When the economic recession occurred in 2008, many business failed. In spite of this, however, many people saw an opportunity to start a business.
Many people decide on business ideas without careful research into whether there is sufficient demand for the product they plan to market. Dominic Salvatore, author of Managerial Economics in a Global Economy that “the quantity demanded for a commodity is a function of, or depends on the price of the commodity, the consumer’s income, the price of the related commodities,( i.e. the substitutes and complements for the commodity), and the tastes of the consumer.”
Limitation in Cash Flows
The consumer’s income in 2008 has been a major influence in the sale of products and services during his economic recession. Millions of people were laid off from jobs due to the financial difficulties of the automobile industry and other major employers. As a result, consumers were spending less money and became increasingly pessimistic about the economic recovery plan of the United States. Therefore, demand for many products and services declined.
Crisis in Supply Chain Management
As the automobile industry bailout resulted in a reduction in the production of automobiles, their suppliers went out of business because the automobile companies were their largest customer. When consumer income decreases, the businesses must find other uses for the product or increase promotional efforts. Since the products were unique to the automobile industry, the suppliers did not find an alternate market and many were forced out of business.
To avoid this in the future, the business owner must undertake a strategy which will work for him in times of economic decline. One strategy to employ is that of diversification in business. One can either undertake a related business strategy or an unrelated business strategy. Diversifying through related businesses helps the business owner to leverage the power of cross-business relationships which will help them to perform better under one umbrella.
For example, the CIT Bank is involved in factoring loans, leases, vendor finance programs and import and export financing, among other businesses. Its clients include those in the transportation, aerospace and rail, manufacturing, wholesaling, retailing, health care and other industries. All of theses clients could utilize more than one of the company’s products.
Recently, when CIT Bank was in danger of filing for bankruptcy, it was able to secure additional financing for its business because it could use the assets of the other businesses as collateral against the loan. The failure of this bank would have put may of its customers at risk, since they are dependent upon CIT Bank for factoring loans.
In conclusion, while there are opportune times to diversify and for some businesses, it may not be a good idea to diversify. Proper and thorough research into the market, after the core business services are established and profitable, will ensure success in diversifying a business.