A manager needs to: Assess the company’s volnerability to recession. Sketch out a contingency plan for dealing with recession. Build flexibility into the company’s day to day operations. Develop an early warning system for identifying coming downturns.
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 |
When the early warning system begins to flash a warning, review and
update the contingency plan, and limit new hires to vital positions.
Reduce or eliminate capital spending plans. Monitor inventories closely.
Set up credit lines if possible. ## Moderate steps The moderately severe
steps taken in a recession are similar to the easy steps, but they are
taken further. Business managers should review employment, capital
spending, and financing and they should keep lenders fully apprised of
conditions. ## Survival steps Companies whose survival is at risk should
consider bringing in a turnaround specialist. Capital spending not only
needs to stop, but asset sales need to be considered. Employment must be
cut as much as possible. Sales personnel will be kept, though perhaps
not at previous staffing levels. Keeping inventories lean, hoarding
cash, and delaying payments are extremely important. Expense reduction
measures that are harmful in the long run may be necessary for
short-term survival. Selling the business may provide more shareholder
value than continuing the operation until bankruptcy. ## Taking
advantage of recessions Recessions are bad for most businesses, but some
companies use them for their own advantage. By using your competitors’s
difficulties as a purchasing opportunity. Long term contracts should be
reviewed for renegotiation. ### Identifying opportunities Recession
provides several opportunities for a company with cash or credit
facilities. Successful firms tend to more acquisitions in bad times.
Identify market segments in which it would like to be larger in once the
recovery comes. Then look for distressed competitors, property,
equipment, and talent. ### Pricing and sales strategies Businesses
should be very hesitant to initiate price wars to build market share.
With predatory pricing it’s legal but hire a good antitrust attorney.
But in some cases it can be illegal and the victim could be awarded
triple damages if a court finds that antitrust laws were broken. New
capital equipment can often be purchased at bargain as well. Watch for
competitors existing a business. Recession is a good time to stay in
touch with prospects looking for remedies for their
dissatisfaction.
## Managing in the recovery Managing in a recovery begins with ensuring
capacity to expand production. Increasing sales usually stresses the
company’s cash position as companies whose cash position worsened in the
recession now face further worsening in the recovery. Expect employee
turnover to increase unless significant steps are taken to retain
workers. ## Managing in a boom Use the boom to get finances in order,
including credit lines. Compare the least profitable sales price to the
cost of the last few percentage points of production. Review the
contingency plan for the downturn. ## Summing Up Managing in a recession
occurs well before and well after the actual recession. The most
important element is to think ahead about how to incorporate flexibility
into the business. Management in a recession consists of a series of
steps to protect cash, each step somewhat more severe than the last. ##
Economic terms
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 money being owed to your company. ### Antitrust (page 163) - Market Structures
Profit maximization is when there is the maximum gap between total revenue and the total cost. ## Economic events
Describe the characteristics of the following events briefly.
So Washington Mutual closed down 53 business banking offices, laying off 850 staff members. Competing banks started calling on WaMu’s business customers and the loan officers being let go. Washington Mutual problems had become it’s competitors other banks’ opportunities. ### The case of the airline industry during the 2001 recession (page 164) In 2001 the airline industry was in a depression, staffing levels were cut and customer service tanked. Complaints increased during this time and the new discount airlines bucked this trend, picking up substantial market share along the way. The recession is a good time to stay in touch with potential clients looking for solutions.