There is no doubt that company success depends on firm-specific factors such as company size, which help distinguish them from competitors. However, their survival hinges on their ability to anticipate and respond to foreseen and unforeseen changes in the larger, external environment. These changes have industry-wide and nation-wide implications that necessitate their consideration by firms. The ties between company performance and macroeconomic conditions rest on which macroeconomic factors strongly correlate to the industry in which it operates (Zeitun, Tian, & Keen, 2007). Macroeconomics, therefore, examines the aggregate economic relationships in an economy (Evans, 2004). The basic concepts of aggregate supply and aggregate demand underlie this branch of economics. The effects of these concepts manifest in the fluctuations in macroeconomic measurements such as inflation rate, prices, and employment rate. It is, therefore, crucial for managers to keep abreast of these vacillations for them to make appropriate reactionary decisions to minimize their shocks on daily operations.
Aggregate demand refers to the collective demand (real GDP) for all commodities purchased by economic agents such as households, government, businesses, and foreigners in an economy within a specified period, usually a year (Tucker, 1999). It has a negative correlation with the general price level prevailing in the country. The price level can affect aggregate demand by effecting changes in real wealth balances, interest rate, and net exports (Tucker, 1999). Price increases during periods of inflation lower the real value of financial assets held by households such as stocks, raises the lending rates, and shortens the net export gap (Tucker, 1999). In contrast, price declines during economic downturns generate the opposite effects. Shifts in the aggregate demand curve arise from non-price changes in any of its components – consumption, investment, government expenditure, and net exports.
Consumption trends in the economy can inform business policies such as product innovation and diversification, marketing, and input sourcing decisions. Managers can analyze the fluctuations in the Consumer Price Index to determine the general patterns in tastes, preferences, and purchasing behavior of consumers. For instance, a fall in demand for certain products in a given basket of market goods imply shifts in preferences or buying power that may compel managers to either conduct aggressive marketing or cut the prices of their products (to accommodate wage reduction) respectively. These approaches aid the firm in staying relevant in the market and maintaining its market share. Investment trends determine the number and scope of viable projects that a company can undertake successfully to yield returns. Changes in investment result from fluctuations in interest rates, profit projections, corporate taxes, and technological development among others. Non-firm factors such as taxes will affect the net profits of a company. If the government raises taxes, net profits decline, forcing firms to cut on investment spending. Constrained by diminishing profits, a prudent manager will select the most cost-effective project to invest in rather than incur massive loans to fund several projects simultaneously. This decision may enable the company to stay profitable and competitive by minimizing the adverse effect of such contractionary fiscal policies. Changes in government expenditure usually follow the implementation of fiscal policies to either stimulate aggregate demand or curb inflationary tendencies. During a recession, for instance, a manager can anticipate infrastructural expenditure by the government, and manufacture more goods for warehousing to meet the rise in consumption demand that is likely to ensue. Hence, the firm will be able to make higher sales when consumption demand grows, unlike competitors who will be grappling with production.
Aggregate supply refers to all commodities produced in an economy within a given period (Tucker, 1999). Factors that affect aggregate supply include taxes, resource prices, subsidies, and regulators. Resource prices significantly influence the production mix of manufacturing firms because of their cost implications. For instance, a rise in the minimum wage in an economy will increase the labor costs of firms, leading to cuts in production that reduce aggregate supply. A manager can respond to salary increases by either laying off some workers or outsourcing production to countries with cheap labor, thus minimizing insolvency risk. Regulatory changes revolving around environmental conservation, consumer product safety, and occupational health and safety standards increase the cost of doing business and eventually reduce aggregate supply. In the course of their operations, firms usually generate social costs (externalities) such as pollution that they overlook (Porter & Kramer, 2011). The government may impose taxes or penalties to force them to internalize these costs. Hence, companies that can adopt a shared value approach by efficiently minimizing their externalities through reconceiving their products and manufacturing processes will attain success.
Together, aggregate demand and supply create business cycles that affect the gearing and profitability of companies (Bhattacharjee, Higson, Holly, & Kattuman, 2007). While predicting these cycles with precision is impossible, managers can obtain valuable advice and guidance on their possible shocks on company performance by evaluating how consumers, government, and competitors react to these cycles (Evans, 2004). Most often, insightful information comes from analyzing changes in macroeconomic measurements such as unemployment rate, inflation rate, balance of payment, interest rates, and consumer price index. Trends in these indicators alert managers to imminent endogenous shifts in the industry or economy, enabling them to make informed business decisions and alterations to the overall strategic plan for better performance.
References
Bhattacharjee, A., Higson, C., Holly, S., & Kattuman, P. (2009). Macroeconomic Instability and Business Exit: Determinants of Failures and Acquisitions of UK Firms. Economica, 76(301), 108-131. doi:10.1111/j.1468-0335.2007.00662.x
Evans, M. K. (2004). The Importance of Macroeconomics. In Macroeconomics for Managers (pp. 1-14). Retrieved from http://down.cenet.org.cn/upfile/8/2009529152422188.pdf
Porter, M. E., & Kramer, M. R. (2011). Creating Shared: Value How to reinvent capitalism and unleash a wave of innovation and growth. Harvard Business Review, 1-17. Retrieved from https://www.hks.harvard.edu/m-rcbg/fellows/N_Lovegrove_Study_Group/Session_1/Michael_Porter_Creating_Shared_Value.pdf
Tucker, I. B. (1999). Aggregate Demand and Supply. In Microeconomics for Today (pp. 464-495). Retrieved from http://www.swlearning.com/ibc/tucker3e/pdf/Tucker_ch20.pdf
Zeitun, R., Tian, G., & Keen, S. (2007). Macroeconomic determinants of corporate performance and failure: evidence from an emerging market the case of Jordan. Corporate Ownership and Control, 5(1), 179-194. Retrieved from http://ro.uow.edu.au/cgi/viewcontent.cgi?article=2533&context=commpapers
