Impact of the Economy on Strategic Planning

Four Pillars Set the Stage for Strategic Planning in Business Management strategies and Investment Strategy

The markets of the world are merging into a single market. The press of globalization continues to break down the ramparts among nations both near and far. In an interlinked world, events that occur halfway around the globe often affect the prospects for local markets. 

On one hand, the critical factors that underpin a strategic plan depend to a large extent on the profile each enterprise. The internal features span the gamut from the resources of the organization to the objectives targets for the future. In spite of the variation from one enterprise to the next, though, a complex of four factors plays a crucial role on the fortunes of any enterprise regardless of its niche, size or background.

Mainstays for Strategic PlanningAll Tied UpBig Kahuna of FinanceImpact on the Business CycleMoving in Tune

In order to prosper in a turbulent environment, every business has to keep track of a host of signals in the marketplace. The crucial factors span the spectrum from gradual trends in the real economy to sudden shifts in the financial forum.

The lineup of pivotal signals in the environment differs to some extent from one enterprise to the next. In fact, the key factors will vary over time even in the case of a single organization due to its changing circumstances across the gamut from current resources to future objectives.

Even so, there is a kernel of variables that has to be considered by any business worth its salt. The key factors play a dominant role in the course of the local economy as well as the global marketplace. For this reason, the planner has to pay heed to the key signals in order to produce a meaningful plan for navigating a shifty environment, whether the agenda deals with the short term or the long haul.

Mainstays for Strategic Planning

In order to sketch out a cogent path to the future, the strategist has to keep track of a slew of fluid conditions in the environment. The relevant factors concern the state of the domestic economy as well as every marketplace that is likely to have a significant impact on the fortunes of the enterprise.

An example of the latter is the health of the economy in a foreign market for an exporter of manufactured goods. Another instance is the impact of exchange rates on the number of tourists coming into the country and filling up the tables in a local restaurant.

In the age of globalization, the planner has to take account of the big picture in order to prepare a lucid plan of any kind. It does not matter whether the strategist is an entrepreneur or an executive, an investor or a policymaker. Everyone has to keep tabs on every country that has a material impact on the prospects for the local economy.

The groundwork for the macrolevel outlook consists of four pillars: economic strategies activity, interest rates, inflation rates, and exchange rates. We take up each of these facets in turn.
Economic strategies Activity

The backdrop for any enterprise is the economy at large; namely, the domestic marketplace as well as the global setting. In gauging the pulse of the economy, the standard measure of activity is of course the gross domestic product (GDP).

The relevant factors for the planner include not only the overall health of the marketplace, but the specific industries and niches that relate to future objectives. If the economy at large slips into a recession, for instance, then certain segments of the marketplace are likely to fare better or worse than the others.

As an example, sales of durables goods and luxury products tend to collapse in the throes of a downturn in the economy. An example of this stripe is the market for brand-new strategies cars or holiday cruises.

By contrast, a few niches are wont to prosper when the economy falters. A sample of this stripe lies in bargain merchandise at budget stores or low-cost entertainment like video rentals.

Interest rates

The basic rate of interest set by the central bank affects the cost of funds in the capital markets as well as the retail segment. An example of the former is the interest rate on corporate bonds or certificates of deposits issued by sizable firms. A sample of the latter is the prime rate charged by banks to favored clients among the ranks of business patrons.

The level of interest rates also affects the purchasing power of the consumer. For instance, homeowner have to shell out more money than before for their mortgage payments. Meanwhile their neighbors are burdened with higher fees on the balance owed on credit cards.

Inflation Rates

A change in the average price of goods and services has an impact on producers as well as consumers. On one hand, certain parties may benefit from an uptick in inflation. A case in point is a farmer or a miner that can raise the price of the final goods beyond the increase in the cost of the input factors.

On the other hand, most participants in the economy suffer from unstable rates of inflation. One reason for the travail springs from the difficulty of fixing up any kind of financial plan.

An example of this sort is an entrepreneur who has little or no idea whether they should factor in a rise of 5 percent for the following year, or 50 or 500. With inflation running amok, there is no sensible way for a planner to create a budget or an investor to pick an asset.

In that case, all the actors in the economy – ranging from producers and investors to lenders and consumers – are loath to make any commitments for the medium term or the long haul. The end result is an economy that can’t function properly.

Another victim of rampant inflation is the hapless soul with a fixed income. A prime example is a retiree living on a fixed pension or a personal nest egg.

Whatever income a pensioner receives is unlikely to keep pace with the spurts in the cost of living. The inevitable outcome is a deterioration of the quality of life.

Exchange Rates

Another task of the strategist is to monitor the condition of the local currency in the global arena. The strength of the currency may be measured against a single counterpart or weighed against a hybrid bunch.

An example of a pointed rate is the value of the U.S. dollar against the British pound, or the price of the regional euro against the Chinese yuan. Meanwhile a broad-based metric is illustrated by the dollar index, which measures the strength of the U.S. greenback based on a weighted average of exchange rates.

