United Kingdoms GDP fell in 2012and raised a fear of possible recession with regards to the data on economic performance. As a matter of fact, the pound which is the main exchange currency sank significantly. Besides, the British government bond prices rose significantly upon release.
The PMI suddenly fell from the previous figure of 50.5 to 47.9 within the twelve months of 2012 (Oxlade 2012). Thus, this reflective treatise attempts to explicitly review the background information on possible reasons for the recession, its effects to the economy, policies for reversing the recession, and effectiveness of these policies.
Reasons Why UK is Experiencing Recession
Despite a series of campaign by the authority to boost lending, approval of mortgages dragged. As indicated in the UK central bank data for the year 2012, mortgage lending grew by 147 million pounds, the smallest increase since August, also less than forecast (Oxlade 2012, p. 2).
Basically, the sudden plunge in the output of factories that contributes 10% of the total GDP could be another possible reason for the recession. This plunge contributed to a negative economic growth of 0.1%. The finance minister blamed the Chinese New Year Holidays as a serious disruption that might have triggered trade delays in addition to decline in demand in the housing sector since the pound currency was very unstable.
As indicated in the above data, it is apparent that the UKs economy is operating below the full employment. Unemployment level caused by recession creates disequilibrium in the market, that is, there is a surplus supply with a corresponding lowerdemand for commodities and factors of production. The disequilibrium state pushed the market rates down resulting in high cost of production and high cost of outputs.
This caused an increase in prices of goods and services. With increased prices of goods and services, consumers real wealth: in terms of purchasing power, decreased thus, decreasing the aggregate consumption in the UK economy. As consumer expenditure decreases, the level of aggregate demand also decreases until the full employment level of output is attained (Uwasu 2006). However, this was not possible in the economy of the UK.
How Recession Affected the Economy of UK
In the middle of the last decade, UKs economy had the largest structural deficit as compared to other European economies. In 2012, the manufacturing industry that formed its backbone was hard hit since these industries are often very sensitive to business cycle changes.
The government of UK opted for heavy expenditure to support the 2012 Olympic Games. Unfortunately, this did not work and instead, the deficit of this country increased un-proportionally to the GDP (The World Bank Group, 2012). As opined by Neuhaus (2006) strong capital accumulation has driven the growth process in the transition countries (p. 8). However, this is not the case in the UK due to recession.
Rather, due to large public debt, the long term economic growth is likely to be compromised since the factors of products will eventually become very expensive and not competitive since this economy has to trade with competitors such as China that has relatively affordable factors of production (Mankiw, 2007).
As a matter of fact, economic growth is primarily explained by the accumulation of physical capital and labor (Neuhaus 2006, p. 23). This should be balanced with the current market requirements to meet the demand threshold. Thus, from the above reflection, technological process of the UK is likely to be compromised in the long run and demand and supply sides of the economy will operate at deficit parameters as factors of production such as labor, capital, and raw material of the manufacturing industry becomes very scarce (Sercu 2011).
In addition, the exogenous progress as a result of competitive advantage may seriously be compromised as investors will opt to move to more friendly economic zones away from the UK. Due to the retarded growth rate of the UKs GDP as a result of the recession crisis, the quantity of the economys capital stock of physical nature and input of labor will cause decomposition of the residual growth characterized by unstable Total Factor Productivity.
In addition, UKs performance of total employment units as a measure of economic will perform dismally in the long term since reduced capital will influenced reduction on man hours of work and lowered income forlabor payment is often based on the units of labor provided as a factor of production (Neuhaus 2006).
Policy Recommendations
The government should incorporate Coincident indicators in the explicit review of the economy. They are expansive series that measure aggregate economic movement. This is because they change approximately concurrently as the whole economy. Some of coincident indicators are trade sales, production, employment, manufacturing, and personal income. Through tracking these changes, the government will be in a position to predict and create appropriate responses to swings in the economy.
The government of the UK should adopt an expansionary production economy model in the major industries in the UK. As a result, the delicate exposure of the UKs economy to competitive trade with neighboring countries will increase its entities by hundreds of billions of pounds in the long run.
Due to increased entities, the GDP will substantially increase as factors of production, productivity and competitive advantage in trade will increase massively. Same as the views of Mankiw (2007), economic growth is mainly defined by the national GDP which comprises of the balance sheet of factors of production against returns.
At the present, UKs factors of production such as labor, capital and raw material have become unstable due to the recession as a result of uncontrolled public debt, currency instability, and discretionary economic policies. In the long run, these factors are likely to lead to hyper-inflation, serious unemployment and lowered productivity. Through expansionary production economy model, the UK government will salvage the economy from further plunge into recession cycle (The Telegraph 2013).
Often, stimulating the economy requires combined use of both monetary and fiscal policies. The UK government should stimulate this economy by using fiscal policies. Fiscal policy entails the use of taxes and government spending to stimulate the economy. To increase consumer spending in the economy, the government should put in place tax cuts.
Reduction of tax increases consumers disposal income thus increasing spending. An increase in consumer spending increases demand for goods and services (Mankiw 2007). This creates an upward pressure on the supply. It in turn leads to expansion of production thus, creating employment opportunities.
As an austerity measure, the government of the UK should respond to the recession crisis through cutting the public expenditures in the economy. Decreasing government spending decreases the purchasing power in the economy in the long run. This leads to an increase in aggregate demand in the economy. An increase in aggregate demand causes expansion of production lines, thus opening the economy to expansionary growth.
Policy Effectiveness in the UK Economy
Reflectively, demand and supply are the fundamentals of economic growth analysis as the interaction of the market to economic swings such as the UK recession may lead to stagnant growth in the GDP. The law of demand and supply works in opposite ways in the sense that, when the prices of commodities changes, demand and supply also change in opposite direction holding other factors constant (The World Bank Group 2012).
The magnitude of change of demand and supply depends on the economic climate besides the nature of the industry and the dynamics of the market. Tax cuts and reduced public expenditure will stimulate the economy since an increase in aggregate demand causes expansion of production lines, thus opening the economy to expansionary growth (Albert 2009).
Expansionary production economy model policies result in improved investments in the economy. As the capital stock appreciates due to increased investments since the cost of factors of production are made affordable, this economy is likely to gain a long term boom due to massive appreciation that can offset the balance between investments and returns. Besides, the marginal product of capital in this economy will increase above the current negative GDP growth (International Monetary Fund 2008).
Moreover, due to increase in labor as a result of increase in the capital stock, the income of this economy is likely to increase tremendously as output per production factor is positively influenced by expansionary investment (Siddidui 2005). The expanding labor force will ultimately increase labor efficiency at macro level of the UK economy in the long run.
The world of finance, as well as the economic world, is complicated indeed. Almost every event has its goal, ground, and explanation. The only factor that is absent is the possibility to develop a personal opinion regarding a personal experience because there are a number of facts, definitions, and outcomes that cannot be neglected. At the same time, people are free to discover some good aspects in many negative concepts and underline the negative points in the required positive changes. There are many discussions about recessions, their backgrounds, impact, various ways of development in different countries, etc. In this paper, the definition of a recession will be given, and the analysis of this concept will be offered to comprehend how people should understand the worth of recessions. As a rule, people consider the term recession as a negative change in a stable economic world; however, research shows that a recession may have several positive characteristics.
Definition
According to the National Bureau of Economic Research (2010), a recession is defined as a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales (par.2). The fact that a recession is a kind of economic decline makes people think that this concept has the negative outcomes only.
The process of recession is not too complicated and has its reasons and explanations. People get used to spending much money, taking debts, and meeting their demands. The government cannot allow spending such amounts of money because there is a risk of inflation. Therefore, it is necessary to raise prices and make people stop spending their money. The results usually impress because people stop spending their money and take numerous attempts to save incomes and be able to pay debts. In a short period of time (it usually takes from two to five years), the economy of a particular country where the recession takes place is recovered, the government is satisfied with its ability to control peoples financial activities, and people may continue spending money they have until they face another case of recession. It means that any recession has a repetitive nature, and it is hard to guess when it may be expected until some of its signs are discovered.
Causes
The definition and the description of a process called recession help to realize that people cannot avoid it even if they take all necessary precautions. Still, there is a possibility to learn the main symptoms of a recession and try to be ready for it. In other words, it is possible to predict a soon development of a recession and make the required preparations. Kotila (2010) explains that economic recessions do not come suddenly but develop during a certain period of time. People have to analyze the current economic situation properly to understand when the next recession can take place. One of the frequent causes of a recession is joblessness. It is hard to control the economic situation of the country due to the constant changes in the job market. However, as soon as a sudden and constant rise of jobless people is observed, people should be ready to face a new recession.
At the same time, it is wrong to believe that a recession can come when the number of jobless people is increased. More causes should be identified. Professional analytics of companies may predict the possibility of recessions better than ordinary people, and they suggest their leaders to keep a number of working places open. Therefore, if companies do not want to hire new people and try to promote new retirement programs, it means their leaders want to decrease the expenses to survive a coming recession.
In addition to the job market issues, people should follow the price politics in the country. The possible signs of recessions are poor sales and profits, a fall of GDP, the inabilities to use credit cards, an impressive rise of food and other commodities prices, and significantly low costs on a property (because not many people are eager to buy it). As soon as people start noticing these changes and discuss the economic situation in the country, all these signs may prove the presence or soon coming of a recession.
Examples
One of the latest recessions that are known globally is the Great Recession that takes place after the financial crisis of 2007-2008 in the United States of America. The essence of this economic decline lies in the impossibility to control housing-related assets. At the end of 2007, the housing bubble burst (Canterbey, 2011), and a number of problems took place. Consumer spending was considerably decreased. Business investments were minor. People continued losing their jobs and could not find new opportunities. The level of uncertainty was dramatic. People did not find it necessary to make serious financial decisions, and companies lost their opportunities to earn money. In a short period of time, many companies became bankrupts because of their inabilities to take debts from banks. In their turn, banks underwent considerable changes, and some organizations had to be closed.
People lost their jobs, and the government did not want to cover the losses. Some researchers admit that President Obama tries to take many responsibilities at the same time and fails to meet the expectations (Canterbery, 2011). Fox (2009) and the team of Time underline the mistakes made by George Bush and his failure to solve the recession problems in 2001 and improve a poor financial performance. However, even if the blame of one person or several people is proved, it is incorrect to believe that other people are out of the problem.
When the recession covered the USA, a number of developed and developing countries faced similar economic and financial problems. Such countries like Britain and Germany were challenged by high unemployment rates, and China was able to resist the challenges of recessions and avoid a number of financial problems. The reports also show that Asian countries and Latin America were better prepared for financial challenges in comparison to the world giants like the USA (Canterbery, 2011).
Effects
There are many negative effects of a recession that people have to be ready for. The problems of unemployment have been already discussed and defined as a crucial point for consideration. Still, it is possible to cope with the problem and, instead of searching for a well-paid job with all working privileges, try to find a part-time job just to earn money and survive the crisis.
