Metro-Phoenix business study: Desert about to bloom?

The “2011 Metro-Phoenix Business Study: New Strategies for Success,” commissioned by SRP paints a community that fought hard to survive the recession, but is now cautiously optimistic about the future. All would like to return to pre-recession conditions, but the downturn has left its mark. The “new normal” amounts to leaner companies, slow growth due to restricted access to capital, and a need to learn new tools for marketing.

The last time Salt River Project (SRP) took the temperature of businesses in the Phoenix metro area it was spring 2007 -- just months before the start of the recession. Of all major stressors, managing cash flow concerned the most– 24 percent - and the economy was a worry to only 1 percent. Last fall the company returned to the field and found the mood very different: 86 percent of the 833 business owners and managers interviewed said that overcoming economic conditions has been their top challenge.

Since the past four years included what economists call the “worst recession in the post war period,” news that 86 percent of businesses are worried about the economy falls into the “dog bites man” category. But the study did uncover much that is new. Looking ahead, businesses are feeling more optimistic, despite the fact that uncertainty is still a factor.

During the recession, some 39 percent reported implementing cutbacks, but last fall 46 percent said they expect to expand in the next 12 months and another 46 percent plan to stand their ground. "Many businesses exist today because they figured out how to survive, they mastered survival mode. And the downturn has lasted so long that some believe this is the new normal for Phoenix, but there are signs of upturn on the horizon and in some sectors it’s already begun,” said Dennis Hoffman, economist and director of the W. P. Carey School’s Seidman Research Institute. “In order to compete effectively in a growing economy, businesses will need to acquire talent and grow commensurately or be left behind. Successful business owners need to know not only how to survive but also how to take advantage of opportunity."

A deep look across all sectors

The 2011 Metro-Phoenix Business Study: New Strategies for Success is the latest in a series commissioned by SRP, which delivers electricity and water in the metro Phoenix area. Beginning in 2005, the series examined a different sector of the business community every year, including Hispanic, women and minority-owned businesses. When the economy crashed in 2008, SRP took a break, coming back last summer to conduct a comprehensive survey.

WestGroup Research collected and analyzed data, and experts from the W. P. Carey School consulted throughout the process. From August through November of 2011, researchers interviewed representatives of 833 businesses by phone and online. Quotas were set by industry type and size of staff to assure that the sample was representative of the existing business mix. As a result, most of those interviewed were “small businesses.” Focus groups and in-depth interviews rounded out the data. The study was designed to answer four questions:

• What have been the biggest obstacles facing businesses?
• What steps have businesses taken in response?
• What strategies have been successful?
• How will businesses operate differently in the future?

According to the published report, “The purpose of this collaborative effort is to provide a resource to companies, government agencies, educators and supporting organizations that want to help develop solutions for business in the midst of an economic slowdown.”

Under cloudy skies

“The uncertainty of the marketplace makes it difficult to forecast and prepare for the future,” the study points out, so no surprise that financial planning concerned 29 percent of those surveyed. The study showed that 41 percent of the respondents listed access to capital as a significant issue, and that number rises to 60 percent when those who stated this is somewhat of a problem are added. And, at a recent presentation to business owners, Brian Cary, SRP’s manager of forecasting, research and economic development, commented that cash flow is a “perennial problem” – a problem of some or significant importance to 58 percent of the businesses. About 35 percent said that the activities surrounding finding and retaining customers – including marketing – is a significant challenge today.

The depth of that challenge is better understood when the 40 percent that are somewhat concerned are added in. Finding and keeping employees is also on their minds. When unprompted, only 5 percent said employee recruiting troubles them (in contrast to 18 percent back in 2007 when unemployment was low), but when asked to pick from a list of possible concerns, 22 percent said this aspect of running their businesses concerned them.

On top of it all, the business owners said they are now dealing with a climate where the rules and tools have changed: “Once businesses reach beyond the survival stage they want to know the impact of new rules (e.g., healthcare reform) and new tools (e.g., social media) to help with their operations.”

Dealing with slow times

According to the study, the impact has been the shrinking of Phoenix businesses. Those that have survived are “smaller, leaner and more efficient.” Some 71 percent reported decreased sales, profits and customers.

About 39 percent of the companies made cutbacks in response, but another 28 percent – typically younger, larger firms – responded by going on the attack. Attack strategies include expanding operations, increasing marketing and advertizing, launching new products or services and adding locations.

Many businesses feel the attack mode is risky – and not guaranteed to succeed. Understandable, says Cary. “The instinct -- and it’s appropriate when you’re in distress and your revenue is trickling away -- is to retreat,” Cary said. “But this business environment provides tremendous opportunities to attack. When is it a better time, if you are a user of commercial space, to shop for another location or expand your existing footprint at a lower average cost?

It’s an opportunity to find and recruit talented new employees. And your competitors are in the same boat – perhaps you can grow your market share at their expense, because they are retreating.” And, Cary points out that a business can survive by reduction – especially the small firms -- for only so long: “You shrink to survive, but in the long run, capitalism is all about growth. Shrinking is a death spiral.” Gary Naumann, professor of entrepreneurship and director of The Spirit of Enterprise Center at the W. P. Carey School, agrees. In fact, Naumann issed a call for small business to lead their businesses -- and by extention the metro area --  out of the slump. “You can only look down at your shoes for so long," he said. "At some point -- and that point is now -- small business executives have to take the initiative, get out front, and lead their companies back. This is what their employees, suppliers and customers are looking for from them. It all starts with confidence”.

Trying to figure it out

One of the major findings of the study is that technology offers opportunity. Many businesses aren’t sure how to leverage it, though. Virtually all businesses contacted – 97 percent – have access to the Internet, 74 percent maintain a web presence, and mobile devices are widely used. But although 47 percent say they actively use social media, when the questions became specific the numbers dropped. For example, 42 percent have Facebook pages, but 33 percent actively use them. Fewer are on LinkedIn—31 percent – but 19 percent are active. Twitter and YouTube are used by even fewer.