Construction Industry, Essay, Research Paper
?What Is this Affect, And How could a small Firm Survive During These Periods?A recession is a decline in overall business
activity.? During a nationwide
recession, a country suffers a drop in buying, selling, and production, and a
rise in unemployment.? A recession may
also hit an industry or a region.?
Historically, nationwide recessions have also brought an end to severe
inflation or even a fall in prices.? A
recession hurts countless people, especially the workers who lose jobs.? Most recessions occur
because the total amount of spending in the economy drops.? For example, if sales rise more slowly than
usual, businesses may reduce their orders for new goods.? The manufacturers that supply the goods cut
back on production.? They need fewer
workers, and so layoffs and unemployment increase.? Workers have less money to spend, which further decreases the
demand for goods.? As this pattern
spreads, a recession begins. Below is a diagram showing the business cycle:
(for business cycle dates see appendix 1) The collapse of some companies during a time of
recession is part of the customary business cycle, and some people reason that
this is the way capitalism works. By allowing some companies to falter, because
they are unable to compete in the world market, we ensure only the best
organisations survive. This survival of the fittest model of business
operations is what ensures that there are gaps in the market for new firms to
set themselves up when the upturn occurs. They are able to expand using the
unemployed resources that are then available. The problem with this theory of market forces is that
occasionally the downturn in the cycle is so severe that profitable and
efficient businesses become insolvent. This results in the economy not having
the capacity to thrive once it takes an upturn during a recovery.What I will now look at is how this business cycle
affects the construction industry in particular, and it?s workers. I will then
examine why this happens and how I feel businesses within the industry could
manage to survive during this time. The building industry is particularly renowned for
struggling during times of recession due to the fact that construction is
generally regarded as a luxury item. As recession takes a firm grip of the
economy we then see a fall in income in the economy as mentioned above. With
disposable income decreasing we see the demand for luxury items decreasing and
thus a fall in earnings in the construction sector. Price Basically,
this is why the construction industry is affected so badly by recession. What
I will now examine is what exactly is the effect of the recession on the firms
within the industry. To do this I questioned to people who work in the construction
business. The first has been in the industry for 45 years, and was affected
very badly by the recession, which peaked 5/90 when he worked for the
organisation Bovis. The second has been in the industry for 27 years and was
self employed during this same spell, and was also very badly hit. To begin with I will
examine worker 1 who was employed by Bovis at this time. When I asked him about
how the company responded to decreased demand during the recession he commented
on the redundancies made in great detail. This was the most major cut-back made
by the firm, and he was one of those that was made unemployed, which also
coincided with the closure of many of the companies sites. These two diagrams
above show the problems of unemployment such as that described by the Bovis
workers in the recession of 1992. As can be seen as the trough hits an all time
low, unemployment reaches a high of 3 million. Then as we head out of the
recession unemployment begins to decrease. This is exactly what happened in the
construction industry, which we can now see experiences what is known as
cyclical unemployment, which is directly associated to the period of time
relating to the trade cycle. This can be seen in appendix 5. Here we have the
accounts for 2 construction companies, Barratt Developments and Alfred
McAlpine. If we look at the periods dating back to 1992 then we can see that at
this stage both firms were experiencing times of negative growth of sales. For
Barratt we see ?19.6% in 1991, leading up to the depression, then ?5.9% in
1992, -7.5% in 1993, until we move back in to positive figures in 1994. This
links with the number of employees, where we see the trend of cyclical
unemployment taking place. In 1991 they have 3,000 employees reduced to 2,400
in 1992 and then 2,200 in 1993, until in 1994 the figures begin to rise again.
Much the same happens in the figures for Alfred McAlpine. So, those employed by
larger firms became unemployed, but what about those self-employed in this
industry? According
to the second person I interviewed they suffered an even worse fate. Being
self-employed they do not have the advantages of the financial economies of
scale such as being able to borrow huge amounts of money from the bank, as they
are seen as a liability (although loans for larger firms were made less
available as interest rates were increased to curb inflation in 1989). As we
can see from appendix3the
problems during the recession forced the owner to close down the business and
move to Germany, which at this period was experiencing a boom as seen in
appendix 1.This meant that he had to cut back
in terms of making people redundant. This leads to the question, so how can a
small firm survive during a recession? In my opinion there are a number of ways
that could combine to help a firm to survive this period without taking drastic
measures like those seen by the self employed construction worker I
interviewed.The
first of these ways is to think like a big firm. Large corporations have a good
understanding of what position we are within the trade cycle, which enables
them to hone their activities to the period they lie in. There are a number of
ways to detect a slump in the offing and once a recession sets in, it tends to gather its own
momentum. Consump?tion demand falls off first, and then investments that looked
profitable on the expectation of continually climbing sales and prices suddenly
become unprofitable. High interest pay?ments, which seemed easily tolerable
when sales and prices were rising steadily, now become a burden, and business
failures, which were infrequent in the boom period, now become more common.
These are all signs of an upcoming slump period, which should enable a small
business to prepare as best as they can. This preparation can also come in a
number of forms.Firstly, management
should be concerned with plans to con?vert fixed to variable costs, probably by
transferring previously full-time staff either to part-time or on sub?contract.
