Week 8: Best Practices 7

Ch7 Managing through the Business Cycle

Chapter Opening Questions

A manager needs to:

• A manager must know a series of steps to cut cost in order to survive in a recession…

• Capital spending; reevaluate, limit, or stop spending entirely

• Employment; Reevaluate, free, or layoffs, some people may even be fire for the long-term

• Inventories; Limit, sell excess if they are not needed

• Accounts Receivable; tighten terms, factor in debts

• Relationship with financing sources : inform throughout cycle and make sure they are informed as early as possible before an economic downturn

• Lines of business; Consider selling or closing money losing segments of the company

Summary

Table of possible options in a contingency plan:

	Expecting a downturn	During moderate downturns	During severe recessions
capital spending	reevaluate	cut entirely or almost entirely	not only cut entirely, but consider selling assets
employment	slow hiring	freeze hiring, layoff generic production workers	eliminate future-oriented positions (e.g., R&D), keep sales personnel though not at previous levels, cut all other staff areas to the maximum extent
inventories	monitor closely	monitor closely, review for unnecessary inventory items	the same as the left
account receivable	tighten credit terms, set up a factoring (selling account receivables) relationship	collect as rapidly as possible, on the payment side delay to the extent possible	the same
financing	secure a larger credit line, delay payments to vendors, get some long term debt	consider stop paying dividends, keep good relationship with banks by disclosing the company’s condition early and fully	the same
lines of business		shut down unprofitable operations	the same

Easy steps

• Capital spending plans that are near implementation should be re-evaluatd. Unbiased calculation is essential when your company is at the beginning of a downturn. You also need to asses staffing levels. You can conduct employee reviews and a few people can easily be dropped from the company. Inventory should be payed attention to as well as accounts receivable. Your company may consider selling receivables if your in need of some fast cash. You should gather further financial flexibility within your company at this time.

Moderate steps

• You should cut capital spending as a whole or almost entirely. There should be a hiring freeze at this time, layoffs may also be appropriate. Administrative staff and highly skilled workers cannot be cut at this time and are essential to keep the company running. Inventories must be monitored more closely and you must be cautious during an economic downturn. Relationships with financial partners needs to be kept well and notifying them ahead of an economic downturn will help them plan for one as well.

Survival steps

• capital spending needs to stop all together and all assets need to be reviewed. Employment must be cut as mush as possible except for essential workers to keep the business running at a minimum. Sales personnel need to be limited. You can also ask banks to accept delayed payments as well as cutting back on inventory and outputs.

Taking advantage of recessions

• Recession are bad for most businesses but some profit in an economic downturn. Long term contracts should be reviewed at this time for market price value and re upping contracts so your company can benefit better.

Identifying opportunities

• Some questions to consider are… Is your company able to spend money on new purchases? If you were to expand in the upturn where are the most profitable location geographically? Are distressed competitors selling cheap equipment at this time to make a quick buck? Are there an division in companies that your company can acquire? Are local companies laying off cheap talented employees?

Pricing and sales strategies

• Prices lower in a recession but it is not wise to enter into a price war with other competing companies. Predatory pricing is aimed at cutting prices in order to put a competitor out of business. Capital equipment is often being sold at cheaper prices during the recession. You must take advantage of a competitors weakness in an economic downturn.

Managing in the recovery

• When there is an economic boom and employees aren’t hired back the uptake in sales will be too much for the staff and your company will end up losing profits by burning out employees more quickly because of the long shifts. Financial simulations can determine cash needs. Management needs to know at all times the levels of production and the capability fo production int he company.

Managing in a boom

• A boom might lead to capital spending but this is really the time to get the company’s finances in order so when there is an economic downturn they are prepared. Now companies must treasure profitable sales.

Summing Up

• The most important element when going into an economic downturn is thinking about your company’s feasibility. This will especially be important in an economic upturn when sales rise and the company is successful once again.

Economic terms

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:

• The Economist
• Fun economic videos

Explain the terms in your own words briefly.

Accounts Receivables

• The money the company is paid by it’s customers when they purchase goods or services. It is usually recorded on a sheet so it is considered debit to the company not credit.

Antitrust (page 163) - Market Structures

• perfect competition: All elements of a monopoly are absent due to highly informed buyers and sellers, the market price of is neither controlled by buyer or sellers.
• monopolistic competition: When different companies offer similar products that compete at different price points and durability.
• oligopoly: When the market has little competition and the market contains small numbers of producers and sellers.
• monopoly: A market condition in which one large company controls the market and offers services and products to the public.

Profit Maximization (page 169):

• A way in which a company tries to increase profit to the highest extent by determining the profits, sales prices, inputs, outputs that will lead to this.

Economic events

Describe the characteristics of the following events briefly.

The case of Washington Mutual in the summer of 2004 (page 163)

• In the summer of 2004 Washing Mutual closed down 53 banks and laid off 850 workers. This was reported in newspapers and all over the US. Other banks took advantage of the opportunity and hired many of the skilled workers that were previously laid off. While Washington mutual was going under other banks profited form their downfall.

The case of the airline industry during the 2001 recession (page 164)

• When the air plane company hit a recession they cut staff and their customer service plummeted as well, there wee late flights and missing luggage. Discount Carriers abandoned the trend and picked up much of the airplane market customers due to higher satisfaction.