Despite the fact that a recession is a financial issue, a number of personal outcomes and challenges take place during this process. On the one hand, family relations undergo considerable changes and tests. Family members have to live together and support each other in case the problem of unemployment takes place. People should be ready to change their lifestyles and learn how to save money. Such problem is urgent for families with children when parents cannot explain why a new purchase has to be suspended or even cancelled. On the other hand, certain financial frames should unite a family and provide its members with a time to be together. Family members can think about their mutual interests and try to start their own business regarding their opportunities and materials. Therefore, it is possible to define a recession as a reason to think about the development of personal abilities.
Conclusion
In general, people cannot avoid recessions and have to take a number of actions to decrease the number of negative outcomes of this process. The government is not always able to control all financial and economic operations. The government-bank-customer relations become complicated during recessions. Ordinary people cannot find good jobs. Banks do not offer loans. Governments cannot solve the problems of unemployment and stabilize the economic situation. A number of discontents and high expectations deprive people of the opportunities to believe in their powers and survive the crisis. The economy becomes weak, and the business environment is unstable. People have to use the current technological achievements, exchange the information properly, and plan their activities in regards to their possibilities. Recessions should not be understood as something terrible and hard to overcome. This economic decline is only another challenge that has to be survived.
References
Canterbery, E.R. (2011). The global great recession. Hackensack, NJ: World Scientific.
Since its inception, RONA has managed to dominate the Canadian Hardlines market by establishing a comprehensive distribution network. The stores operate under different formats and sizes. RONA focuses on nurturing a high level of flexibility and adapting its stores to the diverse customer needs. The firm witnessed remarkable growth from 2000 to 2006.
One of the factors that enhanced the firms growth is the incorporation of a rapid expansion strategy. The firms sales revenue increased from $ 1,289 million to $ 4,552 million during this period, which represents a relatively high growth rate.
Problem statement
Despite its strong financial performance, RONA was affected adversely by the 2007 recession. First, the firm experienced a decline in the rate of growth in some of its Canadian markets such as the western region, which was occasioned by a decline in the consumers purchasing power. The level of consumer spending on home improvement declined considerably.
Furthermore, the firms performance exacerbated after the decline in demand within the automobile industry. The prevailing market trends also presented a major challenge in the firms survival. Consumers were increasingly focusing on the service level provided rather than the store format or size. Moreover, consumers were becoming environmental conscious in an effort to minimize the occurrence of climate change.
In a bid to survive in an environment characterized by a high rate of climate change, RONA was required to adjust its operations to align with the changing consumer behaviors. One of the strategies that the firm had to implement entailed integrating the concept of sustainable development.
In addition to the above challenges, the industry experienced a high rate of technological change. Therefore, its ability to achieve competitive advantage amidst the challenges faced depended on the extent to which it adjusted its operational processes.
Analysis
Organizations are exposed to different challenges emanating from the macro and microenvironments. Examples of such challenges arise from market changes such as increase in the intensity of competition and change in consumer purchasing behavior. The challenges might affect the competitiveness of a firm adversely if effective strategies are not implemented.
It is imperative for organizational leaders to develop a comprehensive understanding of the internal and external business environments. Gaining such insight forms a strong foundation in organizations effort to deal with external and internal changes. This can be achieved be achieved by integrating different internal and external market analysis models. Below is an analysis of RONAs internal and external environments.
External analysis
The level of competition in a particular industry is subject to the changes in the competitive environment.
Conducting a structural analysis of a firms industry is an important source of insight to organizational managers in their quest to ensure that their organizations achieve the desired competitive advantage (Henry, 2011). The Porters five forces is one of the frameworks that an organization can integrate in evaluating the industry.
Threat of new entrants
The Canadian hard-lines industry is characterized by low threat of new entrants courtesy of the high cost of entry. A number of big box companies such as RONA, which have successfully established their operations in the market, dominate the industry. RONA has a strong market position in Ontario and Quebec.
By 2009, the firm was ranked second amongst the big-box stores with regard to sales.
Buyer bargaining power; [low to moderate]
A large number of consumers characterize the Canadian market. Secondly, few big-box retailers pose a threat to RONAs operation. The few big-box retailers in the market [Home Depot, Canadian Tire Corp., and Home Hardware] do not offer services similar to those offered by RONA.
The large number of customers coupled with the high demand in the Canadian hard-lines market makes it hard for consumers to push the price down (Richard Ivey School of Business, 2009).
Supplier power [low to moderate]
Most suppliers in the Canadian hard-lines market do not have a substantial advantage. Subsequently, their operations do not have a substantial effect on the product prices.
The firms large size has significantly diminished suppliers power. RONA can easily control the price of its products. RONA has over the years concentrated on developing a strong relationship with the suppliers. Therefore, the firms relationship with its suppliers may be affected if it shifts to other suppliers.
Threat of substitutes [low]
There are relatively low substitutes to hard-lines products in Canada due to the few retailers in the industry. In its quest to minimize the threat of substitute, RONA has integrated a comprehensive product differentiation strategy.
Degree of rivalry [medium]
RONA faces competition from a number of big-box stores such as Home Depot, Kent, Canadian Tire Corporation, and Lowes Canada. Despite the intense competition, RONA has been in a position to differentiate its product and services successfully. The flow chart below depicts a summary of RONAs industry structure.
Internal analysis
VRIO Framework
Developing sufficient competitive advantage is critical in an organizations effort to attain long-term survival. Integrating the resource-based view [RBV] is one of the avenues through which an organization might achieve the desired level of competitive advantage. This goal is attainable by basing the competitive advantage on rare, valuable, organizational, and inimitable resources.
Valuable
Cardeal and Antonio (2012) argue that the ability of an organizations resources to create value is dependent on their capacity to facilitate the formulation and implementation o operational strategies that will contribute towards attainment of a high level of efficiency and effectiveness.
One of the most evident attributes that give the Canadian hard-lines market a high value is that more than 80% of all home in Canada are more than 15 years old. These houses require major renovation in the near future, which indicates a high market potential for hard-lines companies such as RONA.
A large number of baby-boomers, who are nearing their retirement age, currently characterize the Canadian population. A significant proportion of Canadians within the baby-boomers age group consider renovating their homes as a worthy hobby.
Furthermore, a significant proportion of the baby-boomers prefer the Do-It-For-Me model. This aspect presents a perfect opportunity for RONA to increase its sales revenue by offering installation services, which were launched in 2005. Therefore, the market fundamentals are appealing.
The store also creates value by integrating a flexible operational strategy by integrating different formats and ownership structures. Its strategy to pursue the independent dealers has substantially enhanced the firms value. The organization has recruited approximately 5,000 dealers in Canada who account for 54.6% of the market (Richard Ivey School of Business, 2009).
In an effort to improve its financial performance, RONA has formulated an effective strategy to enable the dealers improve their performance. This has been achieved through integration of a comprehensive employee training and motivation program. The strategy has played a fundamental role in improving RONAs operational efficiency and market dominance.
Rare
In an effort to attain differentiate itself, RONA considers its stores distributed in different parts of the country as a product. The decision to adopt this strategy was necessitated by recognition of the view that the store layout plays a critical role in promoting customer experience (Kazmi, 2008).
RONA is ranked as the first Canadian Hardlines retailers to show its commitment towards replacing its big-box store format in an effort to cope with the changing consumer attitude.
RONA focused on improving its store ambience by integrating effective store designs by ensuring that the stores were decorated effectively, well lit, and spacious. Furthermore, the firm also integrated appealing signage in an effort to direct customers within the store.
Adopting eco-initiatives is another strategy that allowed the firm to attract customers. This strategy is in line with the change in the consumers perception on the importance of protecting the environment by minimizing greenhouse gases emissions.
The firm has also integrated other programs such as the RONA by Design, RONA-certified professionals, and RONA Project Guide, which are aimed at providing optimal level of customer service.
Inimitable
RONA has adopted a comprehensive differentiation strategy in an effort to distinguish itself from competitors. The firm has based its competitive advantage on the services that it offers to its customers. The firm has developed an employee-training program in an effort to ensure that its customers receive high quality customer services. The training program has led to the adoption of best practices within its workforce.
Organization
The firm has based its operational processes on the prevailing market conditions. For example, the firm has exploited the Do-It-For-Me attitude amongst the Net Geners by developing an Installation Service as one of its products. Furthermore, the firm has taken into account the factors that influence the Canadian consumers in their buying process.
RONA has identified the female gender as one of the major determinants in the purchase of household products in Canada. Subsequently, the firm has targeted women by creating a feminine friendly environment. The firm presents its products in boutiques. Therefore, the firm has successfully influenced the female gender.
SWOT Analysis
The chart below illustrates a summary of the firms strengths, weaknesses, threats, and opportunities
Strengths Customer centric approach- the firm is cognizant of the importance of customer satisfaction. Thus, it has integrated an effective customer service training in order to provide customers with quality services. Effective distribution- RONA has been able to cover a substantial proportion of the Canadian Hardlines market by designing an optimal distribution strategy. This goal has been achieved by developing a wide network of stores. Product differentiation the firms success has been enhanced by adoption of an effective product differentiation strategy. Market dominance-integration of different optimal growth vectors has enhanced the firms market dominance capability. Adoption of expansion strategies such as acquisitions and organic growth has contributed towards the firms ability to develop a strong competitive advantage.
Weaknesses Decline in the level of liquidity due to the changing economic environment The firm has only concentrated in the Canadian Hardlines market.
Opportunities Market expansion- the firm can improve its performance by opening new stores. However, the stores should adopt a new layout in order to align with the market changes. Growth in e-retail- the firm should consider integrating the concept of e-commerce in order to increase its sales revenue. E-retail will also enable the firm to improve its market coverage. Strategic agreements and acquisitions-to deal with the degree of industry concentration, RONA should consider acquiring the small firms in the Canadian market. This will increase its market dominance and hence the likelihood of maximizing its profitability. Changing consumer behavior-RONA should exploit the changing consumer behavior with regard to climate change. This goal can be attained by improving its eco-friendly products.
Threats Competition- the firms market dominance is threatened by the presence of major competitors such as Home Depot and Canada Tire Corp. Weak domestic economy- the firms ability to achieve its financial objectives is threatened by the changing economic environment, which is leading to decline in the level of consumer confidence. Labor cost;increase in labor cost may affect the firms ability to maximize its profit.
Financial analysis
The Canadian Hardlines industry was affected adversely by the recession. Most consumers experienced a decline in their purchasing power due to loss of employment. The recession led to a decline in the level of uncertainty regarding the countrys future economic performance (Grusky & Western, 2011).
The level of confidence amongst the Canadian consumers declined from over 100, in January 2002, to below 70, by January 2009. Despite this decline, RONA was in a position to sustain a relatively high financial performance during the period (Richard Ivey School of Business, 2009).
The chart below illustrates the firms performance with respect to sales from 2005 to 2009. From the chart, it is evident that RONA had a relatively strong performance compared to other firms.
The firm is focused towards improving its makret dominanace by increasing its makret share. Subsequently, the firm estimates its desired financial position for a particular year. The recession affected the firms ability to attain the set target. The figures below illustrate the estimated and the actual sales and makret share during the period ranging from 2007 to 2008.
2008
2007
RONA Estimates
17.50%
17.00%
Actual performance
15.60%
15.20%
Furthermore, the firm was not able to achieve its sales target in 2007. However, its sales revenue increased to $ 40.3 million because of adoption of an optimal operational and marketing strategy.