When the local currency weakens, an exporter is apt to prosper as foreign customers find its products to be cheaper than before. Moreover, any profits generated abroad by the local firm will have a larger impact on the bottom line after the earnings have been converted into the weakened currency.

In the opposite direction, a rise in the value of the local currency will batter the vendors of export goods. The actors in this category include the purveyors of goods as well as services. An example of the latter is a consulting firm that deals with foreign clients, or a seaside resort that caters to inbound tourists.

Although a tourist is physically present in the local economy, a purchase by the visitor constitutes part of the export market. In particular, the outlander pays for local products after bringing in funds from abroad. In the usual course of events, the alien converts foreign cash directly into the legal tender of the local economy.

The same precept applies even when a local merchant accepts payment in a foreign currency. For instance, a hotel in Africa that accepts euros from a patron can later exchange the foreign currency for local scrip.

When a currency rises in value, a long-run consequence is the tendency of companies to outsource production to foreign locales. As an example, the assembler of an electronic widget will find that the cost of labor abroad is lower than before. For this reason, the vendor has a greater incentive to procure components from a foreign supplier. If the volume of business is large enough, the widget maker may even decide to take up a project in foreign direct investment by building a factory abroad.

The situation is similar for an investor with an international perspective. Since the stocks of foreign companies are cheaper than before, the punter is more likely to look for bargains abroad. The upshot is a rise in portfolio investment in the favored marketplace.

All Tied Up

In a global economy where everything is related to just about everything else, the four forces described above cannot help but be interlinked as well. As an example, the interest rate in a particular country depends on a potpourri of factors ranging from the pace of inflation to the health of the economy.

Forces in Conflict

As a starting point for discussion, we note that the prime rate charged by a commercial bank depends for the most part on the base rate set by the central bank. For its part, the latter institution fiddles with the basic rate while taking into account the conditions in the real economy as well as the financial forum.

When the economy is booming, the surging demand for finished goods as well as raw materials pushes up the price level throughout the economy. As the tab for all sorts of products clambers upward, the standard response of the central bank is to increase the base rate of interest in order to keep a lid on inflation. A rise in the interest rate then leads to a higher cost of capital for producers as well as a larger burden for loans obtained by consumers.

As a result, the participants in the economy have to allocate a greater share of their earnings toward the cost of credit. A direct byproduct is a cutback in the level of expenditures for other goods and services.

For the economy as a whole, the outcome is a slowdown in the pace of transactions. The falloff in the demand for products then relieves the pressure on inflation.

From time to time, a central bank may jack up the interest rate in order to shore up the local currency in the global arena. If foreign investors can earn a high rate of interest, then they have more incentive to buy the domestic currency rather than dump it in favor of a foreign alternative. The purchase serves to bolster the value of the local scrip at the expense of its foreign rivals.

Bogy of Side Effects

As noted earlier, nudging up the interest rate can lead to problems as it crimps the pace of transactions in the real economy. If the local economy falters, then the central bank will have little choice but to reverse its policy; that is, to slash the interest rate in order to revive the engine of prosperity. The downshift in the interest rate will then dent the value of the currency in the global forum.

On other occasions, the central bank might whittle down the basic rate of interest in order to weaken the local currency. A common reason for softening the scrip is to give a boost to domestic firms in the export sector.

To round up, pruning the interest rate is tantamount to stoking the fires of inflation. The low rate is equivalent to a low cost of capital for producers as well as a light burden on loans for consumers.

As with other factors in a market economy, the cost of funds depends on the interplay of supply and demand. More precisely, a reduced rate of interest stems from a larger supply of money in comparison to the prevailing demand.

Unlike a private person or outfit, the central bank has the wherewithal to create boundless amounts of cash. In fact, a central bank concocts money out of thin air when it wants to lower the basic rate of interest.

Big Kahuna of Finance

In the case of the U.S., the central bank is known as the Federal Reserve System. The institution is a quasi-public outfit created by the government but streaked with elements of private enterprise.

The Fed, as the bank is called informally, conducts monetary policy by intervening in the financial forum. For instance, the bank might buy an asset such as a bond issued by the Treasury Department. Other types of instruments used in a similar fashion include certificates of deposits offered by private firms as well as the currencies issued by foreign governments.

Money Doesn’t Grow on Trees

To see how money is created, a fitting approach is to look at a simple example. For starters, we will consider a company named Biggie that issues bonds from time to time.

To handle its finances, the firm maintains a checking account at a major bank which we will call ComBank. Any receipts from the sale of the bonds by Biggie will be credited to this account.

A primary role of a central bank is to serve as a bank for ordinary banks in the private sector. Against this backdrop, a heavyweight such as ComBank will maintain an electronic account at the Federal Reserve. Put another way, the commercial bank is a customer of the central bank.

If ComBank were a small institution, its connection to the central bank would be indirect. More precisely, ComBank would have a checking account at a major bank which in turn would maintain a deposit account at the Fed.

At this stage, let’s assume that the Fed has just bought a single bond issued by Biggie at a price of $970. In order to compensate the issuer, the Fed directs its computer system to post a new strategies entry in the internal database. The digital transaction serves to raise the balance on the deposit account that the Fed keeps for ComBank.

