Chapter 5 Information
Topic: Managing the Changing Economic Environment
E-Book: Page 176-191
Activity: 96-100
Outcome:
• Fundamental of business cycle
• Business cycle and firm strategy
Changing economic environment
The economy important to business
• Determines 16-53% of firm profits
• Ignore at your peril
– Basil O’Hagan: R100m to 0 in six months
– Borrowing to expand at the wrong time
The secret to soccer
• Don’t run to where the ball is…
• …run to where it is going to be
Same for business
• Don’t plan based on where the economy is…
• …plan based on where it is going to be
• Why look at the business cycle?
– 1 indicator problem
Business cycle
Economic
activity
Turning
point:
peak
Upswing:
Recovery
Downswing:
Recession
Downswing:
Slump
Upswing:
Boom
Refer to the video on page 177 in the E-Book
Turning
point:
trough
Time
Stylised facts - recovery
Recovery
Boom
Slump
Recession
• Financial markets show gains, business confidence grows
• Consumers gradually increase spending
• Firms stop cutting jobs, employment stabilises
Stylised facts - boom
Recovery
Boom
Slump
Recession
• Consumer spending continues to rise with rising inflation
• Firms expand production and employment, but eventually
run into capacity constraints, so they invest more
• Debt and imports rise to meet consumer demand and
demand for capital goods
• Financial markets start to stagnate
Stylised facts - slump
Recovery
Boom
Slump
Recession
• Firms’ cost rise and profits decline
• Employment and expansion plans halted
• Income and spending stabilises, and so do imports
• Negative expectations translate into financial market losses
Stylised facts - recession
Recovery
Boom
Slump
Recession
• Firms cut jobs as consumer spending falls, many go bankrupt
• Negative economic growth and lower inflation (even
deflation)
• Imports and debt levels fall
Summary
Recovery
Boom
Slump
Monetary sector Expansion of both Monetary sector
improves while
sectors but a
stabilises and
the real sector
slower
then contracts
stabilises and
improvement in while real sector
then moderately
the monetary
expansion slows
improves.
sector towards
down.
the end.
Recession
Real sector
contracts while
the monetary
sector stabilises
and improves
towards the end.
Economic policy responds
• Avoid large swings
• Stimulate the economy in a recession
– Reason: negative economic growth
– Reason: unemployment
• Cool down economy during a boom
– Reason: inflation
– Reason: current account deficit
Result of countercyclical policy
Monetary policy response
Recovery
Boom
Slump
Inflation:
Stable rates,
Higher interest
Low and stable
some
rates to slow
interest rate
reduction
down credit
possible later
and spending
Recession
Danger of
deflation:
Lower interest
rates to
stimulate
credit and
spending
Fiscal policy response
Slump
Recession
Tax revenue
starts to slow
down as
incomes
stagnate
Declining tax
revenue,
government
spending to
stimulate
growth
Recovery
Boom
Tax revenue
Tax revenue
stabilises,
rises as income
government
rises,
spending rise
moderate
to secure
government
recovery
spending
Important indicators
• Where are we?
– SARB’s coincident indicator
• Where were we?
– SARB’s lagging indicator
• Where are we going to be?
– SARB’s leading indicator
Important macroeconomic indicators
Refer to practical video on page 183 in the E-book
To survive and thrive…
Increase
market
share
Sustained
profitability
Manage
cash
flow
Where is the greatest opportunity for
market share growth?
Economic
activity
Time
Where should you manage your
cash flow most carefully?
Economic
activity
Time
A value system perspective
Input
Capacity
Output
Capex
Marketing
Acquisitions
Pricing
Purchasing
Employment
Finance
Purchasing
Where increase or cut input purchases?
Renegotiate supplier contracts?
Employment
Where increase or reduce workforce?
Where to train?
Yield curve
Equity issues
Long-term debt
Long-term debt
Refer to video on page 186 in the E-book
Short-term debt
Short-term debt
Finance (2)
Where issue equity?
Long-term debt? Short-term debt?
Capital expenditure
Where increase or reduce capex?
Acquisitions & divestitures
Where to acquire?
Where to divest?
Marketing
Where increase or reduce advertising?
Loyalty programmes? Value offerings?
Pricing
Where increase or reduce prices relative to the
inflation rate?
Different sectors
• Industrial metals, automobiles and parts, electronic & electrical
equipment and travel & leisure = most sensitive to the business cycle.
Caution
• Not all sectors of the economy respond the
same to the business cycle
• Sometimes the signals are false so…
• …don’t aim to time decisions exactly
– It is better to be vaguely right than exactly wrong