Chapter 18 Business Cycles and the

entrepreneur

Learning Outcomes

On completion of this chapter you should be able to: • Describe what business cycles are as well as the four distinguishable

business cycle phases.• Provide a historical perspective on business cycles in South Africa.• Provide a sectoral perspective on business cycles in South Africa using

sectoral financial data.• Indicate the relevance of business cycles to entrepreneurs and

prospective entrepreneurs.

• Describe how entrepreneurs can ensure profitability during the different

phases of the business cycles by making use of their knowledge of

business cycles.• Show how entrepreneurs can incorporate business cycle forecasts in

their business plans.• Describe how entrepreneurs can make use of sectoral business cycles

to optimize their business success in the sector they are operating in.• Identify business opportunities using business cycle information.

Topics • Introduction• The nature of business cycles.• The business cycle in South Africa.• The relevance of business cycles to the entrepreneur.• Ensuring profitability during the different phases of the

business cycle.• Incorporating business cycle forecasts into business plans.• Concluding remarks.• Experiential exercise and case study.

Introduction

• No economy in the world is static.

• To ensure business success entrepreneurs should scan

economic trends continuously and should respond to changes in

the economy.

• Entrepreneurs should use their knowledge regarding economic

trends in their business plans, in identifying business

opportunities, in identifying markets and products for their

services, in conducting market planning, in deciding upon

expanding their business, in making decisions about new outlets

and in calculating business risks.

Phases of business cycles

• Contraction: this occurs when an economy is experiencing negative

real growth in its gross domestic product (GDP).

• Recovery: This occurs when an economy starts to show positive real

GDP growth again after a recession.

• Peak: This is the ‘happy days’ part of the business cycle during which

fairly high real GDP growth rates, sustained positive employment

growth rates and fairly high levels of consumer and business

confidence are experienced.

• Slump: This phase of the business cycle follows the boom phase when

real GDP and employment growth rates start to decline.

The business cycle

Se-ries1

Contraction

SlumpRecovery

Peak

Average GDP growth rates in South Africa

• 5.8% during 1961 to 1969.

• 3.3% during 1970 to 1979.

• 2.2% during 1980 to 1989.

• 1.5% during 1990 to 1999.

• 3.7% during 2000 to 2009.

• It is evident from the growth rates above that there are also

longer term business cycles present in the economy.

GDP growth rates in South Africa

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

-4

-2

0

2

4

6

8

10

Mining Sector business cycle

Mining & quarrying

-30,0

-20,0

-10,0

0,0

10,0

20,0

30,0

40,0

Quarter

% chan

ge

Turnover Inventory

Manufacturing sector business cycle

Manufacturing

-20,0

-15,0

-10,0

-5,0

0,0

5,0

10,0

15,0

20,0

25,0

Quarter

% chan

ge

Turnover Inventory

Utilities sector business cycle

Electricity, gas and water supply

-30,0

-20,0

-10,0

0,0

10,0

20,0

30,0

40,0

50,0

60,0

Quarter

% chan

ge

Turnover Inventory

Construction sector business cycle

Construction

-15,0

-10,0

-5,0

0,0

5,0

10,0

15,0

20,0

25,0

30,0

Quarter

% ch

ange

Turnover Inventory

Trade sector business cycle

Trade

-15,0

-10,0

-5,0

0,0

5,0

10,0

15,0

20,0

Quarter

% chan

ge

Turnover Inventory

Transport, storage and communication business cycle

Transport, storage and communication

-20,0

-15,0

-10,0

-5,0

0,0

5,0

10,0

15,0

20,0

25,0

30,0

Quarter

% ch

ange

Turnover Inventory

Real estate and business services business cycle

Real estate and other business services

-40,0

-30,0

-20,0

-10,0

0,0

10,0

20,0

30,0

40,0

50,0

Quarter

% ch

ange

Turnover Inventory

Community and personal services business cycle

Community, social and personal services

-20,0

-15,0

-10,0

-5,0

0,0

5,0

10,0

15,0

20,0

25,0

30,0

Quarter

% ch

ange

Turnover Inventory

Relevance of business cycles to the entrepreneur

• An in-depth knowledge of business cycles is important to

entrepreneurs. Failing to base business decisions on business cycles

often have disastrous consequences for entrepreneurs.

• The quantity of goods and services demanded differ during different

states of the business cycle.

• The nature of goods and services demanded differ during different

phases of the business cycle.

• The quality of goods and services demanded differ during different

phases of the business cycle.

• There are always business opportunities but they differ during different

phases of the business cycle.

Yearly percentage change in turnover per sector

Comparison of turnover for 4th quarters of 2008 and 2009

Quarterly value added by sector (R mil)

Time series for turnover (R mil) of different size trade

enterprisesTrade

0

100 000

200 000

300 000

400 000

500 000

600 000

Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09

Large Medium Small Total

Time series for turnover (R mil) of different size real estate and business

services enterprises

Real estate and other business services

0

20 000

40 000

60 000

80 000

100 000

120 000

140 000

160 000

Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09

Large Medium Small Total

Time series for turnover (R mil) of different size community, social

and personal services enterprises

Community, social and personal services

0

5 000

10 000

15 000

20 000

25 000

30 000

35 000

Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09

Large Medium Small Total

Reasons to incorporate business cycle forecasts in business

plans (1)• To anticipate changes in demand and supply of goods

and services. This is required to ensure that the

entrepreneur is not caught unprepared for changes in the

business cycle.

• To realign capital overheads in such a way that scarcer

capital resources could be used in such a way that the

business survives while creditors are paid. During times

of economic contraction entrepreneurs need to decide

whether they cut back on capital spending or increase it to

gain first mover advantage during the upturn that will follow.

Reasons to incorporate business cycle forecasts in business plans

(2)• To make important inventory decisions. Entrepreneurs

can make use of business cycle forecasts to decide whether

they should add to inventory or cut back on it.

• To decide on the welfare of human resources in the face

of a looming contraction. Because skilled human

resources is the biggest asset of a business it will not be

wise for entrepreneurs to shed a large number of workers to

cut costs during a recession. Having a substantial pool of

skilled human resources will be vital to ensure business

success during the following upswing in economic activity.

Concluding remarks

• Chapter provided some basic insights into business cycles

and the impact of business cycles on entrepreneurs.

• Entrepreneurs should know that substantial research has to

be undertaken to fully exploit business opportunities arising

from the different phases in a business cycle.

• Entrepreneurs should undertake cross-sectoral and

international analysis when using business cycles for

research purposes.