RONA had a strong financial performance during its growth phase. Its net income increased from $18 million in 2000 to $190 million in 2006. However, this performance was affected by the recession. Its net income declined to $185 million and $160.2 million in 2007 and 2008 respectively. The graph below illustrates the firms performance with regard to net income from 2000 to 2008.
Year
Amount in million $
2008
160.2
2007
185.1
2006
190.6
2005
175.2
2004
138.2
2003
77.9
2002
43.1
2001
24.6
2000
18
The recession had adverse effects on the firms cash flow. For example, its net change in cash flow in 2007 and 2008 was $ 9,480 and $ (55, 620).
Evaluation of alternatives
In its quest to stimulate financial performance during and after the recession, RONA intends to implement two main programs, which include the PEP and the Recovery programs. Re-launching the PEP program will focus on improving the firms level of productivity, profitability, and efficiency. In a bid to achieve this goal, RONA will be required to undertake a number of projects, which include
Improve the level of profitability in its corporate store network
Optimize its supply chain
Improve the recruitment of independent dealers
Promote customer loyalty
Despite the view that implementing the PEP program would contribute towards development of RONAs competitive advantage, the firm will incur high cost in the process of implementing the projects.
The financial analysis shows that RONA is experiencing a challenge in its financial performance due to the recession. Thus, the likelihood of the firm facing a challenge in its quest to re-launch the PEP program is high (Richard Ivey School of Business, 2009).
Adopting the recovery program is more effective in enhancing the firms ability to deal with the recession. The recovery program would enhance the firms ability to stimulate its growth vectors, which had been distracted by the recession.
Furthermore, implementing the recovery program will stimulate the firms business model. For example, the firm will be in a position to venture into new markets by establishing independent dealers. Subsequently, RONA will improve its market dominance.
Conclusion
From the case study, it is evident that the 2007 recession had adverse effects on the performance of firms in the Canadian Hardlines industry. Furthermore, the case depicts a high market potential within the Canadian Hardlines market due to the prevailing market dynamics. One of the sources of market potential relates to the attitude of the Canadian consumers towards renovation, gardening, and decoration.
Most Canadians consider decoration, renovation, and gardening of their homes as an important component of their hobbies. This trend is mainly evident amongst the baby-boomer. Furthermore, most Canadians, especially the baby-boomers have adopted the DIFM model, which presents a perfect opportunity for RONA to expand its market with regard to the provision of installation services.
The case study further shows that RONA can improve its competitive advantage by focusing on its internal and external business environments. RONA has optimally positioned itself in the Canadian market. Therefore, the firm should focus on improving its competitive advantage. The firm can improve its competitiveness by focusing on its differentiation strategy.
One of the ways through which the firm can achieve this goal is by integrating the concept of new product development. However, the success with which the new products penetrate the market will depend on the quality of the market research conducted. The product or service developed should align with the customers needs, tastes, and preferences.
The VRIO framework shows that RONA has the capability to recover fully from the recession. However, this aspect will depend on the effectiveness with which the firm exploits its internal capabilities and resources.
Recommendations
In order to deal with the recession successfully, RONA should consider the following
Open the recovery program the firm should mainly focus on implementing the recovery program rather than opening the PEP program. The rationale for selecting this decision is based on the view that the firm has already developed sufficient competitive advantage.
Subsequently, it is imperative for the firm to leverage on its strengths in order to improve its share price. Implementing the recovery program will improve the firms sales, which had declined substantially. The case analysis also shows that there is a high probability of an upturn in the Canadians economic performance. This projection further diminishes the probability of implementing the PEP program.
Market expansion- the analysis shows that RONA has mainly concentrated its operations in Canada. The firm should consider expanding its operations by integrating the concept of internationalization. However, the firm should conduct a comprehensive market research in order to identify the markets with the highest potential.
Implementation
RONA should adopt the recovery program. However, the program should be implemented in phases. For example, the first phase should have commenced in 2009 to 2011. Secondly, RONA should focus on enhancing its growth vectors.
Recruiting additional dealers and increasing the firms comparable sales should be the first stage and should be undertaken concurrently. This process should be undertaken between 2009 and 2010.
Some of the activities that should be undertaken during this phase entail providing customers with value added services and renovating 20% of its store network within one year. This move will contribute towards improving the firms operational efficiency and effectiveness.
The second phase of recovery should entail constructing additional stores and seeking more Hardlines firms to acquire within and across the borders. The rationale for implementing these projects in the second phase emanates from the view that the firm will have generated additional revenue to implement them.
Mostly, firms fail in their implementation strategies due to lack of enough resources, but given that the implementation comes in the second phase, RONA will be prepared and readily equipped with the necessary resources.
The firm should conduct a comprehensive market research in order to identify the markets with the highest potential. Furthermore, the firm should consider acquiring firms with a high degree of fit with RONA, which will aid in minimizing integration challenges.
Reference List
Cardeal, N., & Antonio, N. (2012). Valuable, rare, inimitable resources and organizations. African Journal of Business Management, 6(37), 10159-10170.
Grusky, D., & Western, B. (2011). The great recession. New York, NY: Sage.
Henry, A. (2011). Understanding strategic management. New York, NY: Oxford
University Press.
Kazmi, A. (2008). Strategic management and business policy. New Delhi, India: Tata McGraw-Hill.
Richard Ivey School of Business: RONA Inc.-dealing with recession. (2009). London, UK: University of Western Ontario.
Macroeconomic conditions on the domestic or international levels may have contributed to the start of an economic crisis. The official reports and lack of inflation that characterized the recent unrest in Brazil necessitated a tight monetary policy, which led to one of the deepest and longest recessions in Brazilian economic history (Holland, 2019). The primary causes of the decline in investment and consumption, as well as the acceleration of unemployment, have been harsh economic conditions, decreasing credit, and political unpredictability. Growth was further hindered by a rapid realignment of regulated pricing and a restriction of monetary policy. The analysis of this problem will create conditions under which potential economic problems can be solved more confidently with an already-known plan.
Recession Policies
Recent policymaking has failed to acknowledge enduring structural issues and turned out to be ineffective, which has weakened the credibility of policy and worsened growth prospects. At both the national and regional levels, making more substantial progress in resolving medium-term structural problems, particularly those involving the fiscal framework, would significantly improve policy credibility and raise the confidence required for the recompense to robust, encompassing, and sustainable growth.
Until there is a greater likelihood that inflation will converge to the central objective, the stance of monetary policy should not alter. It is anticipated that both the recent drought-related inflationary pressures shock and the surge in inflation brought on by controlled price and exchange rate changes will shortly subside. On the other hand, inflation is anticipated to become progressively under pressure due to the consequences of weak demand and the recent discussion rate rise. Nevertheless, there is a chance that high inflations knock-on effects will enhance inflationary persistence.
Reducing the expansion of fiscal spending is a crucial and desirable government priority. Unsustainable fiscal dynamics are being caused by progressively onerous requirements on the central budget, which raise borrowing rates for everyone in the industry, limit economic development, and increase government financing demands. This leads to a further deterioration of the dynamics of public debt. The agreed application of the expenditure cap might be a game-changer since it would allow for the consolidation and ultimate reduction of public debt as a proportion of GDP (Orair & Gobetti, 2017). It would also help the long-term structure of federal investments. In addition to the spending limit, the original budget law that is currently before Congress includes a number of one-time revenues through settlements and the sale of specific assets.
Intended Impact
Tight monetary policy should continue until inflationary pressures reach a level that is closer to the middle of the central banks spectrum of sensitivity. In this situation, it would be possible to relax monetary policy if fiscal reform and adjustment showed real progress (Orair & Gobetti, 2017). It is encouraging that there are plans to make the central banks autonomy and communication more independent in order to strengthen the framework for inflation targeting. A committee made up of all regulatory agencies, the Deposit Guarantee Fund, and the Ministry of Finance should be given a clear and specific authority with clear roles and responsibilities for macro-prudential supervision to increase transparency and personal responsibility and enhance the authorities capacity to recognize and address future risks.
Additionally, a separate organization should be granted the right to establish a communication framework that enables prompt and appropriate decision-making in a disaster and routinely assesses the authorities ability to react to crisis circumstances. The government is asked to carry out its intentions to improve frameworks for private insolvency, speed up the bankruptcy procedure, and lessen default damages incurred by borrowers. High private industry borrowing risks highlight the necessity of ongoing vigilance and close observation of the state of the business sector and its connections to the banking sector.
The pension system should have undergone complete reform, taking into account the regulations controlling retirement age, actions to improve employment, the expansion of benefits after retirement, and the duplication of benefits. The pension welfare state has supported people who should instead be receiving aid from specific social welfare programs; these initiatives should be prepared to take over if the retirement rules are changed (Orair & Gobetti, 2017). It would be economically prudent, fair, and equitable to bring government servant pension plans closer to those of the private industry.
Actual Impact
Despite the recessions effects on the profitability of the company management, the banking systems overall health is still robust. The mission applauds public banks efforts to moderate the rate of credit expansion, minimize direct financing of significant businesses with access to the common market, lessen credit market inefficiencies, and improve the capital positions of the two largest and most influential banks (Ku et al., 2020). Financial stability nets are strengthened by boosting the central banks immediate liquidity support, upgrading the resolution framework, and streamlining the processes for using the deposit insurance scheme in order to make the banking industry more shock-resistant.
Reforms that facilitate gainful employment and lessen the incentives for casualness foster investment, growth, and the creation of new jobs. Reforms take into account first-time job seekers, a group that is primarily made up of young people and particularly susceptible to cyclical changes. The easing of the minimum wage indexation regulation, which was previously advocated on financial grounds, helps to increase employment among young people (Sicsú et al., 2021). Reducing tariffs and nontariff barriers, changing the rules on domestic content standards, and negotiating free-trade agreements outside of Mercosur all contribute to greater productivity and competitiveness.
Payroll expenses account for a sizable portion of spending, particularly in subnational administrations. It will be crucial to make wise employment and compensation decisions. Reforms are also required in this situation to make it possible to leave the civil service and to make automatic career advancement more logical (Hone et al., 2019). The plan to assist states in regaining control of their finances should include improving institutional ties across levels of the government and passing legislation allowing governments to make intricate expenditure adjustments. State cases are fully covered by welfare benefits and payroll administration rules. It is also essential that states make a definite commitment to enhancing transparency.
Conclusion
After the financial crisis, fiscal policy was one of the topics that generated the most heated debate. On the one hand, officials have been working to boost GDP and stop the jobless rate from rising. With shaky appraisals of their efficacy, fiscal policy views have fluctuated between expansion and austerity. Fiscal consolidation was the only game in town, and concurrently, a complete public policy aimed at alleviating poverty and wealth disparity was in place, driving up government expenditures. Along with a spending cap, changes to benefits, several special tax laws, a plan for commercialization, and a rethinking of the notion of generosity in many social programs, an appropriate governance structure for fiscal policy is welcomed.
