DiligenceChina

Markets are slipping – some would even say sliding. Your first impulse is to do something. Anything. Sell out. Double down. Scrap your expansion plans. Cut your prices. Go back to grad school.

Now is a great time for aggressive patience. Hold the line for just a couple of minutes. Some of you haven’t really seen a market slide before, and a steep, dramatic drop in big indices can make brilliant guys act like complete idiots.

Here’s a 5 step action plan for not shooting yourself in the foot:

1) Forget the headlines for a minute.

They don’t know what the hell is really going on. Why did the stock market fall? Regulatory pressures? Drop in demand from the US? War in Iraq? Evil spirits rising from the House of Uranus? There’s a lot of noise right now, and the ugly stink of panic is in the air.

I’ve spent plenty of time in bars with financial writers and business reporters. These guys don’t know ANYTHING. They are the LAST people you want to rely on in a volatile economic environment.

2) Analyze 3 scenarios.

Best case
Worst case
Most likely

There’s a catch, though: these have to be scenarios for YOUR business. Not just big-picture economic stories.
What if it turns out to be nothing? A momentary blip? What if stock markets and economies in China and the US turn out to be just fine? Will that have any impact on your business planning?

What if we really are in for tough times? What’s the worst thing that can happen – to YOUR business? What if economic growth in Shanghai drops to 8% in 07, and 6% in 08? Yes, I know — the sky will collapse and the earth will plummet right into the sun and only cockroaches and slime mold will survive… But seriously – it’s unlikely that the Chinese economy will grow at less than 6 or 7 % this year under any but the most catastrophic scenarios. Vacation homes are going to take a big hit, and Ferrari sales will likely suffer in the short term. Are those your businesses? Calmly analyze how an economic downturn in China and/or the US will impact on your business.

3) Revisit your model

Where do you make money? From new spending? Low cost international buyers? Expat retail? Domestic families?
How wiill an economic downturn impact on your business? If you’re a low cost producer, it may not harm your bottom line too much. If you are vulnerable to a downturn, what are your best options for dealing with it?

How will this affect your competitors? How about complimentary businesses? Some businesses actually perform better in an economic downturn – like home improvement, auto repair and local vacation spots. As customers and clients react to a perceived economic slowdown, spending habits change. This might be a good time to consider how you can get in front of those new trends and profit from tough times. There may be new opportunities your’re not seeing.

4) Plan your next step

If this is the start of an economic retrenchment, then you should take measured, sensible action. But remember – an economic shift will affect everyone – including your customers and your competitors. The job market will cool off, and so will real estate pricing. Customers will initially cut back on ordering, but may change their minds quickly. Think first, build a reasonable plan, and then execute calmly and steadily.

5) Take a deep calming breath. Have a large drink. Take another deep calming breath. Repeat as needed.

The only thing to fear is fear itself. That, and large asteroids heading straight for us. Since there don’t seem to be any asteroids on the radar screens, you are much better off staying calm and avoiding quick, dramatic moves that you will regret for years to come. Even if we are entering tough economic times, the world will still be around tomorrow. Don’t panic.