Solving the Firm-Level Problems in Business Cycles

The following points highlight the top two measures used to solve the firm level problems in business cycles. The measures are: 1. Preventive Measures and 2. Relief Measures.

Measure # 1. Preventive Measures:

These include all measures which would be adopted during the period of expansion for regulating purchases, safeguarding assets arid avoiding unwise credit expansion. These measures can be adopted only if the managers of the enterprises possess intimate knowledge about:

(i) The precise relation between cyclical changes in general business and cyclical changes in the business of the given enterprise,

(ii) Nature of the cyclical price movements in the purchases and sales of the particular business in relation to the general business cycle. If a business manager has secured this information, he has taken the first important step towards chalking out an intelligent programme of adapting to the business cycle.

The various preventive measures against the effects of business cycle are as follows:

1. Conservation of assets during expansion by avoiding undue increase in plant and equipment, and in dividends;

2. Managing the plant use in such way as avoids decrease in unit production and increase in unit overhead costs and yet maintains satisfactory labour conditions and steady employment throughout the year;

3. Avoiding excessive inventories and purchase commitments beyond the available financial resources and excessive sales promotion which results in cancellation of orders;

4. Employing a flexible credit standard so that the terms and conditions can be tightened during expansion, and relaxed during contraction.

Measure # 2. Relief Measures:

The following measures can be adopted to reduce the effect of contraction on the business unit:

1. Reduction of the costs of manufacturing products through streamlining of production processes and quick liquidation of inventories.

2. Improving the quality of products and adoption of marketing methods based on accurate analysis of the developing market situation for securing increased demands.

3. Development of the plant labour and organisation to make it more flexible and versatile in order to meet the challenges of the contraction phase.

4. Launching of new merchandise lines during slack periods so that the plant and the organisation are both ready for production and sales so the contraction phase starts. This of course requires a good research and development outfit.

Credit Policy:

Credit standards may be stiffened during prosperity. When orders are numerous, new orders from customers having poor records of payment should be accepted with great caution. During the depression phase, however the credit standards may be softened in order to attract customers.

Fixed Investment Policy:

Fixed investments are heavy and are made in plant, building and equipment. The business manager must determine the long-term trend of the given business and should plan his building programme accordingly. This would avoid the over-expansion of equipment and premises. New plants should be erected during those periods of the cycle when costs are the lowest. The business manager can depend on past records, if available, for planning the rate of normal growth and for planning the extension of business in advance.

Cyclical Pricing Policy:

In price policy, decisions relate to the degree, the timing and the pattern of cyclical price changes. Changes in price can be made in several ways. These may take the form of changes in list prices, changes in product-line differentials and changes in the structure of discounts and merchandising allowances.

In formulating a policy of cyclical price adjustments, several alternatives may be considered, some of which are as follows:

(1) Price rigidity,

(2) Price variations conforming to cost changes,

(3) Price variations conforming to changes in general price level,

(4) Price variations that stabilise market share,

(5) Price variations conforming to prices of the substitutes, and

(6) Price variations conforming to changes in the industry’s demand determinants.

Of course, a choice among these alternatives is open only to firms which are having some monopolistic advantage in price fixation, as is the case under imperfectly competitive market conditions.

Cyclical Advertising Policy:

The following guidelines may help the management in formulating a cyclical advertising policy:

1. Commodities having a high income-elasticity of demand require larger advertising expenditure to overcome consumer resistance during the contraction phase.

2. Old products should be improved and new trends developed in order to attract consumers to the product even when their incomes are at a low level during the recession phase through effective advertising.

3. Firms must stabilise their advertising outlays so as to maintain continuity in promotion. This policy helps in two ways:

(a) It helps in maintaining consumer’s brand preferences in times of relatively more severe price competition.

(b) In prosperity periods, a firm which has strongly entrenched itself by continuous advertising can exploit the fact that buyers are less price conscious at that time. This can also reduce advertisement costs for the firm at a time when advertising is relatively costly because of severe competition.