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Management Strategies During the Different Phases of the Business Cycle

written by: Carrieanne Larmore•edited by: Wendy Finn•updated: 1/31/2011

When the business cycles moves from each phase, managers are presented with obstacles or opportunities. Knowing how to manage during the different phases of the business cycle can help the business better develop its forecasts and strategic plans.

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    Strategic Plans for Each Phase of the Business Cycle

    Image by Renjith Krishnan http://www.freedigitalphotos.net/images/Charts_and_Graphs_g197-Upwards_Arrow__p22306.html Shifts in the business cycle require managers to change strategies so that the business does not fall at a disadvantage. If the business cycle moves from the recovery to boom stages with an unprepared manager, the business could lose out on a significant amount of sales.

    The business cycle is split into the phases of business expansion and contraction. When the business cycle expands, it goes through a recovery, boom, and peak stages. After expansion it goes through the contraction stages of recession, depression, and trough. In order to know how to manage during the different phases of the business cycle, managers should understand how consumer confidence effects sales in each stage.

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    Recovery

    Business cycles in the recovery stage is showing signs of increased economic activity. Consumers are gaining confidence in the economy so they start making small purchases and replacing items that they delayed replacing during the economic crisis.

    Managers can start making small investments into inventory and employees, plus upgrading equipment and technology. Businesses with higher priced items or luxury goods will still show poor earnings during this stage but marketing efforts should start to increase so that consumers begin to think about making those types of purchases soon. Consumers are still very conscientious of their money, so bundle offers, specials, and other deals help in driving sales.

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    Boom

    Consumer confidence is at its all time high so they are making larger purchases and spending extra on luxury items, such as cars, houses, boats, and large appliances. They are saving less and spending more.

    Managers should use profits to invest into their business in order to grow and better position itself against its competitors. This could be by developing new products, entering new markets, or selling overseas. Mergers and acquisitions are a common strategy for expanding operations during this stage of the business cycle.

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    Peak

    Consumer spending slows and stabilizes. Managers should work on unloading inventory and create new cost reduction strategies. Investments into the company should be done if needed since it will need excess cash on hand. It could be months or years until financing freely flows back to businesses.

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    Recession

    Consumer start saving and significantly reduce spending on large purchases and luxury items. Managers of businesses within those industries may have to drastically cut prices if they are not worried about it affecting their brand image. If costs cannot be controlled, managers may have to lay off employees or cut benefits.

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    Depression

    Consumers only spend on what they absolutely need and hold off on other purchases until they see signs of recovery. Managers across industries reduce prices in order to increase sales or gain new customers. This is an opportunistic time to start developing new ideas for products or services to help generate additional sales to better its position when sales begin to start back up. If the company can afford it, it can hire additional employees. Since rounds of layoffs have been occurring since the recession, they can find qualified or over-qualified employees at a discount.

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    Trough

    Consumers are starting to gain confidence that the economy is going to get better. They are no longer reducing their spending, but they are still saving all that they can. Businesses should work on motivating their employees. If they had a round of layoffs then there could be survivor guilt. Begin marketing efforts slowly and prepare vendors and suppliers for increased activity.

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    Managers and The Business Cycle

    Business cycles lengths vary with no telling how long it will stay in any particular phase. Managers should refer to the National Bureau of Economic Research (NBER) for reports, and the status of US economic indicators for a recovery . It provides memos and updates on the current state of the economy, as well as additional data on the business cycle.

    When developing short- and long-term strategies, forward thinking managers consider the impact of current and future business cycle stages. While there is no set guidelines across industries on how to manage during the different phases of the business cycle, strategies should be based on anticipated consumer behavior within that phase.