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Main Factors and Causes of Business Cycles

written by: Vikas Vij•edited by: Ginny Edwards•updated: 1/3/2011

Looking for ways to prolong the business cycle of growth and stability? Gain an insight into the underlying causes of business cycles, and manage change effectively by anticipating the cyclical forces.

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    Cyclical Factors that Affect Business

    Cyclical Factors Any business goes through different business cycles during the course of its existence. These cyclical stages include the ups and downs that a business experiences in terms of its sales volumes, revenues and product lines. Growth rates of any business do not remain consistent for a long period because the business does not operate in isolation of its environment. Whatever changes take place in the external and internal environment of the business have an influence on the status and performance of the business. The following is a review of the various causes of business cycles that an organization experiences during its course of existence.

    Macro Economic Factors

    There are a number of local and global macro economic factors that have an impact on every business. If the global economy goes through a boom phase, there is a general positive sentiment in most of the world markets and most businesses experience a high demand and go into a high growth cycle. Similarly, if the global economy is going through an economic downturn with cyclical unemployment, an individual business may go into a decline cycle. The local economy of the country also has a direct impact on the business cycles. If the local economy has serious problems, they are bound to impact the local businesses, even if the rest of the global economy is going through a growth cycle.

    Government Policies and Political Climate

    A change of government in the country may lead to a new set of policies and laws that may benefit certain industries, while have a negative impact on some other industries. Such policies could be related to the environment, outsourcing of jobs, and new regulations for certain industries. These are external factors beyond the control of an individual business or industry. So the businesses that may benefit from the new policy changes may go into a growth cycle, where as some other businesses may enter a decline phase if the policies impact their business adversely.

    Technological Changes

    Businesses that are primarily technology dependent are highly sensitive to any technological changes that may take place at a macro level. The emergence of a new technology may make the older technology obsolete in a very short period of time. The businesses that are unable to foresee the change and fail to adapt themselves to the new situation swiftly may enter into a decline cycle. Some other businesses that are early adopters of the new technology may experience a boom cycle.

    Changes in Consumer Tastes and Preferences

    Over a long period of time, consumer tastes and preferences continue to undergo a transformation. The new generations of consumers may have different aspirations compared to the previous generation of consumers. Such transformations take place slowly and are hard to perceive. But businesses need to be proactive to such changes and have a strong customer orientation in order to adapt themselves to change and prevent the business from going into a decline stage.

    Competitive Trends

    In the wake of economic globalization, there is a serious challenge of competition from low cost economies. Even within the domestic economy, a business may face severe price competitive behavior which may result in a decline of profitability and growth. In some cases, the competition may decrease when several competitors exit the industry as they cannot survive in a saturated market. So a business may experience different cycles of growth or decline, depending on the competitive trends and how they impact the business.

    Product Life Cycle

    Almost every product and service goes through the cycles of growth, maturity and decline. The duration of the cycle may differ from one product to another, but the cyclical forces eventually overcome even the best products and services. Therefore, the business which is heavily dependent on a single product or service may go through cyclical phases in accordance with its product life cycle. Exceptional businesses continually reinvent themselves in order to prolong their growth cycle.

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