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production or economic activity over several months or years. These fluctuations occur
around a long-term growth trend, and typically involve shifts over time between periods
of relatively rapid economic growth (expansion or boom), and periods of relative
stagnation or decline (contraction orrecession).[1]
These fluctuations are often measured using the growth rate of real gross domestic
product. Despite being termed cycles, most of these fluctuations in economic activity do
not follow a mechanical or predictable periodic pattern.
Definition: A business cycle is the periods of growth and decline in an
economy. There are four stages in the business cycle:
1. Contraction - When the economy starts slowing down.
2. Trough - When the economy hits bottom, usually in arecession.
3. Expansion - When the economy starts growing again.
4. Peak - When the economy is in a state of "irrational exuberance."
There is a lot of planning that goes into starting any business. Stage one is the
nascent phase of the business during which the business plans and strategies
are finally executed and the business organization comes into existence. This
is the stage where the business is not generating revenue but trying to
establish itself in the market and attract a stable set of investors and
customers. This is the stage where the business has to invest a lot of
resources in creating the basic infrastructure and then marketing and
advertising itself in the market. This is the phase during which innovative ideas
are encouraged, in order to establish a USP (Unique Selling Proposition) for
the company. It is a difficult task to have a smooth sailing business, without
any struggle right from the beginning since the early stage of business setup
involves higher risks. The income in the first stages is always lesser than the
investments and hence initial stage is marked by lower profit margins for the
business.
Once the business passes the nascent phase, it begins to find their core
customers. Stage two or the growth phase of the business is when the
business establishes its niche in the market. This is the phase where the
business owners start to establish their brand identity and generate brand
loyalty within their customer base using sound marketing practices. Although
the focus of this stage is to maintain the core customer group and build trust
and goodwill amongst the customers. This stage is marked by a rise in
consumer demand and a consequent requirement of increased inputs in terms
of production, manufacturing, and general operations to keep up with the rising
sales and continue growth. The growth phase is thus marked by increased
sales, rise in profit margins and thus establishment of the brand name in the
market.
Stage three is the stage where the business reaches a certain maturity level in
terms of the market. The brand identity and brand image of the business are
well established at this stage. The customer base, investors, and other
important business networks are well laid at this point. The sales are either
increasing or at least have reached a considerable regular volume and require
less resources for advertising to enhance sales, however intensive marketing
is a must to enhance the overall market position or at least establish the
current market position. This is the phase where the company would want to
branch out into other ventures and dabble with product innovation. This is the
business stage where the profit margins are fairly stable.
These are the four stages of business cycle experienced by every business big
or small. Sometimes the business flourishes and gains maximum profits, while
at times the business is on the verge of a complete breakdown. It is the
attitude and the positive perspective of successful businessmen that keeps
every business going through the ups and downs and yet always aiming for
the pinnacle.
BUSINESS CYCLES
RECOVERYAlso known as an upturn, the recovery stage of the business cycle is the
point at which the economy "troughs" out and starts working its way up to better
financial footing.
There are several reasons for the volatility that can often be seen in investment
spending. One generic reason is the pace at which investment accelerates in response to
upward trends in sales. This linkage, which is called the acceleration principle by
economists, can be briefly explained as follows. Suppose a firm is operating at full
capacity. When sales of its goods increase, output will have to be increased by increasing
plant capacity through further investment. As a result, changes in sales result in
magnified percentage changes in investment expenditures. This accelerates the pace of
economic expansion, which generates greater income in the economy, leading to further
increases in sales. Thus, once the expansion starts, the pace of investment spending
accelerates. In more concrete terms, the response of the investment spending is related
to therateat which sales are increasing. In general, if an increase in sales is expanding,
investment spending rises, and if an increase in sales has peaked and is beginning to
slow, investment spending falls. Thus, the pace of investment spending is influenced by
changes in the rate of sales.
There are many reasons why the pace of technological innovations varies. Major
innovations do not occur every day. Nor do they take place at a constant rate. Chance
factors greatly influence the timing of major innovations, as well as the number of
innovations in a particular year. Economists consider the variations in technological
innovations as random (with no systematic pattern). Thus, irregularity in the pace of
innovations in new products or processes becomes a source of business fluctuations.
Variations in government spending are yet another source of business fluctuations. This
may appear to be an unlikely source, as the government is widely considered to be a
stabilizing force in the economy rather than a source of economic fluctuations or
instability. Nevertheless, government spending has been a major destabilizing force on
several occasions, especially during and after wars. Government spending increased by
an enormous amount during World War II, leading to an economic expansion that
continued for several years after the war. Government spending also increased, though
to a smaller extent compared to World War II, during the Korean and Vietnam wars.
These also led to economic expansions. However, government spending not only
contributes to economic expansions, but economic contractions as well. In fact, the
recession of 1953-54 was caused by the reduction in government spending after the
Korean War ended. More recently, the end of the Cold War resulted in a reduction in
defense spending by the United States that had a pronounced impact on certain
defense-dependent industries and geographic regions.
Many economists have hypothesized that business cycles are the result of the politically
motivated use of macroeconomic policies (monetary and fiscal policies) that are
designed to serve the interest of politicians running for re-election. The theory of
political business cycles is predicated on the belief that elected officials (the president,
members of congress, governors, etc.) have a tendency to engineer expansionary
macroeconomic policies in order to aid their re-election efforts.
Small business owners can take several steps to help ensure that their establishments
weather business cycles with a minimum of uncertainty and damage. "The concept of
cycle management may be relatively new," wrote Matthew Gallagher inChemical
Marketing Reporter,"but it already has many adherents who agree that strategies that
work at the bottom of a cycle need to be adopted as much as ones that work at the top of
a cycle. While there will be no definitive formula for every company, the approaches
generally stress a long-term view which focuses on a firm's key strengths and
encourages it to plan with greater discretion at all times. Essentially, businesses are
operating toward operating on a more even keel."
Specific tips for managing business cycle downturns include the following: