How to plan for a short war (or long one)

Money Matters / Joseph Anthony

Given the likelihood of a war with Iraq, what should businesses anticipate?

Let's be optimists here. Let's assume that we're looking at a short war — something along the lines of the Gulf War. Andrew J. Birol remembers his own business experience then. In 1991, he was director of New England Business Service, a seller of business forms and supplies to small businesses.

The company was preparing to launch a new product line of stationery and accessories to florists. "We had a couple hundred telemarketers and customer service reps trained and ready to take orders. More than 40,000 catalogs had been sent out," says Birol, now president of Birol Growth Consulting of Solon, Ohio.

But just as the product line was launched, Operation Desert Storm unfolded. Commerce for the next few weeks pretty much collapsed. The product line eventually recovered, but Birol learned that much of what happens in business is out of a company's control. And even though the Gulf War was proclaimed a rousing success, the U.S. economy still fell into a recession.

Here are seven suggestions that Birol and other experts have for businesses concerned about the prospects of war.

  1. Be prepared to experience a drop in business. We've gotten used to round-the-clock battle news — even when there are no battles and not much news. If Americans are glued to their TV sets to keep up with the turmoil, they're likely not going to be out shopping, spending or doing much else.
  2. Hope for something short, which many say could boost the economy. People sometimes cite World War II as an example of how a war can actually stimulate an economy. "That was unique — World War II was a phenomenal thing because we had to build an industrial complex," Birol says. "That's not the case here. At best, you hope for a short, technologically oriented victory that doesn't drain resources out of the economy."

    "I think that if the U.S. wins and wins big, there will be an effervescence in the marketplace," says Sarkis Joseph Khoury, a professor of finance and international finance at the University of California at Riverside. "I believe a quick war would have a very strong positive effect on the U.S. economy."
  3. Figure that the longer it goes, the worse things could get. If the U.S. invades Iraq with the goal of taking over Baghdad and the country, a short-term conflict could become a long-term commitment. That could take the momentum out of any war-related rebound, and force businesses to reconsider any commitments to expansion.

    "Even a temporary military failure or damage to Iraq's oil fields or infrastructure could send [oil] prices to $35 a barrel or higher," says Antonin Rusek, an associate professor of economics at Susquehanna University in Selinsgrove, Pa. "This could increase both household costs and production costs in the U.S. The result would be lower consumer confidence, lower demand and probably a recession."
  4. Don't try to discount your way through a slowdown. Lower prices aren't going to motivate clients or customers who aren't running their own businesses at full-steam or who simply are not in the mood to spend money.

    When there's reduced demand, price-cutting doesn't seem to pay. "People who are going to buy are going to buy not on price but out of necessity or escapism," Birol says.

    Translation: You'll be able to sell people the things they must have, whether those are physical necessities or emotional needs. Restaurateurs may be in for a rough time. But movie theaters might do just fine — as long as they're not screening war movies.
  5. Don't try to whip up new programs. Instead, focus on service. "Get back to what you like doing and what you do well," Birol says. "Assurance, stability, reliability, consistency — these are the things that your customer base is going to want. You bring a lot of credibility by doing what you do well, rather than trying to expand into a new area." But see No. 6.
  6. Do consider new programs aimed at the stay-at-home market. Even though the United States may not be under attack, people are still drawn to their homes by the perception of a crisis. "Remember that after 9/11, consumer demand dropped terribly," Rusek says. "Peoria wasn't in danger, but people in Peoria stopped buying sofas."

    "Cocooning will go on unabated as long as our perception of our individual freedom and our ability to go out is under attack," Birol says. "Look, right now I'm planning to go to Cancun with my wife and daughter. Am I as eager to do that when the FBI is warning people about threats that it won't explain or define? Of course not."
  7. Learn to expect the unexpected. A stunningly quick victory, a horrific setback and other unanticipated events — they all could whipsaw consumers and the economy in one direction or another.

    "It is important to consider psychological impacts," Rusek says. "Things always go wrong in the military. If you put troops on the ground in Iraq and they get somehow stuck there, you could have a very negative reaction. That's long term. Short term, remember that oil markets tend to panic before everyone understands what has happened."

    At a certain point, you cannot plan; you can only be ready to respond. "Economics plus war collectively add up to psychology on steroids," Birol says. "If people don't feel confident, they'll stock up on stuff just because it feels good to be able to do it. [But] they probably won't be throwing a lot of big parties."

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