For successful businesses, is economic downturn more of an opportunity than a threat?

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For successful businesses, is an economic downturn more of an opportunity than a threat? Use real business examples to illustrate your points.

Economic downturn is a stage in the business cycle that is typically attributed by falling demand, high interest rates and a lack of GDP growth, all contributing to a slowing economy. For most businesses, this causes a major decline in sales lowering revenue, while at the same time their costs are increased since suppliers are trying to overcome the effects of low demand. This drastically lowers profit, and for businesses who lack preparation for these market conditions, failure can be a very real option. However, for more successful and typically larger businesses, downturn is often seen as option for growth and investment.

Highly geared businesses with low retained profit are by far the most vulnerable in an economic downturn. These businesses are typically the smaller organisations or new entrants who are having to significantly invest in order to compete with the larger firms. Because of their low reserves and falling profit during a downturn, survival is not always possible. When this is the case, larger corporations gain increased market share which converts to higher demand once the economy is back in recovery. Providing the business had funds to remain stable during the downturn, all in all this would have been a profitable opportunity and one that will stimulate growth. Taking Amazon as an example, despite the 2008 UK economy crash, survival was possible given the size of their business and the extent of their profitability. Woolworths, on the other hand, was already having to invest heavily during 2008 to compete with firms taking advantage of e-commerce such as Amazon. When posed with the downturn, they simply ran out of funds making the business unsustainable thus closing down. As a result, Amazon would have benefitted from increased market share once the economy began recovering since major competition would have been eliminated, raising Amazon’s profitability further.

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However, although survival is possible for successful businesses during downturn, the threat of lower demand still stands. As consumer confidence falls in line with rising interest rates, sales fall often resulting in businesses lowering prices in order to remain competitive (known as deflation). However, this is not guaranteed to raise demand, especially when many other businesses will follow a similar strategy. Alongside lower prices, businesses will almost certainly consider reducing production which leads to inevitable redundancies, increasing unemployment. This means consumers are even less willing to spend since they have less disposable income, effectively creating a cycle. Comet is a ...

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