Write one key takeaway per chapter. Write at least 100 words for each chapter summary.
As a decision maker, you want to be confident in your decisions. Knowledge about economics can help prevent mistaken interpretation of sales data. Economics helps you to understand and consider the risk of cost increases before making any final decisions/commitments. When it comes to making a decision, you’re making a decision for the future. Before decisions are made for the future, you plan for the outcome. If you do not dedicate time to future thinking, it could lead to failure as a business. Although demand is hard to forecast, economists are able to anticipate changes and form a more accurate representation. Economics can make future business decisions easier by enhancing a business’s vision. Providing forecasts in adjectives rather than specific numbers provides more value to businesses. As a business leader, it is important to know that economic growth will shift between a couple adjectives rather than numbers.
Managers need to know when increases and decreases in sales are coming. Although the economy plays a major role in the direction of sales, it is not the only thing that contributes. The quality of a company’s products, services, and marketing efforts are significant impacts. Profits decrease during a recession because costs do not decrease as much as sales do. A major leading indicator of a recession is when there is a shift in the business cycle A leading indicator anticipates shifts in the business cycle before the economy changes. The sector of economy with the highest stability is consumer services. Housing construction is the most unstable sector of the economy. Typically, the housing market decreases before the economy as a whole declines.
Managers need to know how to anticipate recessions. There are many causes of recessions including monetary policy, supply shocks, credit crunches, consumer confidence, more. Monetary policy effects the economy by change in the economies interest rates. To gauge changes in this you must watch short-term interest rates and the yield curve. Supply shocks are change in output causing a change in prices. To gauge changes in this you must know the quantity of product and how many people need it. Credit crunches are when loans are not available, leading to recession because there is a lack of credit. You must watch be aware of the possibility of changes in regulations that suddenly limit lenders’ ability to meet the credit needs of their usual customers to gauge changes in this. A drop in consumer confidence can lower consumer spending which may eventually lead to a recession. You must watch changes in levels of taxation and increase in government spending.
A manager needs to monitor the prices of your inputs and prices of your outputs because the difference between the two is the profit margin. Price changes effect the Company’s profit margin. There are thousands of specific indexes to choose from. So it is important to pick a correct price index for a specific business problem. It’s easier to pass on costs increases when the following is true: Competitors are facing the same cost increases, the industry has little excess capacity and your customers can, in turn, pass the cost increases along to their customers. A business for whom raw materials constitute a major cost should hedge against the risk of sharp increases in the price of raw materials by locking in purchase prices, contract price adjust to the cost of materials, and building an early warning system.
A manager needs assess the company’s vulnerability to recession, sketch out a contingency plan for dealing with recession, build flexibility into the day-to-day operations and develop an early warning system to identify coming downturns. How vulnerable a company is to a recession or a downturn in sales. The more vulnerable your company is, the more your company needs to plan and prepare for a decline. To determine the vulnerability of your company, you can look at the magnitude and and timing of the slowdowns using the data from the company’s industry. A contingency plan is a 1-2 page plan that all company’s should have in place for when a recession hits considering options for the worst case-scenario. All business managers should build flexibility into the business before a recession hits; there are many ways to do this. It’s important to prepare, take in all considerations, and put yourself into a situations you are able to get out of. Many business decisions affect the flexibility of the business in the future. All business decisions should be made with keeping how it will affect the flexibility of the company in mind. A company that learns in its contingency planning that it has limited options for cutting expenses may spend a year adding flexibility wherever it can.
A manager needs to develop an early warning system that includes: macroeconomic warning signals, end-user information, customer sales forecasts, and critical costs. There are many macroeconomic indicators that companies can track. These indicators track specific information about the economy and industry. It’s important that companies keep track of the buying ability and levels of their end users. The end user may not be your customer. Companies will benefit from including sales forecast and sales data in the early warning system if they are selling to other companies or projects that involve a longer sales process. Accurate sales data and sales forecasts allows companies to assign resources for growth in the future. It’s is very important to include cost elements in early warning systems for companies involved in specific industries; some examples of companies that need to monitor costs are manufacturers, contractors, or utilities. These companies could easily be surprised by cost increases. Being open and able to adapt to change can lead to success as a manager. Regularly monitoring data can help you better interpret the data, and understand the economic environment.
A manager must have a series of steps he/she can take to cut costs to survive recessions and how to spot opportunities to take advantage of recessions. Some easy steps to take include reconsidering capital spending, slowing hiring, monitoring inventory closely, tightening credit terms and selling account receivables, and securing a larger credit line and getting long term debt. Some moderate steps you can take are cutting capital spending entirely, stop hiring and start laying off production workers, monitor inventory closely and reduce unnecessary items, collect account receivables quickly and delay payments to vendors, stop paying dividends, and shutdown unprofitable operations. Some survival steps you can take include cutting capital spending, consider selling assets to raise cash, monitor inventory closely and reduce unnecessary items, collect account receivables quickly and delay payments to vendors, stop paying dividends, and shutdown unprofitable operations. It’s important to prepare for a recession in good times and get yourself in good financial footing so you can take advantage of recessions. In hard times, your competitors may suffer and have to go out of business giving them no choice but to fire their workers and lose customers. You can take advantage of your competitors by gaining their talented workers and acquire former customers who left the market. To successfully deal with recessions, managers need to prepare and manage before and after recessions. Being flexible as a business is very important as well as taking a series of steps to cut costs and spot opportunities to take advantage of recessions.
A manager needs to monitor the economic cycle to ensure the same amount of flexibility in foreign countries as there is in the US. When you want to expand your business into foreign markets there a lot of risk that must be considered. To reduce this risk of operating in foreign markets is diversification. Spread the risk to other countries, not just in one place. Similar to the US, an early warning system should be established for every foreign country but will include foreign exchange risk. In countries that are less developed the system will also need to include foreign exchange crisis, war and political disruption, commodity risk, and trading partner risk.
Although a regional economic cycle is not perfectly synchronized with its national counterpart, it tends to move up and down with the national economy. In addition to the broader national economy, two other factors influence a regional economy: the national cycle of its most important industries and its internal growth cycle associated with construction swings. There are two different perspectives to consider in analyzing a regional economy: when a company sells into a distinct local market and when a company primarily produces in a local market and sells into a national or global market. A business manager, to assess the risk of a regional recession, needs to monitor the national economic cycle, the national cycle of the most important industries in the state/region, and the internal growth cycle/the regional economic cycle of the state.
A business manager in a capital-intensive industry needs to monitor its own industry cycles because they routinely experience a visual cycle of over investment, overcapacity, and the price war/weaknesses. The early warning systems for a capital intensive industry must include indicators of new capacity being added in the industry for it to be a successful early warning system. This is important because capital intensive companies are faced with different problems including capacity and over building. Preparing for a downturn starts in good times. You can prepare in many ways including having cash stacked away so when a bad time comes, your company is in a good position. If you are in a good position, you can take advantage of other company’s suffering from the downturn; look for assets at discounts and look for talented employees out of work.