Managers should also start to shorten purchase contracts, pay off debt,
inventories, tighten working capital and review forthcoming budgets. This would
also be the opportunity to review the pattern of sales and distribution in
preparation for differentiating products and seeking niches. As the construction industry provides capital goods in
many cases then they are likely to be hit badly. This may make firms postpone
expansion plans, as they do not need to increase capacity with a falling
demand. However, if the finance is available (and this finance would have to
come from somewhere other than banks for a small firm like this) then the firm
may react to the recession by investing in labour-saving equipment, because in
the construction industry especially labour is the major business cost. The reason
why this is an unusual reaction though is because expected profits are making the decision to invest more unlikely. Another method of raising finances enough to stay in
business could be destocking inputs As firms cease to trade, as is the case
here, then the stocks of inputs will build up. This will cost more money as the
stocks firstly have to be paid for, and secondly they have to be stored
somewhere, which also costs more money. So to cut borrowing needs the company
can run these stocks down. One way that could help a small firm stay in business
during a depression via the use of pricing policies. With poor trading
conditions firms may be able to develop better marketing strategies in order to
boost sales to their maximum during this time These pricing policies could
include bargaining towards a lower price for the customer to ensure the sale
and striking a deal that best suits the current market prospects. Basically any
offer that can keep the business making a normal profit for the time being, until
they can proceed in to the recovery to make a super normal profit. In a more radical approach the small firm could
diversify during the depression. By substituting to a different product they
could avoid the cutbacks of a recession. Obviously the product would have to be
related to the construction industry, because otherwise it would become too
much of an upheaval for the firm. The product could take the form of either a
niche market or by finding another product for which demand is not reduced
during the recession. Looking at Appendix 6 I have come up with an idea of what
this product change could be. First, if we look at the company sales chart for
the Aggregate Industries, which is a supplier of raw materials to construction
companies. From the sales figures we can see that their sales are not affected
as badly as the construction companies themselves. There is a drop in sales
growth, but it does not turn negative until 1993, which was nothing to do with
the recession therefore, and must have been company based problems. This
suggests that there is a sector of the industry that still needs a steady
supply of materials during the depression (note: I am not suggesting that a
small company should enter this industry themselves, as this is too much of an
up heave for the firm). Then looking at the Birse group sales analysis we can
see that there is an unusually small drop in sales over the recession. Birse
are a company that construct retirement homes. What makes them a niche is the
fact that despite the recession demand for private elderly homes stays fairly
neutral as they are almost a necessity. It must be noted however that it is
important that the firm would specialise in private construction because ,
obviously, public retirement construction is going to take a downturn, like the
conomy in the depression as government spending is decreased. Looking at the
sales figures we can see that leading up to and during the depression the sales
growth remains positive, and only in 1993 does it turn negative. Overall,
however sales figures have remained fairly steady throughout the years echoing
the fact that they are not affected cyclically. This is also shown in the
fairly stable rates of employment around the 1,500 mark. Another possibility is to stay in residential
construction, but not by new builds i.e. to undertake renovation,
refurbishment, and extension work. If people want to move but? do not?
have the money, then the next best option is to make the best of what
you have. This is why we can see the survival, and increased sales growth even
through the depression of companies such as Anglian Group PLC. Although this is
a relatively large company, the theory of building extensions as
diversification off of the construction path could also work for a small firm.
The sales analysis for Anglian can be seen in appendix 6. We can see from this
that employment levels in this company actually rise during the depression from
60,026 in 1991 to 71,216 by 1993. This is a complete comparison to those
construction firms who base sales only in completely new builds. This new area
could also include the idea of painting and decorating, which tends to go hand
in hand with the idea of extension work, and could prove to be just as
profitable during times of recession for the same reasons as extension work are
advantageous for the consumer. In conclusion, the construction industry is always going
to be very badly hit during a recession, due to the nature of the market it
operates within. This will mean there will be no end to the cyclical
unemployment problems we can see currently. Large organisations though do not
suffer as much as the smaller firms as can be seen from the two examples which
I have included, due to the fact that larger firms have the ability to spread
risks and have financial assets beyond that of any small firm. There are
however ways that smaller firms can avoid going bankrupt. These include
replacing fixed with variable costs (in terms of employment), investing in
labour saving equipment, destocking, adopting pricing policies, and
diversifying sales, all of which could have helped the self employed
constructor or any other firm stay afloat.
HOW LONG HAVE YOU WORKED IN THE BUILDING INDUSTRY? WHAT
IS YOUR CURRENT JOB TITLE?WERE
ANY OF THE COMPANIES YOU WORKED FOR AFFECTED BY RECESSION?WHEN
WAS IT THAT THE COMPANY WAS AFFECTED BY RECESSION?HOW
DID THEY RESPOND TO THE RECESSION IN TERMS OF COMPANY DECISIONS? I.E. DID YOU
MAKE ANY EMPLOYEES REDUNDANT?HOW
WAS THE COMPANY AFFECTED BY BOOM PERIODS AND WHEN WERE THESE BOOM PERIODS?Nb.
I wonder if it could be possible if you could help me by attaining some
accounts of your current company for both a boom and slump period. Your help
would be greatly appreciated Source Number Source
1 The
Sun Newspaper 19/10/00 2 Nuffield
Economics And Business- Longman 3 Through
The Whirlwind- William Houston 4 Positive
Economics Edition 4- Richard G. Lipsey 5 Phillip
Jones- for interview 1 6 Mr
Brown- for interview 2 7 Advanced
Economics- Oxford Revision Guides