References
Hone, T., Mirelman, A. J., Rasella, D., Paes-Sousa, R., Barreto, M. L., Rocha, R., & Millett, C. (2019). Effect of economic recession and impact of health and social protection expenditures on adult mortality: a longitudinal analysis of 5565 Brazilian municipalities. The Lancet Global Health, 7(11).
Sicsú, J., de Melo Modenesi, A., & Pimentel, D. (2021). Severe recession with inflation: the case of Brazil. Journal of Post Keynesian Economics, 44(1), 89-111.
In 2008, the world began the financial and economic crisis, which manifested in the form of a substantial decline in the leading economic indicators in most countries with developed economies, which subsequently escalated into a global economic recession. The emergence of the crisis is associated with several factors: the general cyclical nature of economic development, overheating of the credit market and the resulting mortgage crisis, high commodity prices, including oil, and stock market overheating. The forerunner of the 2008 financial crisis was the US subprime crisis, which affected high-risk mortgages in early 2007. The second wave of the mortgage crisis occurred in 2008, spreading to the standard segment, where state mortgage corporations refinance bank loans. A 20% drop in property prices left US homeowners nearly five trillion dollars poorer (Berberoglu, 2014). Moreover, the quotes of stock exchanges fell significantly, which affected the stock market. This is how the 2008 global financial crisis unfolded. Economists are still arguing about why it started and ended today, but most of the phenomena have been studied in sufficient detail. However, the main argument of this paper is that the collapse of the banking system caused the recession, while the consequences affected the worldwide economics.
Literature Review
At the heart of the global financial crisis that erupted in 2008 in the United States and spread all over the world at lightning speed is the collapse of the banking system. The starting point, which served as the beginning of turbulent changes, was the so-called cheap loans . It is known that the change in the refinancing rate in the United States is the main instrument of the states monetary policy. In 2003, the Fed decided to lower the refinancing rate to 1% in order to stimulate the credit expansion of banks and thus ensure a quick exit from the crisis caused by the economic recession of 1995-2001 (Berberoglu, 2014). As a result of these measures, during 2004-2006, economic growth was observed in the United States: GDP increased from 11,797 trillion USD up to 13314 trillion dollars, which amounted to 3% of the annual GDP growth (Berberoglu, 2014). The economic boom was accompanied by full employment of the population, a high investment policy, and the rapid development of high technology industry.
The lower refinancing rate enabled commercial banks to expand their credit by lending at low-interest rates. Cheap loans led to an increase in demand in the mortgage market and, as a result, to an increase in real estate prices. From 2004 to 2006, real estate prices increased by an average of 10% per year, which led to a doubling of house prices by 2007 (Berberoglu, 2014). Insufficient banking system regulation allowed financial agents to create new profit maximization tools by carrying out somewhat risky operations. One such instrument was the subprime mortgage. Subprime loans have a reduced down payment or none at all, are issued without guarantees and guarantees and do not require the borrower to provide documentary evidence of his income and property (Islam & Verick, 2011). In fact, any US citizen can get a subprime loan, regardless of their income, financial condition, and reputation.
The peculiarity of subprime loans is that they are a type of mortgage loan with a floating interest rate. By resorting to this type of lending, banks did not see the great danger lurking in providing this type of loan since, in the event of a default, the borrower could always sell the property at a higher market price and close the loan. Mortgages have thus become a public financial vehicle, a phenomenon that has created new perspectives and controversies property (Islam & Verick, 2011). In order to increase their creditworthiness, banks are beginning to look for new ways to attract financial resources to expand their credit expansion. Securitization is becoming such a new tool.
If previously issued loans were the active part of the bank balance, they are now being used as liabilities, further increasing the money supply. Banks sell issued mortgage loans to financial institutions specializing in securitization, thereby replenishing their lending capacity and hedging counterparty risk. Investment banks and other financial institutions buy secured mortgage loans or mortgage bonds, which pool them all and sort or tranche them, depending on risk diversification, into less risky, medium risk, and risky. This type of security is called a collateralized debt obligation.
The reduction of the refinancing rate to 1% meant not only cheap loans but also deposits with a low-interest rate. In search of more good placements of their financial resources, investors begin to buy SDOs, believing that investing in real estate-backed securities is less risky than other securities, such as shares. Demand for bonds backed by debt obligations stimulates an increase in supply from investment banks, which, in turn, creates conditions for issuing more mortgage loans. Thus, the American economy becomes a debt-based credit expansion and a lightning-fast non-cash money supply. This financial model does not lead to sustainable economic development but, on the contrary, is fraught with a real threat of default, which happened in 2008.
Since 2006, real estate prices have been falling. According to Standard & Poors, the fall was 20% of the market value of 2006. In addition, after making sure that the US economy is already out of recession and on the path of economic growth, the Fed is changing financial policy in favor of limiting the credit expansion of banks, raising the rate refinancing from 1 to 5.25%, which leads to an increase in the interest rate on loans (Stiglitz, 2010). The change in the economic situation also led to an increase in the interest rate on already issued sub-standardized loans.
All these changes led to borrowers with low solvency being unable to meet their credit obligations. The low market value of the house also prevented them from closing the loan by selling the property. This economic situation led to an increase in the number of defaults and, as a result, to the transfer of real estate into the banks ownership. Some solvent borrowers, according to an analysis of the current problem in the real estate market, stopped paying interest on the loan, not seeing the point in paying an amount that vastly exceeds the actual market value of the house. The default of borrowers led to the collapse of not only the mortgage market but also the market for mortgage-backed securities and, as a result, to a drop in investment and the bankruptcy of many financial companies (Stiglitz, 2010). Thus, by 2008, a difficult situation had developed in the United States, a kind of debt hole, which led to the most devastating crisis since the Great Depression.
The global financial crisis severely impacted the functioning of the entire world economy. World GDP by 2009 decreased by 5.8% from the level of 2007 (Arpino & Obydenkova, 2020). According to the ILO, the world unemployment rate increased by 0.8% compared to 2008, amounting to 6.6% (Arpino & Obydenkova, 2020). By 2008, the unemployed amounted to about 15 million. Public debt increased sharply due to borrowing to cover the budget deficit associated with the collapse of national currencies, as well as a sharp reduction in income (Arpino & Obydenkova, 2020). The direct consequences of the crisis also include a decrease in trade volume, volatility in commodity prices, a fall in the value of financial assets, a global fall in real estate prices, an outflow of capital, low liquidity, a current account deficit in the balance of payments, an increase in the cost of loans, a sharp decrease in direct investment, a decrease in profitability from the tourism industry, declining remittance receipts, sharp declines in export earnings, and payments imbalances. According to OPEC estimates, global demand for crude oil fell by 1.3 million barrels per day, which reduced production.
According to the UN, a distinctive feature of this crisis is that, due to the high degree of globalization and integration of national economies, the crisis has equally affected both developed and developing countries. However, the poorest countries, whose economies depend on external financing and international trade, were most vulnerable to the economic downturn. In Europe and North America, growth rates decreased from 3.2% to 0.9% in 2008 to -3.7% in 2009. Only by 2010 did economically developed countries manage to overcome the crisis in the economy and enter the path of economic growth with GDP growth of up to 2.6% (Arpino & Obydenkova, 2020). In most developed countries, unemployment remains reasonably high, averaging around 10%. The highest rate falls in Spain, where the share of unemployed in 2009 was 14%. The lowest unemployment rate is seen in the Netherlands, where it amounted to 2.9% in 2009.
In 2008, ORS accounted for almost 1.5 trillion. US dollars, or more than 76% of the worlds foreign direct investment. In 2009, their total volume almost halved to $780 billion. In 2008, foreign direct investment was sent to the EEC countries in the amount of almost 1.1 trillion USD; this accounted for more than 61% of the worlds inflow of foreign direct investment (Arpino & Obydenkova, 2020). The crisis also had a negative impact on the development of trade. In the US, exports fell by 15% and imports by 17%; in the EU, both exports and imports fell by 15% (Arpino & Obydenkova, 2020). In some countries, such as Ireland, Spain, Greece, Portugal, and Italy, there was an increase in the state budget deficit, which led to a new round of economic recession, but already in the EU.
According to ECOSOC, from 2008 to 2009, in Latin America and the Caribbean, there was a decline in GDP by 1.9% or 3% per capita. The decline in economic growth was reflected in the structure of employment of the population, an increase in unemployment to 8.3% (Arpino & Obydenkova, 2020). Due to the decline in prices for raw materials and goods of material production and the increase in exchange rates in Latin America, there is a sharp drop in aggregate demand and, as a result, a decrease in inflation from 8.3% in 2008 to 4.3% by 2009 (Blanco, 2010). Foreign direct investment decreased by 39.1% (Blanco, 2010). The experts also noted a decrease in business and consumer expectations, which further worsened the investment climate and influenced changes in the demand structure.
Involvement in foreign trade makes Asian countries dependent on the economic situation in the world. A sharp drop in demand in the American market affected the reduction in production in Asian countries and, as a result, negatively impacted the regions development. There is a sharp drop in prices for agricultural products, in particular, cereals, by up to 50%, thereby undermining the economy of several Asian countries, the main branch of specialization of which remains agriculture (Wan, 2010). The economic downturn caused GDP growth in the region to fall from 6.8% to 4.1% (Wan, 2010). The decline in economic activity led to a sharp jump in unemployment and, consequently, to socio-political unrest in the region. Demonstrations swept through some Asian countries in a wave, further exacerbating the economic situation in the region and undermining state authority.
Analysis
Regarding the consequences, it should be said that the crisis affected a considerable number of countries, especially countries with developed economies. In general, the consequences of the crisis include an actual drop in global economic indicators: a decrease in global GDP, a decrease in world trade, a decrease in production, recessions in many countries of the world, a decrease in economic activity, and a fall in real estate prices. Of the countries of the Eurozone, Greece suffered the most significant losses due to its violation of fiscal policy and the EU member states that were divided and unprepared for solidarity actions.
Measures to overcome the crisis in individual countries differed, but most countries relied on monetary policy to overcome the 104 crisis. As alternative measures to overcome the crisis, the proposal of Paul Krugman was considered, who argued that during a crisis, one should not be afraid of spending; on the contrary, one should spend, not save. However, this view is highly controversial and has been criticized by many leading economists. The global trend after the acute phase of the crisis in 2008 was the weakening of the middle class in the world, while before the crisis, its share in the total volume of world wealth remained stable for a long time.
The main advantages of the crisis, which can positively affect almost all companies, are the following: the possibility of attracting more professional staff on favorable terms; reduction in the cost of certain types of services used by the company; using an ostrich development strategy. The latter assumed global optimization and cleaning because, on the one hand, everyone panics and reduces their marketing activity and works on developing the management system. However, on the other hand, the costs of these activities are becoming less. Therefore, these tasks can be solved at a lower cost during a crisis and improve their competitive position since most companies will not do this.
Conclusion
Thus, the crisis of 2008-2009, which broke out in the United States due to the collapse of the banking system, echoed around the world, leading to a sharp decline in global GDP, an increase in unemployment, a reduction in foreign direct investment, a fall in global currency and stock markets, and an increase in social economic tension in the world. This crisis showed the vulnerability of national economies and their dependence on the world situation in the context of integration and globalization, thus proving the low effectiveness of the current regulation of financial flows.
