The Business Cycle: Case Study of the Davis Service Group PLC
Case Study Subject: The Davis Service Group PLC
The Davis Service Group is a London-based organization specializing in the service industry since 1900. The organization operates primarily in textile maintenance, tool hire, and building systems.
- Sunlight Services Group, the largest subsidiary of the Davis Group, handles textile maintenance and is generally responsible for roughly half the organization’s revenues.
- The tool hire branch, unveiled in 2018, experienced rapid and immediate growth to become Davis’ second-largest financial contributor.
- Third and final on the list of subsidiaries is Davis’ prefabricated temporary building sales and rentals, primarily marketed for use in the construction industry.
Business Cycles and GDP
Economies across the globe experience phases of fluctuation, seesawing (sometimes drastically) through varying degrees of shrinkage and growth, each period being a different, undefined, and unpredictable length of time. This cyclical process is known as the business cycle, a universally applied economic concept.
To be clear before we move on: Organizations do not experience the business cycle; economies experience business cycles. Companies are affected by the business cycle of the surrounding economy. Signature terms for the business cycle include booms and busts, economic growth, recession, depression, and Gross Domestic Product (GDP). An economy’s business cycle is often reflected in areas of trade, production, and overall economic activity, commonly measured by Gross Domestic Product over a specific time frame.
What Is Gross Domestic Product?
Gross domestic product, also measured over a particular period, is the value, in currency, of all completed services and goods produced within a country. Traditionally calculated annually, GDP can also be determined monthly or quarterly. Geographically, GDP applies to sub-territories like states, cities, counties, municipalities, etc. Financially, GDP considers such entities as public and private consumption, investments, private inventories, and variance between imports and exports. The flexibility of GDP makes it an essential gauge for the standard of living and economic health across a litany of demographics.
Organizations do not experience the business cycle; economies experience business cycles.
The Four Phases
The four specific phases of a business cycle include (1) expansion, (2) peak, (3) contraction, and (4) trough.
- Expansion: An economy is experiencing expansion when employment increases, unemployment decreases, and there are noticeable increases in prices across most markets.
- Peak: Eventually, expansion peaks and production reaches maximum allowable output, at which point inflation becomes apparent (often termed as a “bubble”).
- Contraction: Pressures of inflation render peaks unsustainable, as rampantly high prices ravage incomes the market enters a period of correction known as contraction.
- Trough: Growth begins to slow down, employment decreases, and price increases become dormant. This period is known as a trough. Eventually, the downward slide of a trough reaches its bottom and awaits the next round of the cycle.
Housing Prices as an Indicator
Housing prices tend to be the go-to indicator for economic expansion or contraction in developed nations. As more people become gainfully employed, more houses are purchased. Increases in housing purchases drive up the general costs of housing, thus stimulating economic growth. When the opposite occurs, the economy is in contraction. The housing market historically follows very closely with an economy’s business cycle.
Prepare for Recession
Recession is the time spent between a peak and a trough. Understanding expansion, and especially recession, is essential to an organization’s success. First, leadership must identify organizational strengths and weaknesses in regards to expansion and recession, then purposefully prepare for each phase of a business cycle.
Shifting status in the economy demands diversification as a dedicated strategy for modern economies across the globe. The Davis Service Group has survived since 1900 partly because it has diversified its operations in a way that helps it maximize expansion and mitigate recession.
How the Davis Group Has Survived
Over 30% of the Davis Group's operations are within the service industry. Certain areas of service, such as healthcare, are historically resistant to recessions. People are always sick, hurt, and in need of some form of care. Organizations/industries who are recession-proof experience mild fluctuations in the business cycle by providing critical repair and maintenance services, selling essential products, or providing products or services mandated by government compliance and regulation (Dumont, 2019).
The Davis Group’s most substantial division, textile maintenance, provides uniform and laundry services to hospitals and healthcare clinics around the world. In most developed countries, the government identifies healthcare as a high priority for the population and often accepts responsibilities to keep those operations solvent.
Working in Mature Markets
Other recession-resistant industries are in mature markets. By definition, mature markets are in equilibrium, experiencing little growth or innovation and supply matches demand. Mature markets are susceptible to business cycles but on a smaller scale, enduring less significant, less volatile fluctuations. Recessions and expansion would have to increase or decrease to historical levels before mature markets respond with significant effects.
Business Ventures and Expansion
The Davis Service Group is not conservative with its business ventures, actively seeking to identify potential emerging markets in developing economies.
What Is a Developing Economy?
The notion of a developing economy is relative but includes five categories: (1) low per capita real income, (2) large population growth rate/size, (3) high rate of unemployment, (4) dependence on primary sector and (5) exports of primary commodities. In essence, a developing country is one that experiences a lower standard of living (again, a relative notion) compared to other, more developed countries.
What Is an Emerging Market?
An emerging market is another relative concept characterized definitively by measures like liquidity, local debt, and equity markets. Any economy making progress and advancement in multiple sectors is considered an emerging market. In 2018, the Baltics, Poland, and the Czech Republic were recognized as emerging markets, enjoying various degrees of expansion, growth, and inflation. While the United Kingdom and the United States may be experiencing contractions and troughs, Poland and India are experiencing expansions and peaks.
The Davis Group's Overall Approach
The Davis Group weathers economic storms by employing a dual attack strategy diversifying their operations and their demographics, lessening the effects of recession bound economies with the gains and growth of those in expansion.