A manager needs to monitor:
The companies vulnerability to a recession and plan ahead to understand and fight off a future downturn in the economy.
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.” |
The vulnerability assessment shows the company how vulnerable they are to a recession, downturn in the economy, or slowdown of sales. This assessment “sets the stage” for contingency planning. The top way to gauge this is by looking at national data in your companies industry. From here you determine your industries vulnerability and see its economic peak in relation to your peak.
The contingency plan is important for a business and allows you to plan ahead for any economic downturns that may arise in the future. The contingency plan identifies issues where flexibility is needed and is important to allow your business to prepare for the future and fight off any hard hits that could lead to the end of your business.
Most ordinary business decisions limit or increase flexibility in the future. All of these decisions being made need to be made with an understanding of how much flexibility is being gained or lost.
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.
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.
The standard used by federal agencies in classifying business establishments and publishing data related to the business economy.
The cost added by producing one aditional unit of a product or service.
A proportionate saving in costs gained y an increased level of production.
Goods that are used in producing other goods, rather than being bought by consumers.
The value of shares issued by a company.
A loan made by an investor to a borrower that will have the face value payed back while gaining interest over time.
An amount of money loaned at interest to a borrower.
An amount of credit extended to a borrower
Short-term loan, usually three to six months, in which a large cooperation borrows from large institutions.
Describe the characteristics of the following events briefly.
The author uses this as an anecdotal example to explain the danger of inflexible labor contract. Elaborate.The Jobs Bank Program was created in 1984 by General Motors.GM wanted more flexibility in its labor rules to increase its productivity. The union was worried jobs would be lost so a compromise was reached that made the company pay full wages and benefits to workers who were not needed. The program depended highly on some very optimistic forecasts on future sales. When the future forecasts were wrong the company lacked felxibility to cut expenses.
The author uses this as an anecdotal example to advocate for smaller modular investment in stages. Elaborate. In the late 1970’s, a team at Pacific Gas and Electric Company anticipated strong demand for electricity which gave reason to building a 1 billion dollar coal fired power plant in addition to the 1 billion dollar nuclear plant that had already been being built. Economist forecasted that prices were higher, then damand would be lower than one would expect. They stopped the building of the coal plant and even though both forecasts were off the economists saved the company 1 billion dollars through the process.
The author uses this as an anecdotal example to advocate for borrowing with staggering maturities. Elaborate.In 1970 the Penn Central was financing a large portion of its operation with commercial paper. The recession of 1970 lead Penn Central creditors to question the railroads ability to repay debt so they pulled out on the 82 million dollars of commercial paper. The railroad then went bankrupt but if Penn Central financed its operations with bonds the creditors wouldn’t have been able to pull out and they probably would have survived as the economy rebounded in late 1971.