RELEVANCE OF BUSINESS CYCLES IN BUSINESS DECISION MAKING
Business cycles affect all aspects of an economy. Understanding the business cycle is important for businesses of all types as they affect the demand for their products and in turn their profits which ultimately determines whether a business is successful or not. Knowledge regarding business cycles and their inherent characteristics is important for a businessman to frame appropriate policies. For example, the period of prosperity opens up new and superior opportunities for investment, employment and production and thereby promotes business. In contrast, a period of recession or depression reduces business opportunities and profits. A profit maximising firm has to consider the nature of the economic environment while making business decisions, especially those related to forward planning.
Business cycles have tremendous influence on business decisions. The stage of the business cycle is crucial while making managerial decisions regarding expansion or down-sizing. Businesses have to advantageously respond to the need to alter production levels relative to demand. Different phases of the cycle require fluctuating levels of input use, especially labour input. Firms should exercise the capability to expand or rationalize production operations so as to suit the stage of the business cycle. Business managers need to work effectively to arrive at sound strategic decisions in complex times across the whole business cycle, managing through boom, downturn, recession and recovery.
Economy-wide trends can have significant impact on all types businesses. However, it should be kept in mind that business cycles do not affect all sectors uniformly. Some businesses are more vulnerable to changes in the business cycle than others. Businesses whose fortunes are closely linked to the rate of economic growth are referred to as "cyclical" businesses. These include fashion retailers, electrical goods, house-builders, restaurants, advertising, overseas tour operators, construction and other infrastructure firms. During a boom, such businesses see a strong demand for their products but during a slump, they usually suffer a sharp drop in demand. It may also happen that some businesses actually benefit from an economic down turn. This happens when their products are perceived by customers as representing good value for money, or a cheaper alternative compared to more expensive products.
Overcoming the effects of economic downturns and recessions is one of the major challenges of sustaining a business in the long-term. The phase of the business cycle is important for a new business to decide on entry into the market. The stage of business cycle is also an important determinant of the success of a new product launch. Surviving the sluggish business cycles require businesses to plan and set policies with respect to product, prices and promotion.
In general, economic forecasts are not perfectly reliable. Neither, of course, are the hunches and intuitions of entrepreneurs. Understanding what phase of the business cycle an economy is in and what implications the current economic conditions have for their current and future business activity, helps businesses to better anticipate the market and to respond with greater alertness. However, taken together and applied carefully, economic forecasts can help business firms to prepare for changes in the direction of the economy either prior to or soon after these changes occur.