The business cycle

by Business Case Studies on Monday 15th February, 2010

Activity within the economy fluctuates over time. This is called the business cycle. The Davis Service Group provides textile maintenance, hotel laundry and washroom services in the UK and Europe. Just like any other business, it is affected by the changes in the business cycle – from boom to recession and back again. Throughout the business cycle it has to respond to the economic challenges it faces. For example, people have cut back on holidays, so the need for hotel linen services has reduced. Davis has however, enjoyed rapid growth in emerging markets, such as the Czech Republic, which are at different stages of the business cycle. By balancing resources to meet customers' needs, Davis Service Group has been able to invest in the business where necessary to be ready for recovery.

Like hotels, the magazine publishing industry was expecting a decline in subscribers during recent difficult economic times because this is a 'nice to have' item rather than a necessity.

However, in the second half of last year, Private Eye saw its highest circulation figures for almost two decades, despite the recession. Private Eye is a satirical magazine. Its editor, Ian Hislop, is a team captain on the current affairs quiz Have I Got News for You. In fact, it seems that the magazine industry has fared quite well overall. Men's Health, Reveal and Heat magazines all saw increases in circulation. The popularity of these magazines may well be attributed to the fact that they are a fairly inexpensive way of entertaining us. The challenge for the magazine industry , like Davis, is to provide what customers want. (Times Online 11th February 2010)

Questions

  1.  Draw and label the business cycle.
  2. Using the case study, explain the characteristics of the different stages of the business cycle.
  3. Give examples of businesses that might be able to benefit from the recession
  4. Analyse the strategies that organisations, like the Davis Service Group, can adopt during times of recession.

Answers to questions

  1. Draw and label the business cycle A diagram of the business cycle can be found at: http://www.thetimes100.co.uk/case-study–managing-firms-throughout-business-cycle–111-360-2.php
  2. Using the case study, explain the characteristics of the different stages of the business cycle. Recession – low demand for goods and services, unemployment increases, investment in new plant and equipment falls, businesses close down Recovery – individuals and firms have more money to spend so demand starts to increase, businesses may still be cautious about taking on new staff or increasing investments Boom – confidence rises, sales of goods and services are high, unemployment falls so business may find it difficult to recruit, inflation may increase i.e. prices rise rapidly
  3. Give examples of businesses that might be able to benefit from the recession Examples may include: Shoe repairers – people repair rather than buy new ones, DIY stores – home improvement is a cheaper alternative to buying a new home, Pound stores – people cut back on spending
  4. Analyse the strategies that organisations, like the Davis Service Group, can adopt during times of recession Strategies may include: Cutting unnecessary costs e.g. finding cheaper suppliers, introducing flexible working, Enter markets in other countries that are not experiencing recession, Stimulate demand by cutting prices or introducing special offers, Reduce excess capacity by selling assets or reducing overtime, Delay investment plans – although Davis has maintained a strong financial position which has allowed it to borrow money to finance some of its activities

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