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. ## Summary
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.
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| 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 section is about finding out how vulnerable a company is to a recession or a slow-down in sales. Looking at a businesses history is a good place to start. But it’s not ideal for some because businesses are usually young. Industry data seems to be the best way to gauge at your businesses vulnerability.
Sketch out a plan for recession long before any hints at a recession happening. Planning to develop a contingency plan for dealing with economic downturn should be a top priority on every businesses agenda.
Being able to have a backup plan during a recession or economic downturn is huge, it is a make or break for businesses. Management needs to keep in mind the potential for a serious decline in sales. Humility is needed to keep a business thriving.
Planning for a recession all comes down to the understanding of how vulnerable your business is. Having contingency plans and the ability to be flexible during a recession is all a big help.
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.
Explain 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 standard used by the Federal statistical agencies in classifying business establishments. Companies are classified and separated into industries that are defined by the same or similar production processes.
The change in total production cost that comes from making or producing one additional unit.
It’s a cost advantage that a company gains from increasing their output.
These are goods that are producing other goods. These goods aren’t bought by customers.
This is also known as shareholders, and it means the amount of money that would be returned to a company’s shareholders if all the assets were liquidated.
Type of security under which the issuer owes the holder a debt, and must follow the terms.
When a bank gives someone or a company money that must be paid back usually with interest.
A flexible loan that is given from a financial institution.
It’s an unsecured promissory note given by companies with dates on them.
Describe the characteristics of the following events briefly.
This to me seems like a foolish decision by General Motors, Ford, and Chrysler. I understand how it might’ve worked back in the day, but nowadays it is simply the same as flushing money down the toilet. Paying for workers that don’t work would really tick me off, but like I said I could see why they did it back in the day.
This to me seems like a situation where companies “jumped the gun” a little bit. It sounds like the electric companies back in the 80’s and 90’s didn’t need the biggest power plants imaginable, so this again is flushing money down the toilet. The author put it best “People have a hard time cutting back on electricity usage in the short run but a much easier time adjusting in the long run”. Once the people see the bills they are paying on electricity they will start to cut back on their appliances and total usage, which means less money for the electrical industry.
This to me just sounds like a really unfortunate timing situation for the Penn Central Railroad. I guess you could argue that Penn Central should have done more research and possibly been able to foresee a recession happening. But they did not and ended up paying the price because they went bankrupt.