Five pieces of advice for facing Puerto Rico’s economic and fiscal challenges

September 14, 2015
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By: Gustavo Vélez, economist

Recent events surrounding the public debt represent new challenges for Puerto Rico and businesses on the island. The community of local business owners has been hit hard by the current crisis. Between 2006 and 2015, about 15,000 businesses have filed for bankruptcy or ceased operations, which has worsened the economic problems.

Business owners has been most affected by the crisis, due to the size of their operations, the lack of capital and increased costs, particularly in electricity and consumption taxes. Facing the possibility that the recession will continue, we believe it is indispensable to provide this sector with practical advice and tools on how they can successfully face the recession.

Strategies to capitalize:

1. Understand the new macro-economic context: The first advice to business’ owners is to understand the actual macro-economic of today. Five years after the beginning of the recession, there are still broad sectors of the community of business’ owners who think that Puerto Rico will soon emerge from the current recession and the Island will return to the time of the bonanza experienced in the 1990s.

The only way to be able to make strategic decisions based on economic reality is to accept the analysis of the market in which you operate and other key indicators such as employment, income and consumption. The behavior of these indicators is a good reference for understanding how changes in these variables are affecting sales and for setting metrics for the business’s health in terms of the economy. In the economic bonanza era in Puerto Rico, this understanding of economic trends was not necessary, because the prosperity itself created enough opportunities for existing businesses. Today, however, insufficient information has negative effects on businesses.

2. Retention of customer base: With reduced levels of income and consumption, almost all markets are shrinking. Businesses are fighting to retain their market share, lowering prices and putting emphasis on quality service to preserve their customer bases. The strategy behind these efforts is to avoid erosion of the current revenue base, though that implies sacrificing profits through lower prices. The recommendation to businesses is that to evaluate their costs and analyze at what point they can reduce prices to retain market share, and expand it, if possible, without losing money. The optimal combination should be reduction in prices without sacrificing much of the profit margin and, at the same time, emphasizing service and quality to the customers.

Businesses are in a dynamic known as “cannibalization” of the market, which is achieving growth by taking customers from competitors. This process, if sustained during the current crisis, can lead to the failure of businesses that have not been able to face the competition and the low prices offered by competitors, which will lead to a high market concentration (fewer businesses per market). The challenge facing businesses, particularly small ones, is how to achieve a higher level of efficiency to reduce operational costs and proportionally lower prices to retain customers. This exercise should be done with professional support, particularly from accountants, experts in organizational behavior, and market specialists, to achieve the optimal combination of competitive prices and better service.

3. Redefine the business model– Consistent with the previous advice, many businesses have been forced to revise their business models. An example of a change of business model is the rise of businesses that rent movies by mail, which is a change from the traditional business model of going to a physical location to rent movies. The Internet changed many of the rules of the game that they were used to. Business owners have to review how to adapt their operating model in light of technological, economic and social changes. For example, restaurants that previously offered expensive dishes have revised their menus with more modest and accessible options for the new middle class.

We see the example of airlines that offer cheaper tickets for new travelers who have fewer resources. The changes in business models must take into account the new realities of the markets they serve, the changes being made by the competition and their own strategies for business survival in this new environment of economic scarcity. The main basis for any change in business models must be that the business remains viable and the team or employees (the organizational culture) can adapt to and understand the changes. The human component of the organization plays an important role in the change of model, as employees play a key role in successfully implementing the business’s new goals. Employees become the organization’s principal ally in difficult economic times. Therefore, the working team must be kept motivated and in a relationship of collaboration to create and sustain a good labor environment that facilitates the transition to the new business model required by the current market conditions.

4. Maximize technology– The establishment of technology is one of the preferred strategies for businesses in times of crisis. However, to make the adoption of new technologies successful, they should be aligned with broad business strategies and focus in a strategic way. In other words, more than a simple mechanization of processes that were previously done by people, there should be a clear technology strategy for the business. The objectives of adopting new technology should include: increasing operational efficiency of the business, and increasing the quality of processes, and empowering employees to be more productive, strengthening relationships with suppliers and customers and developing business intelligence and information.

Business owners have to look at the technology strategy in a holistic way to maximize the return on investment and analyze how technology is going to improve the organization’s performance. From that perspective, we suggest that businesses evaluate options for technological transformation with expert consultants in this field emphasizing the importance of the business strategy that the incorporation of new technology is based upon. 

5. Exports as a growth option– Finally, we recommend evaluating incursions into other countries as a strategy for growth. Although exports have always been seen as a desirable goal among some sectors of the community of business owners, actually there are few native capital businesses that are exporting to international markets. However, given the current stagnation in the primary or local market, which is Puerto Rico, many businesses that want to grow have no other option than to go out into the international market to sell their products or services. Although this sounds complicated or risky, exporting has become much more simple and viable than it was in the past.

Trade agreements signed by the United States Government with countries in Central America and the Caribbean (such as Dominican Republic), are defining new rules for the game and reducing barriers that previously faced local business owners. With the goal of expanding trade among North American businesses (and that includes businesses in Puerto Rico), the federal government has created programs to promote exports and mechanisms to facilitate businesses selling their products in markets where the government has implemented trade agreements. In Puerto Rico, the local government has also put into action various initiatives to promote foreign trade by local businesses. For example, the Trade and Export Company provides free business information services to businesses to help them identify the potential for exporting the products or services they offer. This public corporation also organizes trade missions to various countries in the region. On these missions, companies interested in acquiring products from local businesses are contacted. In essence, the local government acts as a facilitator of this process of entering into new markets. In fact, the local government has a trade office in some of the most important export markets for Puerto Rico. Meanwhile, Banco Popular also offers financing for businesses interested in exporting. Beyond the availability of governmental help to begin an export plan, however, the most important factor is that the business owner is convinced that his business is ready to begin selling to a foreign market and has the infrastructure, knowledge and resources to do so.

In many cases, exporting is the final stage in a company’s process of full development and, in other instances; it is a short-term strategy that develops in parallel with the local market strategy. We recommend that business owners who are interested in exporting seek professional advice and prepare an export plan with well-defined goals and a course of action based on the business’s objective reality.

The economic situation raises enormous challenges for all sectors of the economy, but it simultaneously provides opportunities that can be capitalized upon with a good business model. A new kind of economy is taking shape. The challenge is how we adapt our businesses to the new economic reality in a successful way.

 


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