Global Financial Crisis - Article Example

GLOBAL FINANCIAL CRISIS of The general impact of the global financial crisis on the economic and financial conditions of the international market place can be gathered from the changes in the performance of big multinationals, central banks and the governments of the nations. However, this report focuses on the reasons behind the initiation of the global recession, its influence on the corporate segment, the responses of the firms and the current position of the recession. It is yet debateable among scholars regarding the beginning of the recession but most of them consider the micro-credit policy of US which led to the recession. On the other hand, the corporate sector faced critical conditions as money flow in the market reduced as a result of decreased consumer confidence. Another crucial set back was the increased job cuts in order to maintain the operational expenses. Most of the firms tried to counter the impact of global recession by reducing their activities and redesigning their business activities for facing the next boom period while others engaged in the new product or service development processes for keeping the consumers engaged with the business. In context of the current state of the recession, some economists believe that the after effects of the recession still exists but the US Government maintains that the current economic problems faced are not related to the global financial meltdown. The recommendations provided are to focus on new product and service development and also to develop the business network by forming alliances and partnerships with other relevant institutions. The study concluded that while the global financial crisis is considered to be over other economic problems being faced by the organisations and governments can be a sign that the phenomena still exists. Table of Contents Introduction 4 The beginning of the crisis 4 Influence on Business Segments 6 Responses of Business segments 7 Is the crisis over 9 Recommendations 10 Conclusion 11 References 12 Introduction The financial meltdown of 2007-08 is mostly referred to as the global financial crisis which has been termed by Gries and Naude (2011) and Crotty (2008) as one of the biggest economic and financial hits since the Great Depression of 1930s. Some of the key questions being debated in context of the global financial crisis of 2007-08 are regarding its origin, its influence and most importantly if the crisis is still looming or is it finally over. According to Pizam (2009), the global financial crisis mainly targeted the Western countries and effected their business segments as well as their customer groups. The challenges faced by the firms were related with their international as well as the domestic operations. Many big firms had collapsed during this period and many other were bailed out by their respective governments. The challenges faced by the Government of nations primarily that of UK and US. Not only the corporate segment but the social behaviour of the people had changed during the recession of 2007-08. People were not following their cultural aspects and each individual was thinking out ideas for ensuring the safety of their savings and capital finds. This report will try to analyse the primary reasons that triggered the global recession and also strategies implemented by the most corporate segments for tackling the global recession. The beginning of the crisis In the words of Chacko et al. (2006), the fall of American bank Lehman Brothers marked the initiation of the worst economic crisis in a period of 80 years. Lehman Brothers filed for bankruptcy in the year 2008 and this shook the financial system of the world heavily. The company bailout of the bank involved huge taxpayer funds and revealed the existing condition of the financial and economic condition of the world. Crotty (2008) noted that the micro-credit policy of the US which was supposed to be improving the value of American real estate segment as a major factor causing the global financial meltdown. The micro-credit system not only provided loans to a huge customer base of America but also helped the individuals struggling to pay their mortgage. The number of bankruptcy files was increasing in USA as people were not able to pay back their loans and hence the Government implemented the micro-credit policy for helping out its citizens (FSA, 2009). However, the gap in the decision can be proven by highlighting the fall of the housing sector of America which started in the year 2008. Crotty (2008) blames the central bank of American and the inefficacy of the policy markers for ignoring the threats that were visible and also developing false hope that the financial risks have been neutralised. One of the key changes that resulted in the occurrence of the global financial crisis was the pooling of the micro-credits by the central bank. The pooling system had huge gaps one of them being the nature of the debts which were different from each other. Renowned economists such as Forbes (2007) questioned the implications of pooling as the nature of debts were different from each other and would result in fall down of the economy. However, the big banks considered that the American markets are independent of each other and would not be directly affected by the pooling system. The activities of the European and Asian markets also signified the coming threat of global financial crisis. The Asian market reflected a steady condition with low inflation as the savings increased. This also pushed the interest rates lower in the American and European markets and weakened the position of the banks and other financial institutions. Pizam (2009) observed that the European banks were focused extensively on operating in the American money markets to gain global advantage, however this also resulted in their heavy borrowings from the American banks. As a result when the financial conditions weakened in American and the nation started pulling back its lending most of European markets were hit. Among these Germany and UK were the worst hit segments (Harrison, Love and McMillan, 2004). On the other hand, the weak positions of the financial institutions also demoralised the customers and they started pulling back their funds. This was a major factor which elongated the duration of the recession as the market money flow reduced. The corporate houses were also facing tremendous pressure because of decreased transaction level in the domestic and international markets. Influence on Business Segments According