Week 14: Best Practices 11

Write one key takeaway per chapter. Write at least 100 words for each chapter summary.

Ch1 It’s Not Just about Forecasting

Understanding economics can help you diagnose the causes of increase or decrease in sales volumes and costs. The economy can be described in the following ways very stong, strong, moderate, weak, very weak. Business decisions are about the future and must rely on a view of the future. Economics can help you to form a more accurate vision of the future, compared to the other common methods of forecasting.

Sales are not dependent solely on the economy. The quality of a company’s product, service, and marketing efforts play a major role. Recessions happen occasionally, but on any fixed schedule. Recessions average just less than a year of duration, but they can be shorter or longer. No particular recession is inevitable, but the occurrence of some recession at some time in the next ten or twenty years does seem inevitable. Profits fluctuate more than the overall economy, on both the upside and downside. In a recession, costs do not fall as much as sales fall, so profits decline.

Error in monetary policy is the most common cause of recession. Monetary policy works with long time lags. A monetary policy- induced recession moved through interest sensitive sectors of the economy and then spread throughout the entire economy, but interest rates drop, leading to recovery. Supply shocks primarily consists of oil price increases but can include other goods, such as steel. Supply shocks are a secondary cause of recession, adding difficulty when the econ0my is otherwise weak. A wide variety of factors can hurt the economy.

Three types of inflation rates are commonly discussed, though there are thousand of specific indexes to choose from. They are Consumer Price Index, Producer Price index, and measures of wage inflation are important because so much of a typical business’s costs are labor related. Price inflation for services is more stable than for goods. Price inflation for servies is higher, on average, than for goods. Crude materials prices are more volatile than finished goods prices. Labor costs inflation is more stable than other goods and services inflation, but it has a higher trend growth rate.

The key steps in managing through the business cycle are, 1 assess the company’s vulnerability to recession. 2 Sketch out a contingency plan. 3 Build flexibility into the day to day operation. 4 develop an early warning system for identifying coming downturns. The vulnerability assessment sets the stage for contingency planning. Industry data is often the best way to gauge your businesses vulnerability. Plan to develop a contingency plan for dealing with an economic downturn. Many ordinary business decisions limit or increase flexibility in the future. All such decisions need to be made with a conscious understanding of how much flexibility is being gained or lost.

The early warning report should be prepared consistently and regularly. The end user may not be your customer. Companies need to monitor the buying ability and levels of their end users. Current sales reports should include a drill down of major surprises. Product and regional breakdown must be used when new products or territories are added. Pipeline forecasts are useful for companies making large one time only sales. Sales forecasts should be developed in consultation with customers for ongoing sales. You should put costs in the early warning system if your company’s expenses are dominated by one or a few major items subject to large price swings.

When the early warning system begins to flash a warning, review and update the contingency plan, and limit new hires, reduce or eliminate capital spending, monitor inventory closely, and set up credit lines. The moderate severe steps taken in a recession are similar to the steps, but they are taken further. Business managers should review employment, capital spending, and financing, and they should keep lenders fully apprised of conditions. Companies whose survival is at risk should consider bringing in a turnaround specialist. Expense reduction measures that are harmful in the long run may be necessary for short run survival. Selling the business may provide more shareholder value than continuing the operation until bankruptcy.

In many countries, monetary policy serves short run political interests. Countries vary in their underlying attitudes about the role of monetary policy. Susceptibility to a supply depends on the country’s dependence on the material in short supply. Countries whose economy is dependent on one or two commodities are prone to boom bust cycles caused by price fluctuation of those commodities. A country that has a large concentration of its exports to one other country is at risk if the key trading partner goes into recession. Exchange rate fluctuations can make overseas profits translate into more dollars or fewer dollars. Exchange rate fluctuations can chaneg the underlying profitability of overseas operations.

The overall national economy usually has a greater effect on a region than any other factor. The composition of a regions output, in conjunction with the composition of national economic growth, is the next greatest factor on a regions economic performance. Changes in a regions population growth rate can cause the states economy to accelerate or decelerate. State or local economic policy has little effect in the short run. Regional producers benefit from weak local conditions, and they are hurt by local economic strength.

Capital intensive industries are prone to cycle of over investment in capacity, leading to prolonged period of unprofitable operations. Cycles in capital intensive are worsened by long lead times for capacity additions and low rates of depreciation. A capital intensive company’s early warning system must include indicators of new capacity being added in the industry. Recognize and understand the nature of cycles in your industry. In boom times, dont add capacity. Instead amass cash. During industry downturns, buy out weak competitors capacity.