Factors influencing the strategies firms adopt in the recession

INTRODUCTION

Well functioning businesses with healthy cashflow and good control over their expenditure should have the ability to survive and deal with the obstacles presented by a recession. However this is difficult to achieve for many businesses as businesses are susceptible to many external events i.e. loss of a supplier or introduction of a new supplier. Nonetheless, businesses should have strategies in place to adopt in a recession to ensure survival. This may appear straightforward and simple but three important factors can influence the way these strategies are implemented and if they are implemented at all. Within this essay I will analyse how the three factors can influence the strategies and look at examples of businesses that have experienced the recession.

FACTORS

Firstly, price elasticity has a large influence in recession strategies. Price elasticity is a calculation that businesses use to discover how the demand of products will be affected by a rise or decrease in price. If a business is elastic then demand will be greatly affected by a price change therefore all businesses aim to be inelastic, meaning an increase in price will have very little or no effect on the demand of a product.

A second factor that can influence strategies are human resources. To retain capital in a recession firms can do a number of things i.e. cut hours, make redundancies, stop/decrease employee fringe benefits or change some employees’ tasks to homeworking. The mood of the workforce plays a large part because if the business has a happy and motivated workforce then a business can cut all employee’s hours rather than making some employees redundant. A recent example of this is the case of the accounting firm KPMG. The firm offered its 11,000 employees a shorter week where the fifth day is unpaid and unworked. One spokesman said they didn’t want to lose skilled people and this creates a more united feeling between employee and employer. If the workforce feel they are respected and treated well then the business may be able to avoid redundancies which can be expensive to a business.

A third and final factor is the availability of finance. Within a recession this can prove difficult as the banks slow and stop the borrowing of money therefore firms must ensure they have good money management skills. However, if a business does borrow more money then their gearing can increase. The higher the gearing of a business, the higher the chances of gaining too much debt and going in to administration. As most people cut down on the spending and most businesses do see profits fall in a recession, borrowing more money can prove devastating. This is evident in the case of the shoe store chain Faith. They had huge debt and with no available finance and falling demand, the business fell into administration.

CONCLUSION

To conclude, to survive a recession a business must run it’s operations efficiently and take influencing factors in to consideration.