Economies across the world have struggled to recover since the Covid-19 pandemic. In the UK, the cost of keeping the economy afloat and helping businesses and individuals to survive was always going to bite as the government attempts to re-balance the country’s accounts.
The constant rise in inflation has compelled the Bank of England to raise interest rates and issue a warning that the UK faces a two-year recession.
We look at what this could mean for businesses of all sizes, and how a recession can potentially affect the value chain and the business supply chain.
It is important to understand what a recession is, what the value chain is, and what the supply chain is, before looking to understand how a recession affects each chain.
In economics, a recession is a period of temporary economic decline during which trade and industrial activity are reduced. This is generally defined by a fall in Gross Domestic Product (GDP) over two successive quarters.
According to data from the Office for National Statistics (ONS.gov.uk), during the last UK recession the UK’s GDP fell by 6% between the first quarter of 2008 and the second quarter of 2009. The economy then took five years to get back to where it was (1).
A recession is one of four phases in an endless economic cycle, from growth to peak to recession to trough (the bottom of the recession) – and then back again (2).
Recessions can be triggered by inflation, which can cause a widespread drop in consumer spending. Also, by dramatic events such as financial crisis, external trade shock, adverse supply shock, an economic bubble bursting, and natural disasters or anthropogenic environmental disasters (e.g.: nuclear disaster, major oil spills, the European BSE crisis).
The recent Covid-19 pandemic is a typical example of a trigger that can cause a financial crisis and a subsequent recession.
The Value Chain was developed by Michael Porter (3), an American academic who is known for his theories on economics, business strategy, and social causes. He first introduced the concept of the value chain in his 1985 book ‘Competitive Advantage’.
He is credited with creating Porter’s five forces analysis, which is instrumental in the development of business strategy, and is widely taught in marketing and economics courses.
The value chain addresses the fundamental logic of why an organisation exists by looking at how business inputs are changed into business outputs that have a greater value than their original cost, which generates the organisation’s profit margin.
The simple formula for the profit margin is:
Value created and captured – Cost of creating that value = Margin
The way in which value chain activities are performed is what determines an organisation’s costs and affects profits. It can also determine what a product will cost for the consumer.
Porter identified a chain of activities that are common to all businesses and divided them into primary activities and supporting activities, see the Porter’s Value Chain diagram below.
There are nine key facets to the value chain. If one or more of those is weakened, for example via lack of resources or budget cuts, then this can have a significantly detrimental impact across the whole business, and ultimately impact on the margin.
A supply chain (4) is a network between an organisation and its suppliers who are involved in creating a product and delivering it to the consumer.
The links in the supply chain begin with the producers/suppliers of the raw materials and the links end with the delivery of the finished product to the end user.
The components of a supply chain can include producers/manufacturers, vendors, warehouses, transport and logistics, distribution, and retailers. The functions of a supply chain typically include product development, operations, finance, distribution, marketing, and customer service.
Supply chain management is crucial to optimising lower costs and for a more efficient production cycle. Companies constantly seek to improve their supply chains so they can keep costs to a minimum and remain competitive in their markets.
Now that we have a basic understanding of a recession, the value chain, and the supply chain, we can look at how a recession can affect a business.
Recession has negative impact across the whole business and its supply chain, and can start a domino effect that spreads quickly and reduces confidence, causing…
As an example, during the Covid–19 pandemic, many restaurant businesses changed the way they work and began offering home deliveries. This is nothing new in the food industry, but for many fine dining restaurants, it was a step into the unknown that kept businesses afloat whilst yielding greater profits.
Media outlets arguably make recessions worse. Newspapers and news bulletins focus on the negatives when the economy is struggling, which immediately compels people to tighten their belts in fright.
Consumers buy less and businesses extend payment terms to suppliers and use up their valuable stock to reduce costs and orders. This approach causes problems for everyone and compounds the negative effects that a recession can have.
However, there are ways that small businesses can survive a recession, and even come out of it with a leaner, more efficient business and even with a broader client-base.
How to build a recession-proof business
Both large and small businesses are affected by recessions, just on different scales. It is important to ensure you continue to hold the correct levels of insurance, and maintain your monthly premiums, to protect your business assets, including: your staff, property, equipment, cash, furniture, vehicles, and of course your customers.
Don’t be tempted to apply budget cuts to your insurance, either by cancelling policies or reducing the levels of cover to reduce your premiums. If you do and something goes wrong, if you’re not adequately covered you could inadvertently place your business in a worse financial position.
Some key insurance policies to protect your business include:
Office insurance – There is a range of covers available to you, including buildings and contents insurance, business equipment cover, and business interruption insurance, all of which combine to comprehensively protect your property and assets against a multitude of risks.
Public liability insurance – This is a vital form of business insurance if you deal with people, including your customers and your suppliers. The policy will respond to cover claims of accidental damage to property and claims that you caused an accident which caused an injury to someone.
Employers’ liability insurance – This is a vital form of cover to protect your staff. If you employ people, you must hold this insurance as a legal requirement, with a minimum of £5 million of cover. Employers’ liability will cover claims from an employee who has suffered an injury or illness as a result of their work for you.
Professional indemnity insurance – Professional indemnity claims can rise when money is tight due to suppliers reducing their resources to cut costs and maintain profit margins. This can result in mistakes occurring, which can cost the client extra money to rectify, which can give rise to a formal claim.
Legal expenses insurance – The legal expenses insurance policy can provide cover for legal fees incurred when defending instances that some liabilities insurances do not, such as employment disputes including awards of compensation; criminal prosecutions; property disputes and disputes with your landlord; certain tax investigations; regulatory compliance such as data protection defence and compensation; jury service and court attendance costs; and contractual disputes for goods and services.
During a recession there is likely to be an increase in bad debts due to late payments across the whole supply chain. Whilst the legal expenses policy does not specifically cover bad debts, if there is a breach of contract in relation to goods and services, then this can give rise to a legal expenses insurance claim.
If you hold a legal expenses policy with us, you have access to Markel Law Solicitors 365 days a year, 24/7. You also receive access to the online Business Hub, which contains a multitude of useful guides, legal document templates, and links to help you run your business more effectively.
It is important for all businesses across the supply chain to communicate clearly with each other. This is especially important when times are tough. If each business knows, then they can help each other, for example via extended payment terms. Clear communication and understanding can help to make the business relationship stronger in the long run.
Protects against claims of alleged negligence in your professional services, advice and designs.
Protects against claims of injury to third-parties or damage to a third-party's property.
A legal requirement for anyone employing staff. Protects your business in-case an employee is injured at work.
Cover for contract disputes, tax investigations, court attendance, debt recovery, and more.