In the meantime the laws of economics will continue to dictate perpetually increasing prices. At some point in the near term future the economic and resulting political turmoil created by this tension will lead to its inexorable conclusion.