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Objectives:
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To understand that the economy has cycles of growth and expansion over time
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To understand that individual companies sales are affected by the general
business cycle
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To understand some of the strategies that businesses can implement to maximise
their profits and survive at all stages of the economic cycle
The economy does not grow steadily, instead it tends to move in cycles from
economic peaks to troughs in the following pattern:
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An expansion of above-average economic growth - this is the period when
unemployment is falling and business sales are growing
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A peak or boom
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A contraction of below-average economic growth - this is the period when
unemployment rises and sales fall
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A trough or low point
The troughs are then followed by periods of expansion and the cycle generally
repeats, though not in a regular manner. These fluctuations in economic growth
are known as the business cycle and are depicted conceptually in the following
diagram:
The Business Cycle
The aggregate business cycle for the economy masks the individual business cycle
for different industries. Businesses need to know the business cycle for their
industry. For example, the building industry business cycle can take up to 50
years to go from trough to trough, whereas fast-moving consumer goods, such as
wine and tins of beans, have much shorter cycles of about 10 years from trough
to trough. The fluctuations in the expansion and contraction of sales are far
greater for the building industry than for fast-moving consumer goods.
Businesses need to manage the economic cycle. There are various strategies that
they can adopt for this. During boom periods businesses tend to sit back on
their successes and become less disciplined in their management of the business
and expenses, especially salaries. In order to survive the economic cycles
businesses need to:
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develop an ethos of being extremely disciplined at all times
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keep close to customers; offer excellent goods and services that customers want
to come back to buy time and time again
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control costs
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invest in new developments for the future
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ensure total quality management
By sticking to the basics businesses are lean and fit enough to survive and
develop for the future when economic downturns arise.
Companies that are burdened by high overheads and high salaries relative to the
rest of the industry, poor quality controls, poor quality goods and services
will find it a lot harder to survive in an economic downturn if they have to
sort out their core business as well as cope with falling sales and planning
for the future.
Review some current business news stories and identify why some businesses are
having difficulty with economic changes, such as British Airways, Marks &
Spencers, Reuters or Mothercare.
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