Readers Question: how do recessions affects a company operations?
Recessions involve lower output so usually consumer spending will fall. Therefore, firms will see a fall in demand for their products. The extent of this fall in demand depends on the products they produce. For example, if they produce luxury goods like sports cars or organic food, the fall in demand will be much greater than if they produce necessities and cheaper goods. E.g. Marks & Spencers food division will probably be more effected by the downturn than a budget supermarket like Netto.
The slowdown in spending can cause firms in difficulties to go bankrupt. For example, Woolworths has been struggling for several years, the recession was the final nail in the coffin, and now they have gone into administration.
If a company has large reserves then it will be able to ride out the recession even if it makes a temporary loss.
Price Wars
Another feature of recessions is that they are likely to lead to great price competitiveness. Firms often seek to hang onto market share. This leads to aggressive price cuts, which further reduce the profitability of business
Cost Cutting
The impact of declining profitability means companies will be forced to look closely at reducing costs and maybe closing unprofitable areas of the business. Companies may be forced to lay off staff in an effort to reduce costs
1 comment so far ↓
“…Companies may be forced to lay off staff in an effort to reduce costs…”
While this is true, it is also often true that the cost that is being reduced is that of an otherwise idle workforce as unit demand no longer approximates production capacity even after final price reductions.
Regards, Don
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