Berberoglu, B. (Ed.). (2014). The global capitalist crisis and its aftermath: The causes and consequences of The Great Recession of 2008-2009. Ashgate Publishing, Ltd.
Blanco, L. (2010). Latin America and the financial crisis of 2008: lessons and challenges. Pepperdine Policy Review, 3(1), 8. Web.
A recession is a notable reduction in the economic performance of a nation that lasts for more than a few months affecting labor availability and industrial performance. Boushey et al. (2019) also define a recession as a period of economic contract and decline characterized by lowered industrial activities and identified by a reduction of the GDP in two consecutive quarters. While there is no specific definition of recession, there is consensus that it is characterized by reduced output and a sharp increase in unemployment in a nation (Gertler & Gilchrist, 2018). In addition, other indicators of a recession are lowered household income, industrial performance, production, and retail sales.
Fiscal Policies
One of the most crucial demand-side policies is the fiscal policy. According to Boushey et al. (2019), fiscal policies are economic measures that refer to the use of government revenue to adjustment of tax policies to positively influence the economy of a country. From the definition of Gertler and Gilchrist (2018), fiscal policy implies actions taken by governments in an attempt to influence the aggregate demand. From a similar view, Sumner (2017) explains that during a recession, a government may use fiscal policies, which involve the reduction of the tax rates and increasing government spending to trigger economic performance. In the US, fiscal policy actions are enacted by Congress to stimulate the spending of the government and the reduction of taxes to raise output and help the economy to return to preceding status.
Monetary Policies
Another demand policy that is instrumental in managing a recession is monetary policies. Monetary policy is defined by Kuttner (2018) as the action taken by a countrys central bank to monitor and control the quantity of money in the economy through such activities as the modification of the interest rates, purchase and sale of government bonds, and forex rate regulation. The goal of the monetary policy is to encourage customer spending and increase borrowing for investment.
Sumner (2017) adds that the monetary policy can also be referred to as control of the money supply in the economy with the intention of attaining the macroeconomic goals, which include reduction and control of inflation, consistent growth, and liquidity. Notably, monetary policy implies the steps taken by the federal government in collaboration with the central bank with the aim of not only reducing the interest but also ensuring that unemployment is minimized during and after a recession.
Use of Demand-Side Policies during the Great Recession
During the great recession, the monetary policy was applied by the federal government to stabilize the economy. The measure included a reduction of short-term interest rates from 4.25% to almost 2.0% in the period between December 2007 and December 2008 to ease the economy and facilitate its recovery (Kuttner, 2018). The reduction of the interest rate led to increased liquidity as most consumers could afford to borrow. Consequently, businesses were able to run and expand, therefore creating employment opportunities. Boushey et al. (2019) note that to ensure a balance of the economic system, the federal government set to maintain a constant inflation rate of 2%. The aim was to curb the downward spiral of the economy.
The monetary policy did not yield much of the expected results as the crisis continued to rise. The continued increase of the recession prompted the government to further take another measure that was referred to as quantitative easing (Gertler & Gilchrist, 2018). The action involved the creation of bank reserves for the purchase of large-scale assets, such as treasury bonds and security, with the aim of increasing finance in the economy.
In addition, quantitative easing is also aimed at reducing the long-term interest rates for huge investors (Gertlerm & Gilchrist, 2018). However, these monetary policies did not solve the recession as by 2009, banks were not able to lend even with the reduced rates, and unemployment had risen up to 10%, the highest it had ever been (Kuttner, 2018). All the demand-side policies had to be applied to save sharply growing recession.
To reduce the severity of the recession, the fiscal policy was applied. Through the American Recovery and Reinvestment Act 2009 (ARRA), the government authorized spending in such areas as infrastructure and education, which led to the expansion of the economy. Alongside the authorized spending, the ARRA also suggested the making of the tax cuts that would encourage the consumers to spend (Sumner, 2017). The increase in government spending is believed to have stimulated the recovery of the economy by the year 2011 as there was a registered growth of the GDP by 2.3% by the end of 2009 (Kuttner, 2018). There was a notable change after the application of the tax exemption, although at a slow rate.
However, it is notable that not all the aspects of the fiscal policy were effective in growing the economy. Sumner (2017) elaborates that the fiscal policy stimulus that focused on the tax cuts for the business was less effective. Reduction of the tax to lower-income households was more efficient in the elimination of the recession. In addition, the government spending was a more effective stimulus than the deduction of the tax. During a recession, Kuttner (2018) argues that the fiscal policy is highly efficient as the increased government spending leads to a boost of the capital in the economy. As a result, industrial performance grew, which opened opportunities for more labor.
References
Boushey, H., Nunn, R., & Shambaugh, J. (Eds.). (2019). Recession ready: Fiscal policies to stabilize the American economy. Brookings.
The United States experienced a recession in 2008, which extended to other European countries. According to Bargain et al. (2017), recession refers to a considerable reduction in economic activity within a particular economy, which lasts for many months. It is normally visible in real gross domestic product (GDP), employment rate, wholesale-retail purchases and sales, manufacturing production, and real income. The 2008 Great Recession emanated from high-risk loans granted to borrowers with negative credit histories due to housing boom in America. As a result, mortgage lenders aiming at capitalizing on the increasing housing prices approved loans while observing less restrictive terms for borrowers. With the continued rise in home prices in Western Europe and North America, other financial institutions bought bulk mortgage-backed securities as investments, hoping to earn profit quickly. Sadly, the decision to acquire huge mortgages led to economic catastrophe, causing the 2008 Great Recession. However, the federal government used fiscal and monetary policies (demand-side strategies) to mitigate the recession, thus lessening unemployment and restoring economic growth.
First, the federal government reacted swiftly to use the monetary policy, which focused on reducing interest rates to improve borrowing and investments. As the employment rate and GDP fell drastically, the Federal Reserve diminished the federal funds rate to about 0-0.25% in December 2008 from 5.25% in September 2007 (Brakman & van Marrewijk, 2019). The federal funds rate denotes the interest rate, which the banks charge to lend and borrow their excess reserves among themselves for overnight loans. As a result, banks increased borrowing among themselves, leading to increased money to lend to the Americans for investments. Indeed, the low federal funds rate meant banks would also lower the interest rates charged to borrowers. Therefore, this monetary policys primary objective was to reduce borrowing costs for businesses and people, thus inspiring direct investment and consumption, increasing aggregate demand. Notwithstanding, reducing interest rates could only reach a specific limit and could not extend further due to the severity of the 2008 Great Recession. Consequently, the federal government had also to consider fiscal policies as practical recession-fighting strategies.
Significantly, the federal government adopted fiscal policies, including government spending and cutting taxes to increase aggregate demand levels. For instance, the federal government reduced income taxes to increase spending. Indeed, it granted $282 billion in tax cuts, increasing employees disposable income (Bianchi & Melosi, 2017). With this rise in salary, Americans were inspired to increase their consumption, thus shifting the aggregate demand curve to the right, necessitating a higher output level. Besides, producers enjoyed tax cuts, which lowered their production costs. In return, businesses and industries increased their production level to meet the escalated demand at considerably lower expenses. The reduction of taxes on goods and services also promoted their affordability, thus prompting consumers to increase their purchases.
Additionally, the federal government utilized a stimulus package to increase its spending. Fortunately, Congress reacted on time and approved the American Recovery and Reinvestment Act (ARRA) in 2009 (Schanzenbach et al., 2016). This Act played an indispensable role in fiscal stimulus by authorizing spending on education, infrastructure, and healthcare. According to Bianchi and Melosi (2017), the $787 billion stimulus package helped stimulate aggregate demand, thus creating jobs in different sectors. President Obama also initiated a homeowner stability initiative, which was allocated $75 billion to assist 9 million people projected to own homes before the onset of the Great Recession (Schanzenbach et al., 2016). As part of the stimulus package, the federal government invested in unemployment insurance (UI) and temporary assistance for needy families (TANF) programs. Although not every American was eligible for UI, it accomplished its mission in cushioning the newly unemployed against substantial earning losses. Correspondingly, TANF assisted in mitigating absolute poverty in families with dependent children. These two programs helped in increasing the available money for consumption, thus raising aggregate demand.
The fiscal stimulus through ARRA contributed significantly to the alleviation of the severity of the 2008 Great Recession. Based on the congressional budget committee (CBO), the fiscal stimulus bill led to a GDP increase from 0.4% to 2.3% by 2011 (Schanzenbach et al., 2016). In the American context, stimulus directed to cash-constrained or low-income households was more effective than business tax cuts. Although the latter encouraged increased production levels, stimulus directed to key sectors such as healthcare, education, and infrastructure created job opportunities, thus lessening unemployment and promoting consumption. The employment rate has nearly returned to its trajectory before the onset of the recession. Nevertheless, despite the monetary and fiscal policies undertaken to alleviate the Great Recession of 2008, the output level has not reversed to its pre-recession trend.
The 2008 Great Recession adversely affected the American economy by reducing real GDP and increasing unemployment. The high-risk loans granted to borrowers without the necessary restrictions led to the recession. Fortunately, the federal government reacted swiftly through Congress and passed critical fiscal policies, including government spending and tax cuts, to alleviate the situation. For example, reducing taxes led to an increase in workers disposable income, encouraging consumption. On its part, government spending stimulated aggregate demand in different sectors such as infrastructure, thus creating employment. Besides, reducing interest rates, as a monetary policy, helped to increase borrowing, promoting higher consumption and investments. Irrefutably, the monetary and fiscal policies combination played an indispensable role in shifting the aggregate demand curve to the right, increasing production and job creation. Although the output level has not reversed to its trajectory before the recession, the policies successfully mitigated extreme economic consequences.
Brakman, S., & van Marrewijk, C. (2019). Heterogeneous country responses to the Great Recession: The role of supply chains. Review of World Economics, 155(4), 677-705. Web.
This paper is looking into the case of the financial crisis, which results in an economic recession and the further sustained and recovery effects with the main references made to the case of the Great Recession of 2008 in America.
Unemployment, income, and other economic inequalities have been cited as the major causes that led to the Great Recession in 2008. According to Lerman, the rising numbers of the unutilized workforce had swelled because of increasing gap by educational attainment among the college graduates and high school graduates (Lerman 2016, 372). Consequently, this was caused by looking at policies that were brought by President George Bush and Barrack Obama that were aimed at fueling growth. Before the recession, America had a surge of home loan lending. Loans were endorsed out to inadequate borrowers with poor records to reimburse them.
Manifesto for Economic Sense
Americas economy has been marked by the effects of the 2008 recession up to the moment, with joblessness and underemployment widely spread in the present economy. These effects of economic recession are expected to persist among the Americans for some period.
The Manifesto expresses that a wrong move was made after the first phase of the crisis, concentrating on government deficiencies and contending that the general population area ought to endeavor to decrease its obligations pair with the private part. Therefore, the financial policy has wound up strengthening and intensifying the purifying impacts of private-segment spending cuts.
Lack of equality in the global economy presented in this manifesto corresponds well to the new economic structures and policies that seek to address these inequalities and stabilize the market system (Cassidy 2016, 1). According to Cassidy, in A Structural Stagnation Policy , Colander contends that the structural issues made by globalization and extensive exchange shortages will in the long run end, either in view of a fall in the U.S. conversion scale or descending movement in the total supply curve (Cassidy 2016, 2).
