An economic recession has serious consequences for most businesses and the whole economy.
What leads to economic recession?
A recession is a period of six months or more of declining real Gross Domestic Product (GDP) that is adjusted for inflation.
Lower demand for goods and services from customers.
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Output produced by businesses is falling.
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Fewer workers are needed.
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Cyclical unemployment increases.
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As incomes fall, demand for goods and services declines further.
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Government receives less TAX revenue from Income TAX and Corporate TAX.
Is economic recession always bad? Not really!
During the period of recession, the demand for inferior goods and services will increase as people have lower incomes, so they cannot afford normal or luxury goods and services.
The positive consequences of recession include:
- Cheaper Fixed Assets. Capital assets will be relatively cheaper during an economic recession. Land parcels, property, office buildings, factories and even other businesses will decline in price. Therefore, entrepreneurs and companies that own available cash could invest more in Fixed Assets in expectation of an economic recovery.
TIP! If you are planning to buy a house or an apartment, wait for recession to happen. There will be blood on the streets and prices will be the cheapest.
- Higher demand for inferior goods. Demand for inferior goods and services increases during economic recession. Therefore, producers and retailers of inferior products will experience increased demand. Inferior goods and services have negative Income Elasticity of Demand (YED<0), meaning that a decrease in consumers income will increase demand.
- Improved employer-employee relations. During economic recession many employees will be anxious about losing their jobs and facing prolonged unemployment. The perspective of job losses due to retrenchment (the company being forced to downsize its number of employees) may encourage workers to improve relations with their employers. And, with improved relationships between the company and its workforce comes greater efficiency and effectiveness.
Efficiency. The ability to do tasks without wasting resources such as time, money or energy.
Effectiveness. The ability to achieve a desired result, reaching a pre-determined goal.
- Business optimization. During economic recession, there will be an increased number of business closures. Factories and offices will be shut down. It might be a good time for managers to take the advantage of the dire circumstances to streamline the business. Make the business leaner and fitter to build momentum. Making the business leaner means getting rid of unnecessary things that increase costs, so the firm can operate cost-effectively. Making the business fitter means focusing on the most important aspects of your business and ignoring unnecessary details. Get ready for the upcoming economic growth when this eventually re-starts again during the recovery stage. You will be able to operate your business more effectively.
Strategies to cope with economic recession
During the period of recession, producers and retailers of normal and luxury goods and services will experience reduced demand, which will leave them with spare capacity. It is because normal luxury products have positive Income Elasticity of Demand (0<YED).
As people will start buying more inferior products, the demand for normal goods and services will slightly decrease. The demand for luxury goods and services will decrease a lot.
Here is the list of effective strategies to cope with economic recession:
- Cost reductions. Overall cost reductions will help the business to maintain profit margins during the recession period when the demand for normal and luxury products will most likely be falling. Also, cash flows will be improved as the business will face lower cash outflows.
- Price reductions. Price reductions will help the business to maintain sales or increase sales. Customers with declining incomes during an economic recession will be more price sensitive, so lowering prices will be very welcome by potential customers. Companies can also offer various promotions in order to prevent delayed consumption.
- Enlarge The Product Portfolio. Widening product range to offer lower-priced models will help the business to prevent any drastic declines in sales revenue. During an economic recession, customers make reasonable purchasing decisions, therefore are looking now to buy normal goods and services instead of ‘overpaying’ for unnecessary luxury.
- Increase distribution network. Increasing a range of distribution outlets to offer as many inferior products as possible in as many locations as possible to the customers with lower incomes will help the business to tackled potential loses in sales. By bringing the product closer to potential customers, will make it easier for them to make a purchasing decision.
- Non-pricing strategies. Offering customers free samples and tests to stimulate consumption will help to sustain and revitalize the volume of sales. Other ways to employ non-pricing strategies can be repackaging the product, offering extended warranty or after-sale services.
- Branding. Branding is actually a double-edge sword. On one hand, strong branding can help the business to maintain sales as loyal customers remain loyal to the brand. For example, Apple‘s customers remain very loyal who not only by MacBook computers but also iPhones, Apple Watches and iPads. So, branding makes the company defensible – prevents brand switching irrespective of changes in customers’ incomes. However, reducing prices may cause damages to brand image which will result in losing long-term brand value.
- Value-for-money. Promote and sell products that offer customers good value for their money. The business can emphasize advantages of even the most inferior products to persuade customers that the product is still worth buying.
- Offer better payment terms. Usually, by offering attractive trade credit, the business can improve affordability. Many customers may want to buy now and pay later, or pay on monthly basis over the period of the next 12 months, or 24 months.
- Outsourcing. Outsourcing production, or other business functions like accounting or advertising, overseas where labor costs are much lower may help the business to survive during an economic recession.
Even though the economic recession might be bad when it comes to demand for normal and inferior products, there are still many opportunities that well-managed firms may be able to take advantage of.