to Crotty (2008), recession is a continuous fall in economic activities for two consecutive quarters whereas Reinhart and Kenneth (2009) defined recession as a continuous decrease in the economic activities covering the entire economy and lasting for few months. Considering both these definitions, it can be said that these definitions indicate similar results and hence can be held valid. Also from these definitions, the impact of the financial or economic downfall can be gathered. Relating this with the corporate segment, Pizam (2009) stated that the first and foremost influence of recession on big business houses is that it reduces their productivity and quality of performance. As the revenues of the companies start to decline, the firms focus on reducing their operational and administrative expenses and the first relative step is to cut down the number of employees or to reduce their hiring process or to completely entre a free hiring mode. All these activities ensure that the payout of a firm is reduced. On the other hand, Reinhart and Kenneth (2009) noticed that most of the firms do not engage in upgrading their equipments and other materialistic resources during the recession period in the fear of excessive expenses. The changes in the behaviour and operational practices of a big manufacturer will create ripple effects on the operations of other business houses and as a result the corporate sector crumbles. The changes in the operational practises and reduction in production activities mostly creates demand in the market which helps in reducing the impact of recession (FSA, 2009). However, the demand was not created in the market as customers were not confident about investing in the market and s started pulling back their money. The changes in the market nature of the business was also one of the primary impacts on the operations of firms, the small scale business houses were not able to gather their products and raw materials because of increased cost where as the customers were not able to afford the price changed by the big manufacturers resulting in complete market failure. Among these changes the development of the financial sector suffers as other corporate borrowers are not able to pay their mortgage or loans (Harrison, Love and McMillan, 2004). In relation to the nature of customers and the changes that initiate during the recession, the advertising activities of the business houses reduce significantly and help the organisations fund millions of dollars. However, this also reduces the customer confidence on the brand and the brand positioning of a firm takes the hit. The customers feel like concentrating their money and withdraw from their normal purchase behaviour further increasing the influence of recession on the business houses (Reinhart and Kenneth, 2009). Apart from this, the small businesses and their relative funding strategies start to struggle as the financial institutions refrain from taking any more risks related with their marketing activities. These changes also result in further degradation of the market condition and hamper the operations of the big firms as well as the small and medium scale businesses. Responses of Business segments As observed in the previous segment, the influence of recession not only considers the economic changes but also influences the operations of the big business houses. During the recession of 2007-08, most of the firms were focused on reducing their operational expenses which also caused major fall in their brand value and the quality of their products and services. Noting, the overall impact of the business practices on the firms, Pizam (2009) stated that British supermarket chain Tesco had suffered highly during the recession period but their competitor Marks and Spencer’s had successfully reduced the financial barriers for the company by engaging in retrenchment of staff and also maintaining their brand value. M&S’s operations are based on small scale decisions that can be related to their organisational mission. M&S had segregated their cost cutting activities in various directions by focusing on the individual performances of the company. The changes in the business management were thus not felt by any single department and the company was able to recover faster than most of its competitor firms (Harrison, Love and McMillan, 2004). According to Gries and Naude (2011), some of the companies had clearly identified the factors and activities which had supported the business during the market boom period and directed their focus towards these activities for generating their revenues. On the other hand, some business houses such as Barclays and HSBC Bank tried to concentrate on their relationships with their customers (Wu, 2008). Customer relationship has been considered as one of the most important strategies that can be implemented by a firm during recession period (Taylor, 2009). Sorkin (2009) stated that recession reduces the confidence of the customers on their preferred brands and thus the relationship between the customers and the business houses suffers. On the other hand, the challenges faced by the business houses increase when shareholders start to sell their shares and further decreases the position of the company. In order to upheld the customer brand loyalty firms should engage in extensive customer relationship build-up processes which can help them in recovering from the financial strain (Harrison, Love and McMillan, 2004). Sorkin (2009) explained that most of the business houses engaging in pushing their core products during the recession period in order to increase the financial transactions and money flow in the company. However, a better strategy followed by P&G during the recession period was to introduce new products during the recession period for attracting, exciting and engaging the customers (Taylor, 2009). Apple introduced new variants of their core products in the market with extensive promotional strategies which allowed the business houses to keep the customers associated with the firm. Nevertheless, Krugman (2008) considered that involving in renewed expenses during the recession period can also backfire and result in total demolition of the business process. However, some firms have reflected a simple yet efficient process of handling recession. FMCG such as P&G and Unilever had reduced their business activities during the recession period. Fast moving consumer goods explained that organisations can utilise the recession period for realigning their business strategies to face the upcoming