After the posting, the commercial bank finds that its account at the Fed has increased in value by $970. To ComBank, the virtual money is as good as cash. As a result, the company in turn fiddles with a string of digital blips in order to transfer the intake it received from the Fed to the checking account that it maintains for Biggie.

Based on the fresh credit to its checking account, Biggie can then spend the newfound money in any number of ways. For instance, the firm can write a physical check or send a wire transfer to some happy recipient.

In this way, a central bank such as the Fed can whip up any amount of moolah it desires. By reversing the transactions, the institution can also cut down on the supply of money sloshing around the financial system.

In line with the remarks made earlier, the stockpile of money to be created or destroyed is determined by the prevailing stance on monetary policy. To this end, the central bank has to balance a variety of factors such as holding down inflation, pumping up the economy, and shoring up the currency.

Cheaper Capital

From the standpoint of an issuer such as Biggie, an upsurge in demand for its bonds is likely to result in a higher price for the asset. Since the seller gets more money than before for a similar piece of paper, it has more cash to spend. Put another way, Biggie enjoys a lower cost of capital on the money that it rounds up.

If the seller of a bond is the executive branch of the government, then the newly acquired funds can be used to pay for a variety of public expenditures such as welfare payments, highway construction, or military procurement. If the seller is a company, then the money would be used for its own projects such as production plants, computer systems, or marketing strategies campaigns.

To recap, the central bank pares down the interest rate by creating money out of nowhere and thrusting it into the marketplace. A direct consequence of the upsurge in the money supply is a kindling of the flames of inflation.

Impact on the Business Cycle

The quartet of economic strategies factors is part and parcel of the business cycle in the economy at large. The signals track – as well as impinge on and react to – the multiyear waves in the marketplace.

During the winter of the 20th century, a growing chorus of pundits sang the praises of central banking along with the demise of the business cycle. According to the self-professed gurus, the stewards of central banks had mastered the arcane art of tuning the economy with consummate skill. To be precise, the bankers would raise the base rate of interest in order to curb inflation when the economy booms, just as they would trim the rate and uplift the marketplace during a slump.

Thanks to the prowess of the bankers, an extreme tilt of the economy was a thing of the past. No longer was there a threat of high inflation at one extreme, or the specter of a severe recession at the other end. Ergo, the business cycle had been vanquished for good.

Fair-Weather Wizards

Sadly, though, the reports of dead cycles were a tad premature. The Olympians of central banking might be mighty but they were not omnipotent.

Granted, the overlords could steer the economy under normal conditions. The power to control, however, was stunted in the throes of an upheaval.

The limits to clout were spotlighted by the financial crisis of 2008. The central bank could manufacture money to its heart’s content, but the mounds of cash by themselves had no power to grease the wheels of commerce.

Instead, the mounds of freshly minted dough sat idly in the vaults as commercial banks hoarded their cash and refused to lend them out to the mainstream firms that needed the funds in order to finance their routine operations. Starved of cash, companies both healthy and infirm buckled under the strain.

The resulting breakdown of the global economy would end up proving the swamis wrong. For this reason, we are unlikely to hear much from the pundits on this score over the near term. In fact, we can expect to enjoy a couple of decades of relative silence.

After that stretch, though, all bets are off. A new strategies generation of rookies, having grown up without intimate knowledge of major slumps, will surely make similar claims about the death of cycles.

Boom and Bust

In the meantime, we can look forward to an endless chain of undulations in the global economy. Given this backdrop, the state of the business cycle plays a crucial role in the long-range plans of the strategist.

As an example, a company that expands its operations with abandon during an upsurge in the economy is simply taunting the gods of fortune. The plunger stands a good chance of going bust during the downturn that is sure to follow in due course.

On the opposite side of the cycle, an outfit that treads too timidly during a downswing can also end up in a pickle. More precisely, the wimpish player will lose what market share it had to an aggressive firebrand that has positioned itself during the recession to take full advantage of the upswing that always comes around sooner or later.

For a variety of reasons, then, the strategist has to keep track of the quartet of economic strategies factors in order to prosper – or even survive – in a chaotic marketplace. The four forces set the stage for a lucid strategy in the realms of business as well as investment.

Moving in Tune

The four pillars of the marketplace play a fundamental role in describing the status of the economy as well as influencing the course of events downstream. Given this backdrop, a planner in any domain has to consider the quartet of factors in order to sketch out a meaningful map for the future. In particular, the need for a coherent picture applies to strategic planning in the fields of business management strategiesas well as investment planning in a global marketplace.
Impact of the Economy on Strategic Planning
Impact of the Economy on Strategic Planning

Top Strategy Topics to Understand Geo-Strategy News, International Security Events, Global Politics Analysis, Global Trends and Forecasting, Economic Development and Reconstruction, Energy and Climate Change, Global Health and Human Rights. Tags: News, strategy, topics, security, geopolitical, strategies, economies, war, military, armed, economic development, international relations, history, geography, environment, NGO, alliances, European Union, flags, USA, United State of America, international relations, history, geography, environment, NGO, alliances, European Union, flags, USA, United State of America