This is the reality that faces many businesses - and government agencies - as the economy continues to falter. Few companies ever shrink their way to growth.
Angus Loten reports in the Wall Street Journal on the radical changes in strategy, product and service some businesses gamble on to keep the doors open. JL:
Half of 1,000 small- and medium-sized business owners in a recent Office Depot survey said they were planning to alter their core business plans or strategies over the next six months, including changing marketing strategies, products and services, or target markets.
"These are not minor changes," says Office Depot Chief Executive Neil Austrian. Meanwhile, a survey of 1,000 small-business owners released this week by Citibank found 56% were planning to introduce new products and services next year.
For nearly a century, Olympia Candy made mostly boxed chocolates and other bite-size treats. But last spring, the company's owner converted part of his Strongsville, Ohio, factory into a diner serving burgers, grilled cheese sandwiches, onion rings and milkshakes.
"We saw the way the economy was going and needed to do something," says owner Bob McGrath, who had already cut staff to 18 from 24 employees while trimming expenses wherever possible. "It's like a whole new business."
Mr. McGrath, who spent $60,000 converting his 15,000- square-foot factory, is like many entrepreneurs facing gut-wrenching decisions as a result of the prolonged economic slump. When basic cost-cutting and discounting fail, a growing number of small firms are shifting to more dramatic, sometimes risky overhauls of their businesses.
While small businesses may be more flexible and able to transform themselves more quickly than big firms, a misstep could be catastrophic. "When the economy was booming, you could make a lot of mistakes with customers and products. There's absolutely a bigger risk now," says Mike Mirau, a business coach in Dallas, citing the danger of alienating core customers or investing in new products that don't sell during a period of tight credit and weak consumer spending. "The margin of error has become much smaller."
"The question is whether your current people and structure are as flexible as you need them to be," says William Dennis, a senior researcher at the National Federation of Independent Business, a Washington lobby group. Mr. Dennis expects to release a study on evolving small-business strategy later this year.
Despite the risks, Mr. Mirau, who has more than 60 clients, says more small firms are adopting a mantra of "adapt or perish."
Jupiter, Fla., entrepreneur Scott Nichols used to produce custom-made embroidered shirts and caps for large corporate events under the name 4S Embroidery. When those companies started cutting budgets in late 2008, the "market dropped to zero," he says. "You start out thinking it's a temporary thing, but a month goes by, then two months, and everyone is still canceling orders."
Mr. Nichols says he cut back as much as possible, relying on credit cards to stay afloat, before realizing a more fundamental change was needed. So he decided to ditch his corporate clients and instead sell uniforms to police and fire departments, as well as schools, hospitals and other organizations. "It was a major shift, though many of our vendors and suppliers were the same," he says.
The contracts tend to take longer to negotiate, but sales today are double what they were before, and the company, now called Jupiter Uniforms, has 12 full-time employees, up from just three, Mr. Nichols says.
Allonhill Inc., a mortgage due- diligence and credit-risk management firm, also needed to find a new market. The three-year-old Denver firm lost nearly all its private-sector clients after the federal government launched the Troubled Asset Relief Program, says founder Sue Allon.
"We were basically sitting there with 22 employees and $1 million invested in the company, but no customers," she says.
Ms. Allon challenged her staff to search for new clients in the federal contracting market. "We basically badgered contracting officers until they took our call," she says.
The company now has dozens of contracts for quality-control reviews of mortgage modifications and refinancing with Fannie Mae, Freddie Mac and the Housing and Urban Development Department, among other federal agencies. It has also expanded its work force to nearly 400 employees.
"It was a complete shift," says Ms. Allon, "but we're keeping the bills paid."
Sometimes, businesses are rethinking how they find customers. When Colleen McCarty and Russell Rowe launched Mod's Coffee & Crepes, a small eatery in downtown Tulsa, Okla., last year, they spent more than $150 a week on marketing in local newspapers and entertainment listings. They recently re-assessed the long-term value of that move.
"We looked at where that money was going and what return it had, and it seemed like we were just tossing money in the trash," says Ms. McCarty.
The husband and wife team is now hosting weekly promotional events in which 25% of sales are donated to a designated charity—from the local arts and humanities council to a group that sponsors HIV testing. The events, which are marketed online, have increased sales on those days by up to 40%, Ms. McCarty says.
"Our ultimate goal was to get more people into the restaurant, but it's changed how we approach marketing," she explains. "No matter what happens with the economy, we'll continue to do the charity nights. It's become part of our image."
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