Chapter 5 Information

Topic: Managing the Changing Economic Enviroment

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
Turning
point:
peak Upswing:
Economic
Recovery
activity Downswing: Trend li
ne
Recession

Downswing:
Slump Turning
Upswing:
point:
Boom
trough

Refer to the video on page 177 in the E-Book

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 Recession

     
 
 
Monetary sector Expansion of both Monetary sector Real sector
improves while sectors but a stabilises and contracts while
the real sector slower then contracts the monetary
stabilises and improvement in while real sector sector stabilises
then moderately the monetary expansion slows and improves
improves. sector towards down. towards the end.
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 Recession

     
 
 
Danger of
Inflation: deflation:
Higher interest Stable rates, Lower interest
Low and stable some
interest rate rates to slow reduction rates to
down credit stimulate
and spending possible later credit and
spending
 Fiscal policy response
Slump Recession Recovery Boom
     
 
 
Declining tax Tax revenue Tax revenue
Tax revenue
starts to slow revenue, stabilises, rises as income
government government rises, higher
down as spending to spending rise government
incomes
stagnate stimulate to secure spending not
growth recovery necessary
 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
Purchasing
Capex Marketing
Employment
Acquisitions Pricing
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 Short-term debt Short-term debt

Long-term debt

Refer to video on page 186 in the E-book

 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