How to survive in Long Term?

I am a management student of Vinod Gupta School of Management, Indian Institute of Technology, Kharagpur, India. Current economic crisis had made me think almost a thousand times. All theories moving around in the market also makes me more confused of why we students are affected so badly. With jobs in the market drying out has crippled the scenario even more. Even I was left not immune to this crisis even after having fantastic Work and Academic record. With I losing my job it came as a shock to me.

So sub-prime crisis has really become a buzz-word nowadays. We don't see it much in India, as banks here, are far more regulated than in United States. So why India and Indian jobs are feeling the pinch? The reason is the decline in demand in United States for products and services shipped out of India. India has an exports of nearly 24.1% of its GDP towards United States. This is quite a huge percentage. But still India is holding out and keeping things a little more calm. The problems here are not unprecedented, but the control of liquidity regime has ensured that nothing goes wrong at such drastic times.

Thus, I should comment more on liquidity. Liquidity in raw terms is the amount of money available in the market for transactions. It becomes important when people borrow money. People and organizations borrow money to pay off the transactions like, paying for mortgages/loans or paying for services. Thus, banks play an important part. They are both lenders and borrowers. If they borrow more than they can pay off, liquidity is out of the market. The recession begins here. Somehow, the onus also lies in the hands of people apart from these investment bankers having almost out of the world ideas.

Bad news is for the small/medium enterprises. These firms are facing the wrath as they borrow money out of the lenders to pay off for production, services and pays. If the lenders have no liquidity, then where do these people go? The answer is difficult but not impossible. What I propose here is a long term view rather than having a myopic, small term view to the problem.

What should these firms do? I provide the following peoposition which can be followed over a period of 5 years, just as the 5 year plans of Govt. of India.

1. Competitive market is good but not always in favor. Why I say this is that is keeps pushing the necessary evil down - Costs. A few years back, costs were a phenomenon in themselves. Everyone wanted to cut down costs. They reduce production costs and let the final output to the customers. In simple maths. If I am selling an apple for Rs.5 and earning Rs.1 as profit, can I reduce costs to Rs.2 and make sure I sell at Rs.2.5 and make a profit of Rs.0.50. This way I could sell more because immediately the demand will go up and people will buy at lower costs. But at the same time I earn a lower profit of Rs.0.50. I further percolate this into numbers. If I sold 10 apples I was earning Rs.10 in profits earlier. And after the cost reduction if I sell at Rs.2.50, some 30 apples, I get Rs.15 in profits. This is a gamble that most manufacturers play. Market research comes in handy when you have to deal with the demand in the market. But that too is not fool proof.
2. Demand is driven by many factors which are complex and not easily understood. Simplest of the explanation is that, how much buying power do the people have and how much they want to buy? If they want to buy only 10 apples and not 30, the situation becomes even worse for the manufacturer. He now sells out say 15 apples at profit of Rs.7.50, Rs.2.50 less from previous. This induces job losses and problems of lesser profits. In a horde of reducing costs all that happens is a spiralling profit problem. The same is true for services.
3. So what should the manufacturer do? I believe cost-cutting is not a bad idea, but the price cutting certainly is. Due to competitive pressures manufacturers and service providers fall for this trap. Firms doing this are certainly myopic. They are driven by short term goals.

Why hue and cry in making more profits? It is evil and destroys the society fabric. Utterly wrong and misinterprated. Perhaps, firms making more profits should sustain their production. And carefully increasing production and jobs simultaneously. So where do these profit go now. Everyone knows that inflation blows away enough earned. Firms resort to investment into financial tools to earn enough to keep cash at same or a level more. This way accummulated money can sustain the firm.

I shall write more about how these enterprises can sustain even more.