A manager needs to monitor: 1.Assess the company’s vulnerability to recession. 2.Sketch out a contingency plan for dealing with recession. 3.Build Flexibility into the day-to-day operations. 4.Develop an early warning system for identifying coming downturns.
Managing through the Business Cycle
| Steps | Description |
|---|---|
| Assess vulnerability to the recession | “How vulnerable is our company to recession or a slowdown in sales?” Assess the vulnerability in terms of magnitude and timing of slowdowns in sales using national data on the company’s industry. |
| Sketch out a contingency plan for dealing with a recession | It’s an one or two page plan, which can lead a manager to build flexibility into the business. |
| Build flexibility to cut expenses | A company needs the flexibility to cut costs in difficult times. A manager can build flexibility in the business by considering the following areas.
|
| Develop an early warning system. | In 1940, the Battle of Britain began as 2,400 Luftwaffe aircraft attacked England. The Royal Air Force had only 900 planes., yet they successfully defended their country from the Germans. They key to their success, was radar. The early warning system is “radar for business.” |
This assessment sets the stage for contingency planning. Business managers need to know how to guage their companies vulnerability to recessions and other low data points the company may face. The best place to start is using national data on what you companies industries focus is. Using government resources of national data can help you when assessing what your companies industry trends are such as if your industry is more at risk when recessions hit, or how much do sales decline to periods of recession.
The senior management team has to have a plan in place for recession. This plan focuses on how to deal with economic downturns. This plan will help create greater flexibility for a company when economic downturns take place.
“Relationships between vendors and customers need to be managed in the good times with an eye to survival in the bad.” This basic practice creates flexibility when good times turn bad. Business decisions of the most basic principle can limit or increase flexibility during tough times. Capital spending is a great example of somethings where companies plan for booms while also protecting against recessions.This tends to be a judgement call but creates more flexibility if you consider all judgements before making the final decision on spending or minimizing spending. Looking for any and all options to create more flexibility only strengthens ones business during economic downturns.
A company that learns in its contingency planning that it has limited options for cutting expenses may spend a year adding flexibility wherever it can. Planning a business for a recession starts with understanding the vulnerability the company is towards a downturn.
Explan each of the following terms in your own words. The author explains the terms in the textbook. If necessary, you may also Google the term on the Web. Good resources include:
Explain the terms in your own words briefly.
A classification system used to determine businesses by their type of economic activity. The purpose is to collect, analyze, and release data related to their sector in the economy.
The cost added from producing an additional unit of a product or service.
A larger saving in cost gained when increasing the level of production.
A good used to produce other goods or services instead of directly being purchased by a consumer.
The value of return to business shareholders if all assets were liquidated and all debt was paid off.
A fixed income investment which is a lon made from an investor to a borrower. A security sold by governments or corporations.
The sum of money borrowed by a customer from the bank for a specific purchase.
Account that lets one borrow money when needed by using checks or a card to make a purchase. This is beneficial because you can borrow the exact amount needed without paying interest on a loan. ### Commercial Paper An unsecured promissory note issued by a company usually ranging from 3-6 months.
Describe the characteristics of the following events briefly.
The author uses this as an anecdotal example to explain the danger of inflexible labor contract. General Motors was unable to see the benefit of business flexibility as it paid workers even when they weren’t needed. This created an issue with inflexibility further when they continued to produce vehicles when there was low demand. GM was forced to lay off workers because of their inability to recognize value in flexibility in a world with imperfect forecasting.
The author uses this as an anecdotal example to advocate for smaller modular investment in stages. A failure to recognize the effects of price hikes on the industries consumer demand caused issues. People had a hard time adjusting in the short but over time adjusted their behavior. People soon purchased insulation and sought for more efficient products and services which industry heads didn’t see the eventual decline in sale. Furthermore the issue of excess equipment arrose where it was no longer needed. The lesson was to think small and more modular increments where projects can be built in stages to protect against economic downturns.This can allow for firms halting capital spending during declines in the economy. This further could help benefit a project and the industry with technological changes. If a project is built in stages, then if tech-advances happen they might be implemented in later stages of the economy.
The author uses this as an anecdotal example to advocate for borrowing with staggering maturities. When the recession slammed the railroad industry in the ’70s the Penn Central Rail systems revenue and cash flow tumbled. At this time the company was financing a large amount of it operations with commercial paper where they were borrowing money from creditors. The creditors got nervous about Penn repaying their debts and refused to roll over $82 million in commercial paper. Penn Central soon went bankrupt. By financing with bonds rather than short-term loans the investors would’ve been unable to pull out of their financing and Penn would’ve had 2-years to recover from an economic downturn and survived the economic downturn.