BUSS4 Economic Environment

Views:
 
Category: Education
     
 

Presentation Description

Teacher Presentation A2

Comments

Presentation Transcript

Impact on Firms of Economic Variables (BUSS4 – The Relationship between Businesses and the Economic Environment) :

Impact on Firms of Economic Variables (BUSS4 – The Relationship between Businesses and the Economic Environment)

PowerPoint Presentation:

Economic growth and the business cycle – why does it matter? What is economic growth and why does it matter? Growth is measured using GDP; the total amount of output (the value of the output) that the country produces If more output is created year on year (there is an increase in GDP) there is growth Economic growth is important because it brings a better standard of living (debatable) UK citizens can have more to consume Economic growth tends to be around 2.5% per year in the UK GDP – Gross Domestic Product (the total value of output created by a country in a year

PowerPoint Presentation:

Economic growth - why does it matter? Growth is important for firms A growing economy creates more opportunities It is easier to expand a business in a growing economy New gaps emerge creating more opportunity The economic growth of other countries will also be a concern to British firms For example growth in China has led to a rising demand for Rolls-Royce cars To cope with the extra demand they may have to take on more staff It will also have to buy more components This will benefit their suppliers who will also have to increase output and probably employment The UK is relatively small which means the domestic market is also small 90% of Rolls-Royce’s sales are exports British companies like RR that want to grow are partially dependent on growth in other countries

PowerPoint Presentation:

The business (Trade) cycle The economy does not grow at an even rate over time There are booms when it grows rapidly There are recessions where the growth comes to a halt just as in the 2008-9 in the UK and US If things don’t improve there could be a slump where there is a sustained period of negative growth From 1990 to 2003 the Japanese experienced a slump Falling GDP leads to sharp rises in unemployment Recession – two successive quarters of falling output Insert fig 38.1 P259

PowerPoint Presentation:

Put this in a diagram

PowerPoint Presentation:

The impacts of the trade cycle The trade cycle will affect different firms in different ways Businesses like Ferrari that produce luxury goods will benefit most from economic booms Firms like Lidl may struggle during booms due to customers trading up to more expensive options like Waitrose Managers have to be experts at predicting the future state of the economy because it takes time to plan an introduce changes Firms that react to economic changes once they have already happened usually struggle to compete Let’s look at some of the actions a producer of luxury goods could take today if it predicts a recession in the near future

PowerPoint Presentation:

The impacts of the trade cycle – business objectives During a recession a luxury goods producer might need to change its corporate objective from growth or profit maximisation to survival Revenue is bound to fall The key to survival is to minimise losses Perhaps introducing cost saving measures Some of these changes could permanently damage the firm E.g. cutting back on product development will leave the firm with an ageing product range in the future But if the firm does not cover costs now there may not be a future to worry about During a recession managers usually have to make difficult and unpopular decision

PowerPoint Presentation:

The impacts of the trade cycle – marketing Some businesses would react to a recession by changing their marketing strategy to emphasise value for money This might hold up revenue levels in a shrinking market Some may react by cutting prices This might be risky because a price cut might cheapen the brand’s image resulting in a loss of sales when the economy recovers

PowerPoint Presentation:

The impacts of the trade cycle – production Sales of luxury goods fall during a recession Producers should aim to cut production sooner rather than later This can’t be done overnight Suppliers of raw materials and components may have minimum notice periods in their contracts If the firm waits stock will build up which is expensive to store and also ties up cash Expansion plans tend to be shelved because the extra capacity created by expansion will not be needed when sales are expected to fall

PowerPoint Presentation:

The impacts of the trade cycle – Human Resource Management During a recession a manufacturer of luxury goods might not need as many staff They could have compulsory redundancy but pay offs would be expensive, remaining staff would have low morale and it may create negative publicity A better alternative is to reduce your wage bill by natural wastage (not replacing staff that leave and suspending recruitment) Some firms use job insecurity created by a recession to force changes in work practices to reduce costs During a recession job opportunities elsewhere tend to be scare and ruthless manager may take advantage

PowerPoint Presentation:

The impacts of the trade cycle – Finance Firms fail when they run out of cash During recessions producers of luxury goods leak ash because of low demand The best chance of survival is to start a recession with a healthy balance sheet; low borrowings and high liquidity To conserve cash a firm could Carry out a programme of budget cuts for all departments Restrict credit given to customers and chase up debtors Rationalise – sell off under utilised assets such as machinery and property bringing cash into the business Refinance the business by taking on additional loan capital; unfortunately during recessions the availability of credit tends to dry up

PowerPoint Presentation:

The impacts of the trade cycle – Evaluation Recessions don’t last forever Firms should aim to survive so that they can benefit when the economy recovers Not all firms suffer during a recession (Tesco has grown) Firms can do nothing about booms or recessions They are external factors that are beyond the firm’s control However managers need to make offsetting internal changes to minimise the worse effect (e.g. cut costs) The challenge is for management to have a long term strategy that can keep the business healthy

PowerPoint Presentation:

