Successful businesses economic downturn
For successful businesses, is an economic downturn more of an opportunity than a threat? Use real business examples to illustrate your points. Economic downturn is a stage in the business cycle that is typically attributed by falling demand, high interest rates and a lack of GDP growth, all contributing to a slowing economy. For most businesses, this causes a major decline in sales lowering revenue, while at the same time their costs are increased since suppliers are trying to overcome the effects of low demand.
This drastically lowers profit, and for businesses who lack preparation for these market conditions, failure can be a very real option. However, for more successful and typically larger businesses, downturn is often seen as option for growth and investment. Highly geared businesses with low retained profit are by far the most vulnerable in an economic downturn. These businesses are typically the smaller organisations or new entrants who are having to significantly invest in order to compete with the larger firms.
Because of their low reserves and falling profit during a downturn, survival is not always possible. When this is the case, larger corporations gain increased market share which converts to higher demand once the economy is back in recovery. Providing the business had funds to remain stable during the downturn, all in all this would have been a profitable opportunity and one that will stimulate growth. Taking Amazon as an example, despite the 2008 UK economy crash, survival was possible given the size of their business and the extent of their profitability.
Woolworths, on the other hand, was already having to invest heavily during 2008 to compete with firms taking advantage of e-commerce such as Amazon. When posed with the downturn, they simply ran out of funds making the business unsustainable thus closing down. As a result, Amazon would have benefitted from increased market share once the economy began recovering since major competition would have been eliminated, raising Amazon’s profitability further.
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However, although survival is possible for successful businesses during downturn, the threat of lower demand still stands. As consumer confidence falls in line with rising interest rates, sales fall often resulting in businesses lowering prices in order to remain competitive (known as deflation). However, this is not guaranteed to raise demand, especially when many other businesses will follow a similar strategy. Alongside lower prices, businesses will almost certainly consider reducing production which leads to inevitable redundancies, increasing unemployment.
This means consumers are even less willing to spend since they have less disposable income, effectively creating a cycle. Comet is a prime example of a successful business that entered liquidation during the 2008 downturn. As a result of falling demand, the business was forced to scale back operations massively but still had to pay suppliers for stock already held. Despite lowering their prices, demand did not improve proportionally and thus the business ran out of funds.
Perhaps this demonstrates that businesses selling non-essential goods are most at risk during a downturn, raising the importance of retained profit in preparation for economic circumstances such as downturns. A final point is that in some industries, downturn can be an opportunity for massive growth. With smaller businesses failing as discussed earlier, assets are suddenly readily available at very low cost, allowing successful and prepared businesses with significant retained profit to invest in these assets and experience growth once the economy is in a period of recovery.
Furthermore, as well as assets, businesses handling stock may benefit from the effects of deflation whereby suppliers are lowering prices in order to survive. This, combined with the economies of scale these large and successful firms hold, mean that the profit margins on stock can be massively increased, once again improving profit once consumers begin spending again and the economy enters recovery.
Overall, I think that for successful firms, downturn is definitely more of an opportunity than a threat. Businesses identified as cost leaderships by Porter are the least likely to suffer a drop in demand since these products and services are typically more essential, whereas businesses following a differentiation strategy are almost certain to suffer drops in demand that can lead to liquidation if unprepared given the products are less of a necessity.
When these liquidations occur, competitors gain market share and in oligopolies, competitors can even consider raising prices given the reduced saturation in the market, boosting profit significantly once recovery begins. However, all of this depends on a firm’s ability to carry out strategic planning and forecasting whilst ensuring they have sufficient funds in place to deal with and take advantage of economic downturn.