boom in the market. This is the period of boosting the growth of the market and also to enhance the ability of the firms in creating a long-term approach. Is the crisis over The influence of the great recession was diverse in the various markets of the world. The challenges in the business environment and the economic structure of the countries varied from place to place based on the existing condition of the countries and the accuracy of their economic and financial policies (Taylor, 2009). In 2014, UK declared that the Great recession has passed from their land after six years of struggle to align the financial and the economic. Gries and Naude (2011) stated that the true position of a recession cannot be measured in terms of the performance of individual segments of a nation but have to compare the Gross Domestic Product during the recession with its preceding and succeeding values. The recession hit in UK was one of the longest and the declaration of the end of recession was made by comparing the rate of GDP which was marginally short from that of the GDP rate during March 2008 (Goldberg, Kennedy and Miu, 2010). On the contrary, other European nations had reflected an early growth in comparison to UK where as the Asian markets were the fastest to recover from the recession. The US markets on the other hand also experienced a slow recovery which has been mostly blamed on the reformation of the policies and the change in the Government. The government of nations have often blamed the policy markers for the occurrence of the recession (Baba and Packer, 2009). While most of the European nations had declared the passing of recession from their economy by the end of 2011, the countries are still facing challenges in bringing back their economic position and GDP to the point before the recession. On the other hand, US markets are also struggling with the growing unemployment issue in the country and in response the Obama Government declared to bring back the outsourced activities. Although economist such as Krugman (2008), noted that the policy making process of US still is in a developing phase, the Government strictly maintained that the current economic issues being faced by the country are not linked with the global financial recession. Recommendations Based on the above analysis of the influence of global financial recession on the business houses, it can be recommended that organisations should try to develop new and improved strategies for existing in the market during recession. It was earlier noticed that some firms have engaged in production of new products for sustaining during the recession period. This is one of the most crucial aspects for surviving in the recession hit markets. However, in order to engage in new product or service development strategies. Understanding the strengths and weaknesses of a business is important while launching a new product or service in the market. Also the marketing process of the firm needs to adjusted and continued so that the customer interests on the products and services can be retained. Another effective recommendation for the business houses to sustain during recession can be to maintain their corporate network throughout the period of recession. The operational expenses and administrative functions are often reduced for cost cutting during the recession period. However, in order to align their market needs with the business performances, they can enhance their resource utilisation by engaging in various business relationships such as ventures, alliances and partnerships. This will retain and spread the brand value of the business in different directions and also help them in maintaining their business performance steadily in the market. Conclusion The report focused on the influence of global financial recession of 2007-08 on the international market place and the business houses. The study highlighted the primary factors which lead to the initiation of the recession in the market place and also analysed the position taken by various reformers and the governments of nations. On the other hand, the influence on the business firms and their reflective strategies for handling recession has been analysed to understand the nature of changes instigated in the corporate segment of the business. Considering these factors, the report finally assessed the duration of the recession and suggested suitable recommendations for surviving in a recession hit market. References Baba, N, and Packer, F. (2009).From Turmoil to Crisis: Dislocations in the FX Swap Market Before and After the Failure of Lehman Brothers.” Bank for International Settlements Working Paper 285, July. Chacko, G., Sjoman, A., Motohashi, H. and Dessain, V. (2006). Credit Derivatives, Philadelphia, Wharton School Crotty, J. (2008). ‘Structural Causes of the Global Financial Crisis: A Critical Assessment of the New Financial Architecture’, Political Economy Research Institute (PERI)Working Paper no.180, Forbes, K.J. (2007), The Microeconomic Evidence on Capital Controls: No Free Lunch, in: Sebastian Edwards (ed.), Capital Controls in Emerging Economies: Policies, Practices and Consequences, University of Chicago Press. FSA (2009), The Turner Review. A Regulatory Response to the Global Financial Crisis, March, London Goldberg, L. Kennedy, C. and Miu. J. (2010). Central Bank Dollar Swap Lines and Overseas Dollar Funding Costs. National Bureau of Economic Research Working Paper 15763, February. Gries, T. and Naude, W. (2011) Entrepreneurship, structural change and a global economic crisis.Entrepreneurship Research Journal, 1(3): 4. Harrison, A.E., Love I. and McMillan, M.S. (2004), Global Capital Flows and Financing Constraints, Journal of Development Economics, 75 (1), 269-301. Krugman, P. (2008). Depression Economics Returns. New York Times, November 14. Pizam, A. (2009) The global financial crisis and its impact on the hospitality industry. International Journal of Hospitality Management, 28, 301 Reinhart, C. M., and Kenneth S. R. (2009). This Time Is Different: Eight Centuries of Financial Folly. Princeton, NJ: Princeton University Press. Sorkin, A. R. (2009). Too Big To Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—And Themselves. New York: Viking. Taylor, J. B. (2009). Getting Off Track: How Government Actions and Interventions, Caused, Prolonged and Worsened the Financial Crisis. Stanford, CA: Hoover Institution Press Wu, T. (2008). On the Effectiveness of the Federal Reserve’s New Liquidity Facilities. Federal Reserve Bank of Dallas Working Paper No. 0808, May Read More