Efficiently managing companies

through the business cycle

Business cycles and corporate
management
2018-2019
 Forecasting the cycle
• Watch leading indicators
– Yield curve or interest rate spread
– New orders
–…
– Stock indexes
– Composite indexes of leading indicators
 Managerial principles to take account
of expected business fluctuations
• Inventory control and management
• Supply chain management
• Human ressource management
• Marketing and targeting
• Pricing
• Capital expansion and modernization
• Acquisitions and divestitures
• Corporate finance and credit management

Navarro, Peter. "Principles of the master cyclist." MIT Sloan management

review 45, no. 2 (2004): 20-24.
Inventory control and management
• If a recession is expected
– begin to cut production to avoid the cost of being
caught with large inventories
• If a recovery is expected
– increase production to avoid having too little
inventories and miss sales opportunities

Navarro, Peter. "Principles of the master cyclist." MIT Sloan management

review 45, no. 2 (2004): 20-24.
Inventory control and management
• Companies that master the cycle
– trim inventories when a recession is expected
• Expand inventories as they gear up for an
expansion
 Supply chain management
• trim input purchases if a downturn is expected
– A large stockpile of inputs is costly during a
recession
• probably paid at a high price during the late phase of
the expansion, when demand is robust

Navarro, Peter. "Principles of the master cyclist." MIT Sloan management review
45, no. 2 (2004): 20-24.
 Human ressource management
Navarro here recommands a conventional business view of adjusting the employed
labour force in reaction to expected cyclical fluctuations of aggregate demand

• If a downturn is expected
– trim the workforce in expectation of a contraction
• even if rivals continue to hire at premium wages
• If an upturn is expected
– begin to hire sooner than competitors
• Select the best among unemployed

Navarro, Peter. "Principles of the master cyclist." MIT Sloan management

review 45, no. 2 (2004): 20-24.
 Human ressource management
• However this conventional view of business
consultants, summarized by these recommandations of
Navarro, neglects major issues
– Considering workers as mere costly inputs that can be
quantitatively adjusted over the cycle is in contradiction
with corporate social responsibility and ethical principles
of business firms
– If all the companies simultaneously decrease employment
in expectation of a contraction, this behaviour aggravates
the upcoming recession by excessively contracting
aggregate spending of consumers, which causes harm to
all firms

Critical view of Eric Dor, IESEG School of Management

 Human ressource management
• Principles of corporate social responsibility imply that
firms owners and managers should care about their
wage earners and do anything possible to safeguard
their jobs even during a recession, even if it implies
reducing profits in the short term
• Citation of the Japanese founder and CEO of Sony “If
we face a recession, we should not lay off employees;
the company should sacrifice a profit. It’s
management’s risk and management’s responsibility.
Employees are not guilty; why should they suffer?”

Critical view of Eric Dor, IESEG School of Management

 Marketing and targeting
• If a downturn is expected
– temporarily boost marketing expenditures to sell the
inventories
– then should marketing expenditures be ratcheted
down ?
• Maybe, to weather the contractionary storm
• But if the company can afford it, countercyclically expanding
marketing expeditures in a recession is effective to build
brand and increase market share
– Indeed most other companies decrease marketing expenditures
during a recession.. The advertising market is less congested.
Compelling messages can thus stand out clearly.
– Also it is cheap because the advertising rates are lower in a
recession

Navarro, Peter. "Principles of the master cyclist." MIT Sloan management

review 45, no. 2 (2004): 20-24.
 Marketing and targeting
• But both the advertising message and the
product mix need to change to meet the
changing behaviour of customers in a recession
– In recessions the product mix should be shifted away
from expensive products to cheap products
– The sales of the cheapest products are generally much
better insulated from a recession than those of the
most expensive products
• Marketing messages should sell value in
recessions and style in booms
Navarro, Peter , Recession proofing your organiation, MIT Sloan
Management review, 2009, vol 50 n°3
 Pricing
• If a recession is expected
– take the lead in lowering prices
• before the competitors
• in order to protect market shares in bad times
• If an expansion is expected
– take the lead in raising prices
• before the competitors
• in order to build revenue in good times

Navarro, Peter. "Principles of the master cyclist." MIT Sloan management

review 45, no. 2 (2004): 20-24.
 Pricing
• Price elasticities of demand increase during
recessions and decrease during booms
• It must thus be avoided to increase prices
during recessions in hopes of offseting
revenue declines as demand decreases
• On the contrary cut prices in recessions

Navarro, Peter , Recession proofing your organiation, MIT Sloan

Management review, 2009, vol 50 n°3
 Capital expansion and modernization
• If a downturn is expected
– Trim expansion plans well in advance
• because capital expansion programs need large cash flows to service the
additional debt
• In a recession revenue can fall dramatically, leaving the company in a cash flow
and credit crunch
• If an upturn is expected
– In the through, initiate capital expansion plans so as to have new
operational and retailing facilities ready
• Interest rates have fallen, thus good credit conditions
– Replace and renovate equipment
• The opportunity cost of lost capacity is low in the through
– retrain workers
• Costs are low in the through

Navarro, Peter. "Principles of the master cyclist." MIT Sloan management

review 45, no. 2 (2004): 20-24.
 Capital expansion and modernization
• Decrease capital expenditure when a recession is expected
so as not to be saddled with a big debt load when cash flow
will decrease
• However, after a recession has begun, companies can
increase capital expenditure
– To be the first to market with products that reflect the latest
innovation and style
– to benefit from the lowering of the cost of capital, construction
labor, raw materials and equipment during the recession
– Also a recession is an excellent period to replace or modernize
existing facilities because the opportunity cost of temporarily
lost capacity is low since their rate of utilization is low

Navarro, Peter , Recession proofing your organiation, MIT Sloan

Management review, 2009, vol 50 n°3
 External growth
• Countercyclical strategy
– acquiring companies at bargain prices during
downturns
– divesting unwanted companies at premium prices
in the late stages of expansions

Navarro, Peter. "Principles of the master cyclist." MIT Sloan management

review 45, no. 2 (2004): 20-24.
 External growth
• Managers should apply a « buy low sell high »
stragegy,
– acquiring companies at bargain prices during
downturns and accompanying bear stock markets,
– and divesting unwanted companies at premium
prices during booms when stock prices are high

Navarro, Peter , Recession proofing your organiation, MIT Sloan

Management review, 2009, vol 50 n°3
 Corporate finance and credit
management
• A business cycle sensitive corporate finance team
can reduce capital costs of the company by
paying closer attention to managing the short to
long term debt and debt to equity ratios.
– In recessions central banks cut short term interest
rates and the spread between long and short interest
rates widens, while during booms this spread narrows
– The relative costs of equity and debt capital vary over
the course of the business cycles as stock and bond
prices fluctuate, often in opposite directions

Navarro, Peter , Recession proofing your organiation, MIT Sloan

Management review, 2009, vol 50 n°3
 Corporate finance and credit
management
• Concerning credit management, default rates
increase during recessions and decrease
during expansions
• Companies should quickly tighten credit and
reduce receivables when a recession is
expected
• Later, as the economy picks up, companies can
loosen credit to encourage consumers to nuy
 Corporate finance and credit
management
• Managers can use the business cycle for
competitive advantage
– By setting up a business cycle forecasting
capability in their company
– By applying appropriate business cycle
management strategies
– By improving the economic environment
awareness to build a recession proof company

Navarro, Peter , Recession proofing your organiation, MIT Sloan

Management review, 2009, vol 50 n°3