As indicated by Cassidy, the structural stagnation model and strengths can hold merchandise costs down so that increments in the cash supply prompt to resource cost builds, which can make irregular structural characteristics (Cassidy 2016, 5). Therefore, sluggishness will be experienced in the structural changes for them to retrain workers at a position relative to their perceived standard. Additionally, endeavors by the Legislature to stay away from the agony may well blowback and cause more torment over the long haul.
A Structural Stagnation Policy Dilemma
As per the structural stagnation theory, there are both long-run and short-run causes. The long-run cause brought about by the deficits in trade is linked to globalization, and trade rates. Consequently, the short-run cause is linked to the financial crisis results. The two connect in light of the fact that one of the reasons for the monetary crisis is that of the administration abstaining from managing the issues displayed by globalization. Managing structural stagnation, therefore, takes the potential of drawing attention in the coming years.
Cassidy considers the explanation of this theory not sufficient to warrant an understanding of the failure of standard monetary and fiscal policy to help foster growth of between 67 % as projected by the economists (Cassidy 2016, 7). This has given rise to new systems within the American economy that ensures the prevention of possible economic setbacks. Further, as indicated by this speculation, the structural stagnation issue started in the previous two decades. This has brought down the development drift for the U.S. economy to a lower rate than the earlier anticipated by economists.
Inequality and Unemployment
Lack of employment largely affects the bargaining power of other workers in an economy with the greatest impact felt in the proletariat class (Baker and Bernstein 2014, 6). In examinations of imbalance and low wages, many claims that what we need is a well-educated workforce. Their contention is that well-educated specialists are more productive and their compensation mirrors their efficiency. Other workers are also bound to win increasingly if they can go back to class and add on their education. Even so, while more knowledge is often the reason for higher wages, it is simply a part of the story.
In many employments, the estimation of specialists work depends on the interest in their work. A retail representative in a store or a server in an eatery is significantly more lucrative, which means they are creating much more income when business is strong than when it is weak. This implies, in a solid economy, bosses can bear to pay a specialist to a similar level of instruction and to prepare a higher wage.
Looking at the trend of unemployment in America, one can confirm that for a drawn-out stretch of time, the unemployment rate has been on the high end as opposed to the low of 4% in the year 1969 (Baker and Bernstein 2014, 8). This consequently, shows a long haul issue in the nations unemployment. Federal Reserve has since settled on policy choices to balance out the financial sector, end the recession, and realize economic recuperation. Reverberating these policy choices in their article, Baker and Bernstein state:
It is essential for reducing the income stagnation that has beset the middle class, reducing poverty rates among working-age families, pushing back against economic inequality, and improving the fiscal outlook. Economic anomalies often occur in weak labor markets. Full employment can be a regular feature of the policy landscape, with tremendous benefits for rising living standards, poverty reduction, the federal budget, and equitable economic growth. (Baker and Bernstein 2014, 16)
Government Spending
Hungerford notes a policy on government budget that gives blackout on the public investment and focuses on federal expenditure and ways to raising the revenue to meet them (Hungerford 2016, 279). Hungerford additionally notes that the individual decline in savings and investments is also part of the real problem, and cause to the growing inequality (Hungerford 2016, 279). Given these two views, it is important to note the role of government in encouraging investments by providing a favorable and safe environment. The federal government needs to work with its citizens in taking the right steps towards investing more as compared to expenditure.
This decline in public investment has led to an emerging of deplorable infrastructure that impacts negatively on private-sector productivity and economic growth. In addition, a decline in education spending by the government causes the widening of the disparity gap among children funding. In this regard, therefore, one can conclude that government spending impacts the schools performance. It is essential to have the government regulate its expenditure so as not to affect other sectors of the economy.
Works Cited
Baker, Dean, and Jared Bernstein. Want to Attack Inequality? Reduce Unemployment!. Challenge, vol.57, no.5, 2014, pp. 6-16.
Cassidy, John. The Demand Doctor. ProQuest. 2016, pp.1-8.
Hungerford, Thomas L. Were Not Broke: Americas Real Spending Problem and How to Fix It. Challenge, vol. 59, no.4, 2016, pp. 279-297.
Lerman, Robert I. Reinvigorate Apprenticeships in America to Expand Good Jobs and Reduce Inequality. Challenge, vol. 59, no.5, 2016, pp. 372-389.
Wisman, Jon, and Nicholas Reksten. Rising Job Complexity and the Need for Government Guaranteed Work and Training. The Job Guarantee: Toward True Full Employment, edited by Matthew Forstater and Michael Murray, Palgrave, 2013, pp. 5-38.
When faced with a recession, there is a great anticipation of a general slowdown in economic activity. During the recession period, people cut off on expenditures and shift to spending exclusively on the necessary items. Expenses during these tough times are aligned to basic human needs such as food, shelter, clothing and education.
As a businessperson, I would stick to producing foodstuffs (if recession were to occur). Demand for food would always prevail. However, there would be a difference in the volume of purchases as compared to those made in the good economic times. This is a time when people would never indulge in excesses. This includes excessive feeding. People only purchase enough and this applies for those who would be able to do so. This being the situation, I would trade on foodstuff and just to minimize losses I would trade in small scale. This is so because of the perishability of most food materials. Product movement would be very slow and this would imply that one either stocks fast-moving goods or deals with goods with longer shelf lives. Food is fast moving but with a short shelf life. Therefore, producing in small quantities would make more business sense.
Immediately after the recession, I would shift to selling products that might have been required by people during the recession and treated as excesses or unnecessary. One such commodity is clothing. By the end of the recession most people would need to replace their worn out clothes and this would present a lucrative business opportunity.
What are elastic and inelastic goods and services?
Services and goods could be either inelastic or elastic. The elastic ones include vehicles, electronics and others. The inelastic ones include water, medicine and electricity. When goods and services show elasticity, the demand for them is likely to go down. The price, on the other hand, increases.
Inelastic items have a comparable demand regardless of the price. For instance, when the price of an elastic product (such as a television) hikes, people simply go for television brands. In the case of inelastic goods such as electricity and water (when there is an increase in costs), people are not presented with options except to cut on usage in order to lower the costs.
The best way to render some inelastic goods and services less inelastic is through de-monopolization. Most of the producers of the inelastic items and services operate as monopolies and therefore consumers do not have other options. The elastic goods and services can be made less elastic through efforts to stabilize their prices and costs.
Workers unions today
In the modern day, there are a number of workers or rather trade unions that are purposely instituted to look into the workers affairs. One can accurately postulate that every country has a workers union of some sorts.
Unions bring forward the rule of law. They also show the need for human rights as stipulated by law. Based on this, employers are restrained from exploiting or arbitrarily treating their employees by the legal contract. The union, on behalf of the employees and the employer, agrees upon this binding contract. These unions look into all spheres of employment including hiring and firing, job descriptions, promotions, employee benefits and discipline amongst many other areas of the employees welfare. In addition, employee benefits not only cover retirement packages but also the employee compensation schemes. In case an employee is hurt during work, then he or she has every right to be sufficiently compensated by the employer. Unions also protect their members by entering into contracts with employers to bargain on work hours, health and safety, non-discrimination clauses, contract lengths and even management rights.
In case of unheard plights voiced by the union, the body undertakes industrial actions to influence fast solution to the workers grievances. The actions may include go-slows, demonstrations and even strikes whereby the workers avoid working completely and put down their tools of trade. The unions, together with the employers also agree on unfair labor practices and on the necessary course of action to take in case of a similar occurrence. The workers unions have been proven to promote much efficiency since workers feel secure in their workplaces.
Virtual Strikes
As opposed to conventional striking whereby literary all business comes to a halt, a virtual strike is meant to keep the business going as the negotiations are in progress. Only the players are included in the bargaining table. During a virtual strike, a business stays open while the union keeps working. The only deviation is that neither labor nor the company is paid. The services are either rendered free of charge or are directed to charity organizations. In other cases, the money can be stashed elsewhere to be handed back to the company when the parties arrive at a consensus.
In my opinion, virtual strikes are not practical. This is mainly because the duration that the strike can take is never known or obvious. A company cannot afford to give out its products and services free of charge for a long time. This means that virtual strikes are not factual since most strike occur indefinitely and may take a long time before it ends.
The United States hospitality industry is one of the most vibrant in the world in the service delivery sector of our economy. Due to its unique position in the globe and diverse cultures that allow a variety in the provision of services, coupled with tremendous advancement in technology, booking in hotels, participation in tourism and general travel seems to enjoy a pride revolution. The sector of hospitality, especially the hotel industry, is exposed to great competition that enables innovations in service delivery and alternatives that supplement the mainstream services of boarding, hosting and food.
The industry has however, not thrived on a whirlwind of successes. There have been difficult spatial recessions that can be told through reduction in the number of customers, few arrangements for travels and bookings, large amounts of capital in client retention strategies as well as attempts in innovation to keep the number of clients high even during these bottleneck periods. During these periods, hotel occupancy levels subside so that most hotels are not worth sustaining. Raising room rates do not always work to alleviate this phenomenon.
Recession is associated with a declining overall activity in economics with greatest impact in employment, corporate and private profits and investment. Falling prices is just one of the indicators. Inconsiderable inflation or deflation that is not commensurate with economic planning is a common future of economies in recession. Economic depressions are thus within the reach of many countries and pose the greatest challenges to overall service delivery sectors. Once recession sets in, most service industries suffer with few exceptions of the so called “recession proof” such as medical provision, cosmetic industry entertainments and to a least extent, education (Siegel, 2002).
Global recession is debatable in the context of time. IMF predicts a recurrence period of between eight and ten years with a per capita input of the globe being zero or even negative. Three points or less of the GDP index can perfectly describe a state of recession with the years 1990 to 1993, 1998 and 2001 to 2002 qualifying since the last of such periods in 1985.
Recession is reflected as a negative GDP growth and a reduction or surge in inflation. The expected scenario is that when there is a slow down in economic activities and corporate returns start to waiver, companies scrutinize their travel and hospitality budgets. The immediate reaction to a notice of recession is a softening of group travels and corporate involvement in hospitality. This cycle is repeated each time a recession is threatening in the US (Tully, 2008). Leisure travel does not suffer much because vocations are preferred to good accommodation.
In America, there is a general speculation eminent recession based on parity of purchasing power as predicted on avenues of less spending by consumers, a drop in the stock prices that have affected markets elsewhere and the mortgage issue that has pushed up the credit cost worldwide (Tully, 2008).
The average modern recession is quoted to range for six to eight months and before it is described, it might just be winding up (Siegel, 2002). The effects of recession are felt immediately in loss of jobs by some people in various service sectors since the demand for their services or goods related to their production service reduces. The stock market usually registers poorly during this period (Jenifer, 1994). In the US, the talk of recession in the last quarter of 2008 and its possible encroachment into the year 2009 has most economy sectors reeling in panic. The hospitality and tourism sector is no exclusion. The effects of this recession are already being felt. People feel that their lives have been hijacked by increased cost of living for this period of time.
