Economic Environmental Scanning

Firms that anticipate economic change and identify the constituents through which that change will be applied; can better adapt goals and action plans.

Shareholder expectations of financial return are dictated in part by alternative investments and their associated return and risks. Interest rates, tax policies, shareholder incomes, availability of funds for margin-purchased equity investments, and expectations of future economic circumstances will shape changes in equity investor profiles and/or the financial performance expectations of the firm’s owners. Personal income, savings, employment, and price-level trends can have dramatic effects on the attractiveness of a firm’s products or services in output markets—not only final markets, but intermediate markets as well.

Similarly, total sectoral outputs, movements in private-sector capital replacement and expansion, government spending, and the allocation of the consumer dollar can have dramatic impacts between and within industrial sectors. Each can be set off macroeconomic changes well outside the control of the firm, yet may be buffered by appropriate strategic action.

Economic conditions faced by competitors can play a large part in shaping a firm’s strategies and policies. The movement of manufactures out of the “snow belt” to areas of the country with lower energy costs could provide decisive competitive advantages vis-a-vis those who remain. Transportation costs, on the other hand, could reduce those savings. Competitors selling to diverse markets might realize less volatility in their capital bases and abilities to compete across economic cycles than might a firm with a narrow product/market scope. In any case it is important to recognize that the economic conditions faced by the competition may be different in form and substance from those faced by the target firm.

The capacity, reliability, and, in some case, the survivability of suppliers are largely a function of their economic climate. Both debt and equity capital markets often realize significant swings as a result of overall economic conditions. The firm accessing these markets experiences the repercussions. Interest rates and change in reserve requirements have both short-term and long-term implications in primary capital markets, and often affect the private sector borrower through secondary markets. The available supply of goods and services can be affected by the overall economic health of suppliers, including their productivity, alternative markets, and cost structures. To the extent that the target firm represents a major market for a supplier. To the extent that the target firm represents a major market for a supplier, that firm becomes a significant factor in the economic climate the supplier experiences. The choice of multiple versus singular sources of supply might be dictated by assessments of suppliers’ economic bases as well as by the degree of control the buying firm can maintain over them. Though could also provide buying leverage for the firm or represent new opportunities for backward integration.

The economic climate of the firm is also manifested through employees. Wage and benefit escalations are often as much a function of he overall economic circumstances employees face as they are unilateral policy set forth by employers. Rising consumer prices are usually translated into expectations and/or demands for increased compensation. Shifts in employment status, including societal and regional unemployment levels, can increase or decrease these pressures. Economic conditions usually affect employees unevenly, thus requiring creative policy adaptation.

Clearly, economic conditions have wide-reaching effects on the general public. These can be as abstract as an alteration in high birth rate trends or as direct as changes in personal income. Conversely, public expectations and behavior substantially determine the health or inadequacy of the economy, through earning, spending, and saving patterns. In any case the general public is so inter-wined in the mechanics and psychology of a firm’s economic climate that movement by one can have dramatic implications for the other.

Finally, in assessing the economic dimension of a firm’s environment, it is important to recognize the interrelated nature of the participants. The multiplier effect in macroeconomics has its micro counterpart. Raw data on prices, wages, savings, government spending, manufacturers’ shipments, and the like are valuable in themselves but represent only the front line of a truly comprehensive analysis.