Write one key takeaway per chapter. Write at least 100 words for each chapter summary.
Having knowledge about economics can help business managers navigate increases and decreases in sales. Knowing when to purchase items at the best price is crucial for making a profit for the company. Decisions about the company need to be about the future, not the present. Whether it is increasing prices or products, the decision needs to be made by predicting the outlook of the future. Although forecasting should not be the only information that a business uses to navigate future decisions, it should still be understood by managers. Forecasting can be used with adjectives to describe the economy such as very strong ro very weak. Numerical data such as GDP is also important to understand what it means when these levels increase or decrease.
There are questions that will arise in a company that will be hard to answer if their knowledge about the economy is sparse. The economy can have an impact on the price of products. Other factors that play a role are services and marketing. The economy can also have an impact on the start of a recession. Referring to the levels of GDP, typically when there is a decrease it can indicate a recession. Having knowledge about past recessions can help predict future recessions. Recessions can last for more than a year or less. Regardless of how long a recession lasts, knowing how to react when prices drop is crucial. Consumer spending and housing are indicators in the development of a recession. When consumers decrease spending and stop purchasing homes, it can take a turn on the economy. The prices of exports and imports also can be the result of a recession if materials are too high than industries might not be able to purchase and make a profit.
The book begins with the discussion of the invasion of Kuwait and how it impacted the economy. War can be a factor that triggers a recession if it is not taken care of in advance. The year 1990 showed a decrease in consumer spending along with a decrease in construction and a credit crunch. One of the primary reasons for triggering a recession is monetary policy. This relates to the amount of money in the economy and the growth of the economy. GDP levels and inflation are also indicators related to monetary policy. The amount of money in the economy is looked over by the Federal Reserve. They also have the ability to raise interest rates in hopes of slowing down the rate of money to prevent a recession. Time lags contribute to recessions in the sense of a change in fed policy to help ease the economy if needed. The recovery process is a time where businesses can bounce back from their loss and potentially make money if they are smart. Supply shocks also contribute to recessions as inflation rates can increase along with prices.
The concept of inflation starts to go into depth in this chapter by discussing the Consumer Price Index (CPI) and the Producer Price Index (PPI). Wage inflation also is crucial to look at to see how high these costs are for a specific company. Between the CPI and the PPI, the PPI prices are more volatile than the CPI. To continue with this concept, CPI prices reach a high quicker than the PPI prices. Even when there is a slight increase in the produce prices, consumer prices tend to see an faster increase. The Phillips curve is elaborated in this chapter on how it took over the idea of inflation in the 1960s. The correlation that low inflation means we need to tolerate high unemployment and vice versa did not carry through past the 1970s. Unemployment and inflation can increase as it was shown during that time. Moving on to cost increase, there are three rules that William Conerly suggests, “Competitors need to be facing the same cost increase, the industry has limited excess capacity, and the customer can pass the cost increase along to their customers. Understanding how to interpret specific pieces of evidence supporting downturns can help a business succeed.
Creating a plan for a downturn can help a business survive a recession. Although these plans can be negative toward a business, it will keep the company away from the possibility of bankruptcy. Throughout this semester, we have used these four key steps in managing a business cycle which are, “Asses the company’s vulnerability to a recession, create a contingency plan for a recession, build flexibility into daily tasks, and develop an early warning system for downturns.” Vulnerability in a company can differ depending on what you sell. Once a company identifies their vulnerability, they can then figure out their gross domestic product that is included with their company. To prepare for a recession, hiring needs to freeze, production should be reduced, and trying to save money for any additional costs that the recession creates needs to be prioritized. To sum up, a contingency plan is helpful for when a recession or a downturn occurs in the economy.
This chapter goes into detail about what a business should look for if a downturn is about to occur. Sales will either begin to decrease or increase and how the company reacts to these changes will show customers if they are a reliable vendor or not. The early warning system has four key concepts that businesses should keep a close eye on, “Macroeconomic warning signals, end-user info, customer sales forecasts, and critical costs.” Being aware of consistency is important because sometimes people can look past other signs that are showing evidence towards an economic downturn. Macroeconomic signs can be keeping up with the news, important data in the economy, or even hiring an economist to keep up with the data. For end-user, being aware of what motivates customers to spend and producing goods should be based on how much is being consumed. How much a company can afford needs to monitored as well. Customers are a major role in the revenue for companies and understanding what product is in high demand helps a company navigate how much they produce. Fluctuating in sales can also be a seasonal issue especially if you sell specific food or products that are popular during a season.
Conerly starts this chapter by listening the steps to manage through the business cycle to remind the reader that these still apply throughout the book. He lists off ideas for managing a downturn such as limit capital spending, freeze employment, get rid of extra inventory, tighten accounts receivable, positive relationship with financial sources, and lines of business should be reevaluated. Layoffs are tough during an economic downturn, but sometimes are necessary to save money. Layoffs should be used on employees who can be easily replaced, employees who have distinct skills should be kept in the payroll. Inventory needs to reevaluated to see how much is left or if there are unnecessary products that might not make the company a profit. Keeping a positive relationship with the company’s bank is crucial so they know that they can trust that you will pay them back. If a business shows that they pay back on time then they can build that trust with the bank and continue to stay with them during a recession.
Foreign sales differ from America’s sale because of the currency and the amount of supply changes. The type of policies also differ when sales happen outside the country. The central bank is different by the name and the way it is carried out in that country. Countries tend to keep interest rates low to have a regulated economy and less money in government borrowing. Understanding how independent a bank is in a specific country will help a company evaluate how sales will prosper there. For monetary policy in different countries, business managers should take a look or read a newspaper to stay up-to-date with the policy. For supply shocks they can have a greater impact on countries that rely on imported oil. With these countries they see a rise in prices if oil is harder to import or there is a short supply. Some countries are also dependent on an individual product and they are more likely to see a dip in prices regularly. Trading with other countries can create an issue if one of the countries goes into a recession and exports take a toll when this occurs. A contingency plan still applies when working with other countries. A company recognizes the risk and with the plan they create a solution even if it occurs in another country. How they solve the issue might change depending on the policy and who they are working with in that country.
Selling in a specific market can differ from state to state. There is an impact on the national economy with the state’s economy and the national state of specific industries can impact the economic situation in a state. A business manager needs to evaluate the similarities between the region they sell in and the national economy. There is a similarity index that is provided through the U.S. Bureau of Economic Analysis that can help managers asses how much impact the relationship between the region and the national economy is to their business, Within a region, population growth can have an impact on housing in a state. With population there comes the building of houses, stores, and work areas. This creates a positive economic cycle in the region. With a lower population, businesses can have a downturn on profit and not make as much if people are not channeling into a specific region. Each state also has its own economic policies that need to be followed by businesses. For short term business there is a small impact than there is for long term business in a state.
This chapter goes into depth about how capital-intensive industries are different from other industries in the national economy. Capital-intensive industries have strained lead times on expanding and slow levels of depreciation as Conerly discusses on page 222. All businesses have regular costs and during a downfall they try to reduce these costs to save money. For capital-intensive industries, they tend to have most of their costs from capital costs. The example of producing coal to strawberries outlines the differences from these products when it comes to lead time on expanding. Capital-intensive businesses are impacted more with lead times and slow outlook of depreciation compared to regular businesses. For the warning system in capital-intensive industries, there needs to be information about the inventory and how much is being added to keep up with the economy.