Currently, the GDP growth is projected to slow down from the current 2.2% while the CPI rises to 2.6%. These values are rising. This portends a growth, retardation or decline in the hospitality industry depending on the strategies of the sector stakeholders. This is in tandem with the fact that hotels adjust quite fast to these changes as opposed to other sectors. The PKF estimates the rise in room rates in response to the rise in economic indices at a three point lead of 5.6% ahead of inflation in the current fiscal year (PKF- HR, 2008).
Rising inflation usually has a potential of increasing operating costs. Different sectors approach recession variedly. Various strategies are used to offset or at least reduce the effects of this state of economy. The service and more specifically, hospitality sector, has devised some rather interesting approaches to this scenario. Studies indicate that the hospitality industry is vulnerable due to the tendency to raise room rates to maintain profitability from operations.
This arises from labor requirements and negligible automation. The industry can only rely on increased employment for its customers that translates to higher purchasing power to be at par with other sectors. The industry, nonetheless, boasts of great foundation in financial management that enables it to enjoy a better position in the anticipated recession than ever before (AH&LA Lodging Survey, 2008). The worry of most stakeholders therefore is in longevity of their operations during this recess.
The status as it is warranties not only innovation to curb eminent and already biting restructure in the industry. Market reports show “recession drills” and specific customer retention strategies can help to carry businesses through turndown once this is predicted (Varian, 1989). More client oriented approaches need to be introduced to complement the existing strategies. The industry needs to target not only the traditional market; new markets should be ventured into while the promising ones maintained.
Research Question
Considering the likelihood of choice for group services by most clients during recession, the study aims to investigate the necessity and relevance of the former strategy in maintaining marginal profits. In carrying out this study, the investigator was guided by the hypothesis that group services can cushion the effects of recession through marginal profit gains as opposed to services offered to individual customers.
Justification of the study
The hotel industry will always experience competition within itself and for opportunity selection by customers during changes associated with fluctuations in economic conditions of states. The state of this competition is even enhanced during bottleneck periods when hotels compete for the few customers available. In old days it was okay for a hotel to have only rooms and a restaurant. Today a hotel has to have a recreation center, an elegant spa, a shopping arcade, etc.
The guests want it, even if they just stay for one night. Hotel managers have to deal with a lot of wishes and expectations of the guests, so they have to have a look of the hospitality industry from two sides: from the industry specific and from the guest specific (NYSE:CHH, 2006). The understanding of specific needs of these customers so that establishments have a competitive edge is paramount.
Knowing the factors that determine choice of specific services that are attractive to clients especially during turndown periods plays a great role in maintaining business. The rationale of hotels introducing client specific services is geared towards achieving this. Relating the time of slump, kinds of services wanted and investment costs to during these periods on one hand to consumption rates, degree of customer retention and profits accruing will inform the decision to intensify group services or diversify into other forms of maintaining profitability during these periods.
Reactions to future circumstances can borrow from this study. The results of correlating these variables is instrumental in making an informed market decision on what kind of services to invest in to avert the effects of recession in future. Furthermore, methods used to remain profitable as championed by this study may be a starting point to making even greater innovations that will work for future circumstances. All stakeholders are informed appropriately to consider perfecting their drills to prepare for future economic difficulties.
Assumptions and study limitations
The luxury that is associated with big hotel spas and pleasure domes is reportedly underutilized (ISPA, 2006). The idea of investment in these services is therefore, on the face value, uneconomical. Hotels may want to supplement the returns from these investments through conventional services that tend to maximize on small scale investment. It is, however, noteworthy that the trends in returns in investment in these suites are on the rise (PKF, 2006). It is assumed here that the increase in returns necessitate the use of these services to accommodate willing clients.
A report by AH&LA (2008) indicates that services associated with technological advances are increasingly finding their way into hotel industry. These services have been preferred by clients on conditions of stability in finances. This study will assume that under financial difficulties, clients will opt for cheaper even traditional services if the technologically advanced services are not tailor made to benefit their constraints.
Finally, this study assumes that the effects of recession affect all subsectors and cross contribution from other industries that are stakeholders to the hotel industry while this may vary according to states. The United States hotel industry is assumed to be affected in the same manner throughout the country. This study will therefore have the same ramifications for the whole hotel industry in the US.
Literature review
Management of businesses in the 21st century has an equal number of successes as challenges. To be in business, management has to have the most important duty to manage change. Strategy and vision are most important while analytical and problem solving skills are a must. Structures should be put in place to motivate while entities should invest in valuable communication and interpersonal skill development. The last and the most important balance in the approaches above is the ethical and spiritual orientation that favors client retention.
Recession has been defined as a decline in overall economics engagement affecting sectors of employment, corporate and private profits and investment. When two or more quarters experience negative growth in gross domestic product (GDP), a country is said to be in recession.
These tallies are confirmed by statistical economic data. When a recession starts in January, for example, the only way of assessing its viability is when the statistics on economic trends are released in July of the same year. Some economists describe it as a decline in the value of goods and services in a country for a consecutive two terms of a three months period (Jenifer, 1994). The indicators are varied but characterized by falling or rising prices below or above projected GDP.
Recession affects the general economy. However, some companies and industries are hit harder due to their sensitivity to changes inflicted into the state economic process. The production of durable goods is most affected due to the fact that people tend to cut back their spending on durables which are assumed to last through the recession period. These industries are followed in this effect by the financial industry such as banks which face lack of demand for financial services at the time since people spend less. The third is the tourism and the hotel industry. The effect in this industry is because of perceived leisure that they provide. The effect is most felt in the middle income serving hotels and lodgings.
Trends and Forces
CCH indicated that the occupancy fell during the years 1997 to 2003. Thereafter, there was a rise in economic growth that boosted the industry and it has seen the trend to date. The graph below indicates the trends.
In the present downturn, most people are of the feeling that the circumstances will be worse because of the credit crunch and the housing crisis. The buck, however, it is advanced, stops with the government’s role in containing or reversing it, thanks to the election year. The political description may, well, not indicate the exact position in the United States scenario since one may want to capitalize on it due to political realignment. A state of recession is analyzed by national bureau of research, where one exists and this is usually in response to the underlying economic facts.
In general, what defines recession is a turn in the negative direction in the growth of the country. Suffice this to say, the nation’s growth is in spurts out of the normal control of government and strategists. The GDP may grow or shrink depending on the status of the economy. During this time, unemployment, inflation and reduced production will miss many advances in the general economic growth. The slow and steady growth of the economy is not assured. The interest rates may have to be lowered, economic incentives issued or tax breaks instituted.
The US economy has experienced growth which altogether has fluctuated on a number of times into the global recession. Prior to 1985, recession in the US had no much effect on the global economy. However, the subsequent ones of 1990 to 1993, 1998 and 2001 to 2002 indicated a scenario where such impacts in the economy have greater effects in all sectors of the world economy (Jenifer, 1994).
Recession primarily arises from control of the supply of money in an economy. The actions of the Federal Board to control money supply, interest rate and inflation contribute to a balance in the money market and control inflation, which when missed the control is lost and the Fed must correct this. The US scenario suffers from relaxed policies in lending that made it quite easy to borrow money as well as keeping interest rates low. The lack of sustainability of these actions caused an apparent inability to sustain the economy. There has thus been a credit market meltdown due to these policies.
Factors that retard short term growth in the economy cause recession. These have been enumerated as rising prices of oil in the international market and regional wars. These however, are known to correct themselves within a very short time and do not account for the trends in full time recessions that have been witnessed in the history of the US.
Prior to the current recession, the 1990 to 1991 global recession had great impacts in the US economy. It was milder that those experienced after the world wars. The measures of labor market stagnated up to the official end of the period. There was great unemployment especially from the service industry and even education was slightly hampered as a result. The effect on the labor market was so enormous it continued slumping long after the official end and after the indicators of economic growth improved. Employment was affected in most occupational and production industry sectors. The effects were badly felt in the hospitality industry.
There was however, a great expectation for rehire for the main service sectors (Gardner, 1994). In the following recessions of 1998 and 2001, the effects were equally the same, only this time the US economy responded slightly stably.
The effects in the US are also as a result of a number of associated service and produce industries such as the air travels that is exposed to terrorism and affect business, the health and disease outbreaks that reduce the number of people ready to ravel, communication and internet that affects the bookings through online reservations that do not take quality of service into consideration, marketing strategies and competition. After September 11th bombing, the rate of bookings decreased to less than 2.5 percent but due to economic stability have increased to around 25 percent. The next threat that awaits and which is forecasted to cost the industry great retardation is there cession
In Missouri, the industry has a considerable number of players who compete and complement to provide services in hotel and resort, tours and travel, food and beverage, conferencing and group hosting, tourism and activity and a whole host of specific programs within the sector. Some of the best hotels and resorts in Missouri are Westin St. Louis, Black River Lodge, Big Cedar Lodge, Hannibal, Table Rock Lake, Branson, and Chateau on the Lake, Branson among other three and four star hotels. These hotels are served by clients from all over Missouri. Chateau on The Lake ranks as the most popular in Branson.
The sector thrives in a considerable variety of supplementary service industries such as labor, marketing, transport and communication. The latter has been instrumental in reformations and development seeing increased marketing through online bookings, conferencing, industry news that enable development of strategies and overall improved technology in service delivery.
The Missouri community of hoteliers thrives in a number of professional chapters that assist in engaging the best to suit clients. The great Missouri chapter is one such kind of association that includes hospitality professionals from hotels, clubs, theme parks and casinos. These professionals chart the destiny of services in the Missouri area and propel networking and education that address current trends in the hospitality industry.
Hotels will provide services depending on their rating and cost of hosting. These vary and are determined by the location, and prestige. In Missouri, which hosts a number of high class hotels, the services determine the class. Hotels struggle to provide services ranging from service marinas, luxurious hosting, attractions and vocational lodging, family fanfares and conventional hosting and meeting spaces. There are provided bed and breakfast services, rendezvous of romantic nature, summer services and even Christmas activities. The degree and quality of these services definitely affect the customer wave and choice of which they will associate with.
Determining fluctuations in market response
Responses to recession vary according to the thought of the policy makers. Measures include deficit spending to necessitate economic growth while tax cuts may also be considered so as to boost capital for business. A hands-off government has also been proposed especially by the liaises-faire economists. The most employed strategies in business are to gauge the ability in spending and to design offers that would maintain the customers. Worker replacement and motivation play major roles during this time.
The role of theoretical models in research has been more of a complement that an alternative. The economic theory is a policy tool that enables the research to be informed through policies and trends. In analyzing the trends and effects in and of recession respectively, one is able to understand the magnitude to which government policy and factors of recession as contributed to by government involvement shape the understanding and strategies in the industry. The strategies must be defended from a policy perspective for them to hold water.
When we want to determine fluctuations in market responses such as choice or withdrawal of services, a regression analysis would be necessary to compare against the known factors contributing to this adjustment in behavior such as taxes, rates of inflation or government policies that cause recession. These aspects of policy changes should find description in the independent variables of comparison such as seasons or location to make them viable.