The impacts of the trade cycle – Boom So what if there was a boom? What would a firm do with the windfall profits it may be able to make? The threat of takeover might encourage plcs to increase their dividend payments to shareholders Unfortunately doing this does nothing to improve the firm’s long term competitiveness Managers running companies owned by long-termist shareholders will be able to use the profits to increase their investment in new products and production methods and make the firm more competitive in the long run Some may be more reserved and set aside profits to help the firm survive the next recession Most banks react to booms by relaxing their lending standards It is easier for firms to expand because funds are cheaper and easier to borrow Banks will also lend to consumers which may increase demand for big ticket items These actions may lead to inflation

PowerPoint Presentation:

The effects of inflation on a firm’s financial position Inflation is persistent rises in prices In basic terms, as a consumer, as prices rise you get less for your money The amount we can buy for a certain sum of money is called the purchasing power of money In 1970 I could have bought 11 loaves of bread for £1, by 2000 I could have bought around 2 and this year I would be lucky to get 1 http://www.bankofengland.co.uk/education/inflation/prices/prices.htm For a consumer inflation increases the cost of living It also means increases that wages need to rise so that households are not worse off Most people’s real wages may be unchanged in value so consumer spending should not be affected Real wages : changes in money wages minus the rate of change in prices (inflation) – for example if your pay packet is up 6% but prices are up 4%, your real wage has only risen by 2%

PowerPoint Presentation:

The effects of inflation on a firm’s financial position - Advantages Inflation makes real assets become worth more The value of any property or stock the firm may own will go up if prices are going up A firm with more valuable assets will have a more impressive balance sheet As a result the firm may find it easier to raise long-term finance from banks and shareholders because the business now looks more secure Firms with large loans will benefit from inflation because the real value of the money owed will be less Because revenue and profit will have risen repayments will be easier

PowerPoint Presentation:

The effects of inflation on a firm’s financial position - Disadvantages Firms that have fixed price contracts will see their profitability damaged a local building company agrees a £5 million price for an extension to a local school which is expected to take three years to finish If inflation is high their costs will have increased If they have not priced in large profit margins they may wipe out all profit Even if the school had agreed to pay an inflation allowance the builder would have to fund the unexpected cash flow Inflation damages cash flow – it pushes up the price of machinery A manufacturing company like Ford needs to replace its machinery regularly to stay internationally competitive

PowerPoint Presentation:

The effects of inflation on a firm’s financial position - Disadvantages Inflation also damages industrial relations (relationships between staff and the business) Staff will push for a rise in salary due to the increase in the cost of living They may estimate inflation to be higher than management expect This could cause costly industrial disputes that will damage the firm’s reputation Evaluation Inflation will impact different firms in different ways according to the different product they sell, the production methods and whether or not they have loans Inflation might benefit a hairdresser but severely damage a company in heavy manufacturing such as Airbus

PowerPoint Presentation:

Unemployment Unemployment happens when the demand for labour is less than the supply of labour Rising unemployment tends to be associated with recessions During booms unemployment tends to fall Unemployment can also be affected by emigration and immigration because this affects the supply of labour Between 2006 and early 2008 unemployment decreased in the UK – demand for labour was growing faster than the supply In November 2008 there were 1.82 million unemployed as the credit crunch reduced the amount of money available to consumers There are now 2.5 million unemployed The decrease in consumer spending during the recession meant that businesses had less demand for their products and services and had to lay off workers

PowerPoint Presentation:

The impact of unemployment on firms - Benefits

PowerPoint Presentation:

The impact of unemployment on firms - costs

PowerPoint Presentation:

Evaluation The impact of unemployment will depend on the culture of management Theory X managers won’t worry too much about making redundancies Theory Y managers are more people orientated and will try to avoid redundancies even if this is at the expense of short run profits Japanese companies with a paternalistic culture react to unemployment by diversifying They move into new markets and retrain staff to move them from their old jobs to new ones

PowerPoint Presentation:

Exchange Rates S P I C E D Strong Pound Imports Cheap Exports Dear If Imports are cheap this is good for firms that import their stock or raw materials If exports are dear (expensive) this is not good for firms with large export markets If exports are expensive then the demand will drop – the firm will no longer be competitive The firm will have to decide whether to change its price and risk the fall in demand or reduce its profits S P I C E D If today you can by $1.5 for £1 and tomorrow you can buy $1.7 for the £1 then the pound has got stronger (you can buy more foreign currency for it)

PowerPoint Presentation:

Exchange Rates W I D E C Weak Pound Imports Dear Exports Cheap The effects are the opposite of a strong pound If Imports are expensive this will not be good for firms that import their stock or raw materials If exports are cheap this is good for firms with large export markets If exports are cheap then the demand will increase – the firm will be competitive W I D E C If today you can by $1.5 for £1 and tomorrow you can buy $1.3 for the £1 then the pound has got weaker (you can buy less foreign currency for it)

PowerPoint Presentation:

Exchange Rates – what can the firm do? Firms can do very little about exchange rates apart from minimise the risk If the majority of their revenue or costs is in another currency than the home currency this may be a big risk for the firm The firm can reduce the uncertainty by buying or selling currency in advance This is called hedging If a firm sells its goods in one currency ($) but pays its costs in another currency (£) it could ask the suppliers to accept dollars which would reduce its exchange rate risk however the suppliers may not be happy or willing to do this

authorStream Live Help