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Recession and small firms: Bad news good?

Updated Thursday 19th December 2013

For some, a recession can be a shock to the marketplace or it can unleash new opportunities.

Newspaper headlines depicting the economic depression Copyrighted image Icon Copyright: Flynt | Dreamstime.com Newspaper headlines depicting the recession It has long been recognised that small, entrepreneurial firms often thrive during times of market uncertainty, or rapidly changing macro-economic conditions. This is not only illustrated by the rise in the churn of small firms during recessions – that is an increase in the number of start-ups as well as closures - but the resilience of those already in operation to ride through difficult economic times. Studies have tended to show that it is their close proximity to the marketplace and ability to be agile that enables many small firms to survive periods of economic uncertainty or external ‘shocks’. This is quite different from large-scale, corporate organisations with their rigid structures and chains of command that are often slow to respond and as a result, too often, seek to make fundamental changes in their strategies and operations too late, such as once a recession has started to bite.

The world of the smaller enterprise is somewhat different. Of course, external shocks have different effects on small firms and some may be forced to close down. However, if we take a macro-economic recession as a type of external shock, it may be seen as having different implications for different types of small firm: according to industry, region and product/service type and ability of the owner-manager to adapt.  Recessions and similar shocks to the economy can generate many new opportunities: we have to remember that a recession is a net downturn in activity and within this there are components of growth and expansion. Hence, some small firms remain untouched while others have to face the downturn head-on and look internally to their own products and services and the resource inputs they utilise.

Small firms’ relative close proximity to market is crucial here: first of all they have to receive signals from the market that there is trouble ahead. Many small firms have what could be termed as their own ‘early warning’ systems, such as shifts in customer/client requirements. Many small firms are constantly adjusting to signals from their marketplace: their relative vulnerability means that they have to constantly be aware of their operations, cost structures and market offerings.  A recession is an extreme event that tests these systems and raises questions about the necessary adjustment processes required for survival and development.

Once the signals are received, owner-managers will seek to adjust to the requirements of their markets: this can be almost immediate for some but for others it may take some time. During a recession, this can involve retrenchment: in practice involving tightening their own belts, entrepreneurs taking less income for themselves, reducing the purchase of inputs and/or changing the offer to the marketplace, including price changes. 

Simultaneously, the more entrepreneurial owner-managers will also be looking for new market opportunities. A recession can produce contradictory effects for different types of enterprise: for some a shock to the marketplace can unleash new opportunities or accelerate what has been a longer term structural trend. Of course, much depends on the strategic response of owner-managers and their ability to identify and act on new market opportunities.

Many small firms survive because they pursue an ‘ambidextrous strategy’. This involves undertaking multiple activities for the business. In the case of managing in a downturn in demand, this may involve cutting back costs but at the same time, investing where there are new opportunities.  Firms that are able to ride through the initial shock wave of a recession are often able to see the whole recession through. In other cases, the exit of firms from some markets provides opportunities for surviving firms or new entrants.

Recent analyses of the responses by small firms to recession bear out the varied effects and responses by owner-managers (1). Even when small businesses have no control over the circumstances of the recession, they are shown to be much more flexible and adaptive than many of the media headlines would lead us to believe.

References

  • (1) John Kitching, Robert Blackburn, David Smallbone, and Sarah Dixon (2009) Business Strategies and Performance During Difficult Economic Conditions (Project Report). London : Department for Business Innovation and Skills;  David Smallbone, David Deakins, Martina Battisti and John Kitching (2012) “Small business responses to a major economic downturn: empirical perspectives from New Zealand and the United Kingdom.” International Small Business Journal, Vol. 30, No. 7, pp. 754-777.
 

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