The equations generated from this regression analysis will enable us to predict effects of strategies introduced to curb any negative effects of such policies or transformations in economy. When the effects are not so paramount to cause any jittery, usually price elasticity are enough to forecast the economic rearrangements. Theory thus forecasts the anticipated outcomes of experimental research. The use of economic theory enables the prediction of variables of study. The relevant parameters are projected in this theory to understand the importance of cycles in relation to adjustments in consumption behavior.
Hotel industry standards are measured in the operating performances. This is measured in the amount of revenue per room availability referred to as RevPAR. This is calculated as the percentage of room occupancy over the average room rate on daily basis that is realized. The measure is a demand function D(q) where the profits realized depends on the number of rooms occupied (q) and the function of rates per room (D) such that profit is:
p =D(q) the price at which q units of rooms are occupied.
Methodology
The study was carried out in a four diamond star hotel in Branson. It is one of the most popular and celebrated hotels in Missouri and the most luxurious in the Branson region. The variety of services makes it stand as one of the most visited hotels in the region.
Branson has a population of about 7,000 people with more others considering it home due to its diversity in natural scenery. It is situate in a mountainous area with Ozark beaches adjacent and showing a spectacular environment that has been referred to as the “Live Entertainment Capital of the World”. The area was first home to Mabe Brothers who built a theater at the Highway 76 and referred to themselves as the “Bald Knobbers”. What was started by these brothers has been a maintained; music and comedy to visitors who visit Branson.
The place has wonderful features such as caves (Marvel Cave, for instance) where Silver Dollar City theme park now stands and still remains a place of highly regarded entertainment. Visitors have been in the area since some 100 years ago due to its beauty and outdoor activities that fascinate. It is the most popular family destination for vacation in the whole of Missouri. These characteristics place “Chateau on the Lake” Resort Spa & Convention Center in a vantage location that describes its status as a preferred destination for a variety of services.
Population of the study
In this study, the researcher considered potential customers in the hotel industry within and out of the study location according to bookings recorded in the clientele system of the hotel. The idea of using this population was due to the fact that in the hotel industry, one is a client if he/she books into a hotel, the potentiality which actually characterizes the industry from other general service sectors like education, health provision or even transport and tour
The study was centered on determining the import of specific services of which the choice population is under no bias to enjoy in the hotel. This qualifies the population choice to be all customers in categories of transient, individual or family and corporations that subscribe to the services of the hotel, churches or delegates of conventions.
Research Design
The study was a cross sectional descriptive design. Descriptive design is helpful in identifying behavior based on perceived determinants of choice. It is most suited in customer behavior to service provision such as the study portends. Cross- sectional studies take into consideration variations in times and characteristics of a study. This is suitable where data is collected over different times from different clients and management. The data obtained is representative of the behavior or reaction causal factor which is recession- which borrows from time.
Samples
Subjects were in categories of individual, family or transient clients; group service clients such as corporations, churches or conventions and; the management of the hotel. Hotel records were used as sampling frame that necessitated the choice of the first two categories of clientele. The first choice for subjects’ i.e. individual, family or transient customers were willing clients, ready to spend, and had more than a singular booking into the hotel. The second choice of clients i.e. members of corporation, association, church or convention was pegged on clients willing to spend and have booked into the hotel more than once.
The researcher used simple random probability sampling where all in the identified population were given equal probability of selection (Moore et al, 2008). The frame was considered as a whole. Of the total sample space, the investigator chose 20 in each category through random selection of names from the sample frame. The probability of choice for any given client was thus (20/N) x 100% = (120/N), where N is the sample space in each category. Three experienced managers were selected for the purpose of this study at their will on first come basis.
Determination of variable relationship
The number of clients booking during specific times was compared statistically through percentages. Again, the response of clients to determinants of their choices during recession was compared. The comparable returns for each groups during this spending season was also noted. The dependent variable in both cases was the marginal profits. Independent variables were time and the number of clients.
Questionnaires were also used to gauge the clients’ approval of the determinants of their choices for a given hotel. The major influence in this choice was cost of service. Other determinants included prestige, quality of services, influence form other customers and location. These were to complement the results of the demand survey. Data obtained from questionnaires and hotel records of profit margins were entered into spreadsheets against the input from each category of services. The input was assumed to correspond to the number (q) of clients booking into rooms.
Data Analysis
Data was analyzed using Ms Office Excel 2007. Tabulation for the margin of profits and corresponding individual and group services was done for a sample of room bookings as shown in the table below.
Table 1: Profit margins per season (Months): the table shows the trend for the six months from February to July for the profits accrued from individual services and from group services. It can be noted that there was high profits from group services but there was even distribution for individual services.
MONTH
PROFIT MARGINS
INDIVIDUAL SERVICES
GROUP SERVICES
NO OF BOOKINGS
PROFIT ($)
NO OF BOOKINGS
NO OF ROOMS
PROFIT ($)
FEB
123
17097
20
32
88960
MAR
150
21000
24
21
70560
APR
270
39150
38
50
275500
MAY
254
36068
30
27
115020
JUN
262
37466
32
26
118976
JUL
260
36920
31
30
132060
The results of the survey to determine the attribute of choice based on cost of services was also done and tabulated as below. The responses were to the opinions concerning the cost for the services.
Table 2: Scale of Agreement for Cost of Service per client type.
COST OF SERVICE VS TYPE OF CLIENT
IS THE COST OF SERVICE FAIR?
TYPE OF CLIENT ANSWERED
GROUP
INDIVIDUAL
Those who replied to the questionaire
Those who replied to the questionaire
Strongly Agree
1
7
Agree
3
8
Neutral
5
3
Disagree
8
1
Strongly Disagree
3
1
TOTAL
20
20
The following table presents the findings of choice for each client category based on other demand factors.
Table 3: Scale of Agreement for Other Determinants of Choice per client type: The choice of most clients were: for prestige, the quality of service offered, influence from other people and the hotel’s location.
DETERMINANT OF CHOICE PER CLIENT TYPE
PRESTIGE
QUALITY
INFLUENCE
LOCATION
GROUP
INDIV
GROUP
INDIV
GROUP
INDIV
GROUP
INDIV
Those who replied
Those who replied
Those who replied
Those who replied
Those who replied
Those who replied
Those who replied
Those who replied
Strongly Agree
1
3
10
6
8
4
4
3
Agree
2
4
4
6
5
4
5
6
Neutral
8
8
3
4
3
8
7
8
Disagree
5
3
2
3
2
3
2
3
Strongly Disagree
4
2
1
1
2
1
2
1
Results and analysis
Table 1 shows a great parity between individual services and group services. The data indicates that at any given season, the number of bookings for group services is lower than those of individual services but the margin of profit arising from room bookings is much higher. This is an indication of the strength of group services in containing clients even in current economic slow down. The results were presented in the graph below.
Using coefficient of multiple correlations, the relationship between the cost of service and the type of clientele was analyzed as follows: this was done so as to compare the factors that most contributed to the trends in profits for groups and individual services, and one uniting factor that contributed to both the group and the individuals choice of the hotel.
COST OF SERVICE VS TYPE OF SERVICE
COST OF SERVICE
TYPE OF CLIENT
GROUP
INDIVIDUAL
frequency
Y1
frequency
Y2
Strongly Agree
1
5
7
35
Agree
3
12
8
32
Neutral
5
15
3
9
Disagree
8
16
1
2
Strongly Disagree
3
3
1
1
20
51
20
79
∑X=3
∑Y1= 10.2
∑ Y2 = 15.8
Rx.y1y2 =
The data for the analysis was entered into the Ms Excel software. Correlation analysis was then done for the two entries with reference to the cost of services. There was a positive correlation for each case of services choice (choice for group services r = 0.69 and choice for individual services r = 0.82). The choice for group services scores lower than that of individual services on a cost evaluation basis.
From the results it can be found that the cost of the services determines the choice of hotel is less in group services than is the case for individual products. This is partly due to shared cost of group services. Group services are favored against a backdrop of increased costs of services.
Other determinants of choice according to the scale of agreement reported were also analyzed for correlation for different types of clients.
PRESTIGE
QUALITY
INFLUENCE
LOCATION
GROUP
INDIV
GROUP
INDIV
GROUP
INDIV
GROUP
INDIV
Y1
Y2
Y1
Y2
Y1
Y2
Y1
Y2
Strongly Agree
5
15
50
30
40
20
20
15
Agree
8
16
16
24
20
16
20
24
Neutral
24
24
9
12
9
24
21
24
Disagree
10
6
4
6
4
6
4
6
Strongly Disagree (1)
4
2
1
1
2
1
2
1
51
63
80
73
75
67
67
70
5
5
5
5
5
5
5
5
TOTAL
10.2
12.6
16
14.6
15
13.4
13.4
14
TOTAL FOR GROUP
54.6
TOTAL FOR INDIVIDUAL
54.6
X1= 3
MEAN (Y1) = 13.65
MEAN (Y2) = 13.65
The correlation analysis between other determinants of choice and cost of services was similar for both individuals and groups at (r = 0.98). This indicates that the overall quality of service that determines all the other factors as compared to cost is viewed similarly to affect choice.
Discussions
The study indicates that group sales have a greater potential for returns throughout the seasons. Individual choice confirms that based on the cost of services, group services are cheaper but cumulatively profitable, hence the apparent choice by customers. There seems to be the likelihood of clients choosing group services based on the notion of combined spending or what is called mutual spending for mutual enjoyment according to AH&LA Lodging Survey (2008).
Determinants such as prestige, prior knowledge of the services through influence and quality of services and the location are chosen on an equal footing between each group of clients. Most clients choosing group services recorded agreement that their quality is better as compared to individual services. On the other hand, individual clients who know about group services prefer them to individual services under reduced spending seasons.
Limitations of the study
The study was limited by the assumptions that the hotel industry is profit maximization and a cost minimization entity. This implies that for the smallest possible capital investment, the hotel should get the maximum possible revenue.
The diversity of group and individual services was also limited to the studied setting. The implication is that where individual services could be better and lower in cost, the scenario could drastically change. This scenario is most unlikely but probable. The study thus assumed that on average, the cost of providing group services as in the case of the studied hotel is lower than that of providing individual services. This in itself is a limiting factor to this study.
Suggestions for future research
This study implies that at a given time in the hotel industry, group services will provide greater returns and that that recession changes the spending pattern of most clients seeking services to hospitality industry. The degree to which economic imbalances may affect the specific variations in services for each region in the US can be investigated to narrow down the effects for the stakeholders to fully understand the dynamics of the industry. A further study may shed light into which of the groups targeted in service delivery may be of greater yield. Knowledge of this will further enhance the hotels’ strategies to invest in the most viable groups during recession or even under normal economic circumstances.
The idea of transforming individual utility into the potential group services also lingered on the mind of the investigator during this study. A study should be done to find means of transforming individual consumption during normal economic times to group consumption at the onset of recession. This will help in utilizing the cycle of consumption by clients for greater benefits by the hotels.
Conclusion
Knowledge of the most cost minimizing services and what determines choice of clients during recession and the best returns as per the service category for an investment in this hotel informs the use and improvement in service delivery. The findings of this report help the hotel management to develop grater strategies for competition and customer retention during economic recessions in future.
