A manager needs to:
Table of possible options in a contiengency 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 |
Is used in the beginning of the early warning system going off. Is supposed to limit new hires to vital positions, reduce or eliminate capital spending plans, monitor inventories closely, and set up credit lines if possible.
Is the next step after easy steps. Takes similar steps to easy steps but one step further. The managers should review employment, capital spending, and financing. They should also keep lenders fully apprised of conditions.
The drastic steps business needs to do to save their businesses. Capital spending needs to stop and assets sales need to be considered. Employment needs to be cut down as much as possible. sales personnel needs to be kept but to a minimal level. Then they also have to implement the steps that were mentioned earlier but another step further.
Using competitors misfortune against them. Utilizing your own position to the best.
The first step is looking inwards to see the current cash and ability situation. Next should be to find market segments it would like to be bigger in when recovery comes. The third step is to look for competitors in dire situations, property and equipment, and talent.
Needs to be careful when changing prices. Customers can be very price sensitive and leave if not careful. There are predator pricing, which is made to put competitors out of business. Though when increasing the price again it invites competitors in to the market again. There are a lot of sales strategies in a recession because of the weakness created in the market and competitors. The easiest one to see is when competitors exit a business.
When managing a company in a recovery you need to ensure the capital and capacity for expansion exist within the company. The business manager needs to be aware that steps needs to be made to retain workers at this crucial point. When the company starts to perform again and increase their sales it will put the competitors under a lot of stress.
When managing in a boom a manager needs to get finances in order, this includes the credit lines too. It is also a good time to prepare for the future downturns, without any stress from the market. The manager should also compare the least profitable sales price to the cost of the last few percentage points of production to make business more effective.
The most important part is to be thinking ahead and be flexible. A contingency plan is always needed in case of a recession. Ii should also be planned in more than one step to adapt to more situations and severity.
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.
Accounts receivable is the balance of money that a company is supposed to receive by their consumers that have not arrived yet.
Profit maximization is the process of maximizing profits by adjusting the price of product and input and output levels.
Describe the characteristics of the following events briefly.
At the time WaMu went through a though time and was almost considered a dead bank walking. The company had plunged headlong into the business of making exotic, high-risk home loans, selling many of them to investors but holding onto others. Now defaults on those loans were rising, and big investors had lost their taste for them.
Almost a year to the day after the Lehman conference, Killinger was fired. Two and a half weeks after that, federal regulators seized WaMu’s banking units, effectively euthanize a 119-year-old institution that had survived the Great Depression and the S&L crisis.
After its collapse, Killinger and other leading WaMu executives repeatedly deflected responsibility, saying the company fell victim to a housing slump turned global credit crisis that they foresaw but couldn’t outrun.
WaMu’s overall business strategy fueled its implosion. Since riskier loans had more profit potential than safer loans, the bank paid its loan consultants and independent mortgage brokers more for making them. It pressured appraisers to inflate home values.
This entire situation became a golden opportunity for WaMu’s competitors and they did take advantage of it.
As they hit recession in 2001—or actually a depression for the industry—staffing levels were cut and customer service tanked. Complaints from late flights to missing luggage accelerated. The new discount carriers bucked this trend, picking up substantial market share in the process.
Some competitors will tighten their credit terms in a recession, though this is more likely to occur late in the downturn, when collectible receivables are a major problem. It’s always dangerous to ease credit terms just to hold market share, but a firm that has a well-established and statistically justified credit policy can often gain customers late in the downturn as more skittish companies overreact to credit losses.
This lead to companies like AirTran Airways investing in themselves and lowering their maintenance drastically.