A manager needs to monitor: The company’s vulnerability to a recession. they need to sketch out a contingency plan for dealing with a recession. Also build flexibilty into the day to day operations. And Develope an early warning system for identifying coming turn downs. ## 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.
|
| 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 sets the stage for contingency planning. Industry data is often the best way to gauge a business’s vulnerability.
A company should plan out a contingency plan long before any recession. The goal is to identify where flexibility will be need and areas where bold moves will be necessary, as well as opportunities for growth that may occur long before it’s needed.
Many ordinary business decisions limit or increase flexibility the future. All Such decisions need to be made with a conscious understanding of how much flexibility is being gained or lossed. ## Summing Up
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.
It’s a system which gauges the your company’s vulnerability based on your companies industry and category.
Marginal Cost is the difference in the total cost when the quantity produced is increased, Think the cost of producing more product.
Refers to the cost advantages gained when production becomes more efficient. When the average cost of each unit goes down when you increase the magnitude of production. ### Capital Goods It’s the assets used by a business in production to make their products or services. ### Equity The value returned to the share holders of a company if all company’s assets were liquidated and all debts were payed off. ### Bond They are issued by governments and companies when they are trying to raise money from investors. Typically you will lend the company money for a certain amount of time with them paying you interest payments along the way. ### Bank Loans Form of debt, the bank gives you a set amount of money in which you agree to. To be paid back in a set amount of time and the bank makes money on interest payments from the loan. ### Line of Credit Is a preset borrowing limit that can be used at any time. The borrower can take out the money until the limit is reached and then once until it’s paid back. ### Commercial Paper It’s commercial short-term unsecured form of a note payable that pays a fixed interest rate. Typically used by banks and corporations. ## Economic events
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.
So GM committed to the greatest foolishness imaginable by limiting it’s flexible through its ’Jobs Bank” program. A compromise between the company and unions where GM would pay full wages and benefits to workers who were not needed. This depended heavily on future sales forecasts, that were overly optimistic and GM lacked flexibility to cut expenses. This lead to GM selling cars at large discounts, zero interest loans which fails to cover all costs but material costs. Also lead to perennial weak pricing of cars. GM failed to recognize the value of flexibility in a world with imperfect forecasts. In the end corporation suffered for this error.
The author uses this as an anecdotal example to advocate for smaller modular investment in stages. Elaborate. So what happened was that in the 1980’s and 1990’s was regularly whipsawed by unexpected declines and demand growth in the 80’s and 90’s. People bought more energy efficent products which weakened the energy company’s sales. The company’s also had a preference for large billion dollar power plants cause they had operating costs much lower than a small plant. The industry began to realize the benefits of a smaller plant as they are much more likely to be utilized. Even if they are not as efficient as the large plants, their flexiblity more than outweigh the cost disadvantage.
The author uses this as anecdotal example to advocate for borrowing with staggering maturities because what happened to The Penn Central Railroad was that they were financing a large portion of their operations with commercial paper. Then when the 1970 recession hit it lowered freight traffic and Penn’s Revenue. Their creditors got nervous about their ability to pay back their debt, so then they refused to rollover $82 million in commercial paper. Thus The Penn Central Railroad went bankrupt. They use this as an example because if Penn Central had used bonds to finance it operations, their creditors wouldn’t had been able to pull out on their financing and Penn might had survived.