Managing firms throughout the business cycle
A Davis Service Group case study

Page 3: Recession

The way to survive and prosper in a recession is to reduce costs, such as cutting out any waste activity and to out-perform competitors. In a recession:

  • demand for company products and services falls
  • jobs are lost in the economy
  • many businesses cut down on their investment in new plant and equipment
  • businesses close down.

In Davis' mature markets there has been some decline in demand. The Group has responded by cutting back on products and services that are not performing so well.

One of Davis' services is to supply and clean workers' overalls for industrial companies. As jobs are lost in the wider economy during a recession, manufacturing companies require fewer work clothes.

Davis therefore has to discuss with customers where layoffs will occur and how this will impact on its sales. For example, it will seek alternative wearers such as canteen workers. However, recession may also encourage some companies, who at present manage their textile needs within the business, to consider outsourcing their requirements. This will generate additional custom for Davis.

At the same time Davis can look to make cost savings. The Group currently sources some of its textiles products from the Far East and China. As demand falls, the Group could increase the proportions of goods supplied from such cheaper sources.

Falling investment by companies in a recession has a limited impact on Davis Service Group's sales. The company typically supplies on three-year contracts.

Textiles such as bed linen (for a hotel or hospital) are bought for customers continuously throughout the year. The customer uses as many of these textiles as it needs to run its operations during the contract period. The textiles are used for up to three years before the products complete their useful lives. This sequence needs precise timing. For example, it is important that the purchase of linens for hotels is completed before the run-up to the peak summer season.

The recession has forced some companies to close down certain operations altogether. However, this is not the approach Davis has taken. It continually re-allocates production between its plants to make best use of resources. It also puts aside or 'moth-balls' other plants or production lines when demand is less. In this way the company is best placed to increase supply when recovery occurs.

Managing a business through a recession requires careful planning. One key advantage for Davis is that it empowers managers in local operations to make decisions for themselves. Local managers are best placed to understand local market conditions and can decide on staffing levels, textile purchases, distribution requirements and important ongoing contact with the customer.

At a central level financial experts at the company consider how best to deal with changes in interest rates and exchange rates. The exchange rate is the rate at which one country's currency can be exchanged for other currencies. For example, Davis operates both in the UK where the currency is the pound sterling, as well as in other parts of the European Union where the Euro is used. In 2008 and 2009 the value of the pound fell against the Euro. As a consequence, Davis's business on the Continent became more valuable to it.

Another important factor for Davis Service Group during the recession has been to maintain a strong financial position. This includes borrowing money from banks to finance some of its activities. Davis has maintained good relations with its bankers over many years and as a result the banks have been willing to commit to Davis by continuing to lend money to the company.

Davis also needs to keep its shareholders happy. It pays out a dividend of around half of its earnings each year, giving the shareholders a secure income - very important in difficult economic times.

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Davis Service Group | Managing firms throughout the business cycle

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