One of the most critical skills for any Business Leader is knowing how an economy works and then using that knowledge for decision making. The skills that macroeconomic and macroeconomic concepts bring to business strategy and management practices should be foundational skills present in every business leader. Why?
The world is a complex place. So the ability to distill complex concepts into business insights and, ultimately, into an action plan is tough work. Most business leaders refine their decision-making over time, but business leaders, especially those in the C-suite, must understand the impact of changing consumer trends and behaviours, employment levels, interest rates, inflation, public finance, economic sectors and the level of their interdependence – amongst other things.
Let me give some examples. If we were to look at examples of macroeconomic factors that affect business decision-making, one could understand economic concepts better by the following insights
Employment: The economy is cyclical. In prosperous times, companies employee more to keep up with high consumer demand. In a down cycle, companies employee fewer new employees and may conduct layoffs. For businesses with healthy reserves and cashflow liquidity levels, strategic advantages accrue from moving against these trends. In periods of prosperity, they can invest in technologies that can increase productivity by employing fewer employees. During a downturn, they can capitalise on the availability of talent and employee sharp employees.
Inflation: Inflation effects businesses as it is likely to increase input costs. Most businesses raise prices in accordance with inflation in order to maintain their profits. Businesses with healthy reserves and cashflow liquidity have the luxury of deciding to use inflationary periods to gain market share by not raising prices as much as their competitors.
Microeconomic theory is also very useful. Decisions are rarely easy. All decisions come with opportunity costs and trade-offs. Something must be given up in order to do something else, and that something could be whatever type of resource, be it a worker, time or money. In addition, a decision may be effective up to a certain time or a certain level of expenditure. One must understand when to pull the plug on an activity and transition to another. Let me try to give some examples here also, to drive the point further
Inventory management: What is the optimal level of inventory at any given time? This decision comes down to an understanding of marginal benefit, or the point at which revenues exceed the costs of keeping inventory. Economic factors are forever changing, so decisions related to inventory need to be made on a continuous basis.
Advertising and marketing budgets: Marketing managers are likely to keep asking for bigger budgets as they need to keep up with the changing costs of different marketing and advertising vehicles. What measure will a business leader use to find what level of budget to give to its marketing team? The calculations that determine potential Return on Investment (ROI) from advertising on traditional media vs. ads on online/social media platforms based on cost and shifting consumer behaviors is a way to start homing onto a solid decision. In addition, business managers must decide on what budgets to allocate and vehicles to use depending on whether they want to compete where their competitors or else trying to engage audiences where their competitors are not present.
To be a confident and successful business leader, the skills of economic decision-making is what I call a foundational skill. Just ponder on the opportunity cost of not having this skill!
In line with all this, Kurt Muscat and myself will be delivering an online training session on “Surviving the turbulence from the Ukrainian conflict”. In this training session we will first deliver a good overview of why the conflict will impact a number of economic parameters/metrics and the likely economic implications on the Maltese economy with a specific focus on the sectors that will be most hit. We would then focus on the likely affects of this conflict on businesses and how these businesses should prepare and respond to such turbulence. To register for this online session, kindly click HERE.