Economic Factors That Influence Manager Decision - Essay Example

Economic Factors That Influence Manager Decision number Due Economic Factors That Influence ManagerDecision Introduction The business world has become more competitive as compared to decades ago. Organizations are implementing strategies that will not only see them be competitive in the market but also remain relevant. For this to happen, there is a need to always to be ready to embrace change that is brought forth by the different decisions that are made so as facilitate the change. In this light, multinational corporations have always faced challenges especially in the management level given the size of the organization. It is imperative to understand that multinational companies are often tasked with making sure that the branches in other countries perform as expected. However, this does not come easily as there are decisions that are need to be made. Moreover, there are implications of the decisions that will be made. Therefore, this paper aims to present an in-depth understanding of the economic factors that influence the managers’ decision-making activity. To begin with, it is important to understand that economic factors refer to the changes that take place in cost and prices of commodities, the exchange rates, inflation rate, and interest rates among others. In simple terms, they hamper the ability of an organization to generate profits thus often require to be monitored closely (Arnold, Birkinshaw and Toulan, 2000). Lack of this may have serious consequences on the organization and may even bring it to its knees. It explains why organizations are laying so much emphasis on the economic factors when it comes to decision making. It is imperative that organizations look at their budgets before setting out to start a project. This is because it will be able to give them an overview of the finances they have to carry out the project. However, there have been instances where organizations did not look at the resources they have due to myopic vision. Most of these leaders were driven by the interests that had been forecast if the project succeeds but did not want to look on the other side of what happens to the organization when the project fails. Take the case of Apple Inc in the 1990s when it was on the brink of bankruptcy because of the decisions that were being made by the management (Anderson, Sweeney and Williams, 2000). It forced the board of members to employ back Steve Jobs who had parted ways with the organization. Therefore, this is just but an illustration of the importance of an organization working within its budgets in relation to the resources available. Another economic factor that comes into play is the maximization of value. It is imperative for any organization that wants to associate itself with success to maximize values. This is what influences the managers of multinational companies when they make decisions. The aim of any business entity is to make profits, and if this does not take place, then there is no need of operating because it will mean that losses will be frequently incurred. However, this does not mean that the organization forgets there is a need to have a balance between maximization of profits and minimization of costs (Blackman). In this light, it is important that an organization is able to find the lowest cost suppliers that meet the quality of the company. Therefore, in doing so the organization is able to not only remain competitive but also relevant. Taking the case of McDonald, it needed to give quality foods to its clients in Asia as well controlling the costs of operation. Therefore, the management was forced to make alternative choices because it would be costly to transport the ingredients from the United States to Asia so that they may have uniformity. They decided to involve different communities in Asia to provide them with the ingredients they needed (Bayne and Woolcock, 2011). This saved on the costs that would be incurred when brought from the United States and at the same time quality of the product was maintained. Another factor that is often taken into consideration is the costs and benefits. This is because it is important to know what is being spent and what is to be gained from that expenditure. It explains why organizations often take their time in analysing the costs that are incurred in the organization and the benefits to decide whether the product or service should continue being generated or done away with (Shapiro, 2006). When there is a balance in this, then the organization is in a stable position and can be able to support its activities without much strain. In this light, organizations should take into consideration the benefits and costs before committing to a project (Zhao, 2012). Taking an example of the Bimbo group that is involved with baking, they applied the costs versus benefits model. In this light, when we look at the distribution channels that are used by the company it is interesting because they have reduced the costs of operation. They hire distributors through contracts, and this alleviates costs such as buying trucks for transportation and employing drivers. Another factor that influences the decisions that are made by the multinational company is such as the fluctuation of exchange rate. This is because it will have an effect on the cash flow of the corporation through the transaction, economic exposure risk, and translation risks. In this light, it is imperative to understand that there are two types of exchange rates; the unexpected changes and the expected changes (Rugraff and Hansen, 2011). Many a times organizations often have the capability of responding to an expected exchange, but the unexpected change is somehow complex. However, it is imperative that the currency fluctuation risks and considered. Translation risk comes from the changes that are carried out to the financial statements of global companies. We have financial progress being measured in its resident currency and converted into the multinational corporations’ currency parent after each statement has been consolidated (Reinalda and Verbeek, 2004). However, the translation is often affected by the exchange rates. In addition, the fluctuation that takes place in the currency exchange rate, the annual accounts of the multinational companies may either make gains or losses. This forces the management to have a balanced balance sheet. In this light, it is imperative to understand that translation profit or loss impacts hugely on the profitability of the organization and is more dangerous than those that may be caused by operational activities like profit and sales margins. Transaction risk also known as the cash flow risk is generated from currencies of regions. This comes into existence when projected cash transactions of an organization are influenced by exchange rate fluctuations (Palacios Lara, 2008). Though it is a clear and simple form of exchange rate risk, it is important to understand that it still influences the decisions that are made by managers. Economic exposure risk occurs when there is a change in the financial performance of the organization that is brought about by fluctuations that arise in exchange rates. Economic exposure is a representation of any impact of exchange rate variations on the imminent cash flows of companies. Notably, cash flows are influenced by exchange rate movements but will not be connected directly to foreign transactions (Mintz and DeRouen, 2010). In this light, it is important that multinational companies verify their economic exposure to enable the management to effectively manage it. It becomes a difficult task in managing economic risks that impact on the exchange rate on net flow. Furthermore, it forces the management to tread carefully because the decision they make will also impact on their cash flows. Another economic factor that influences the decision making of managers is economic growth. When economic growth is high in one country and low in another, then it affects the international markets as well as the demand for goods and services (Molero, 2013). Taking a case scenario of the 2011-2012 Eurozone debt crisis that slowed down the growth of the economy in many European countries while other countries were experiencing economic growth meant there were decisions that managers of multinational companies had to make so as to ensure stability continues existing. In addition, it often forces multinational companies to consider such disparities in planning and operational activities. Competition has an influence on decision making by the management. It is imperative to understand that when multinational organizations set out to have a new company in a different country their aim is always to have stability. It is their hope that the organization will be stable and thus be able to compete with other businesses (Knowles and Wareing, n.d.). However, things may be different if the company does not show sighs of stability and is always being bailed out. In the long run, the management will be forced to take action. The reason as to why the company cannot have stability is high competition in the environment. An example is Wal-Mart stores who have always been known to have stores in different parts of the world. They have closed stores on different occasions if they realized that it was not making profits as expected. The management comes up with the decision after it realizes that the organization is not able to compete in that environment. Government policies also have an influence on the decision that the management makes. The policies in place have an economic impact on the activities of the organization. In this light, things such as taxes that are placed on multinational organizations may favour them or not. Therefore, when organizations find that government policies are not favouring them, it may force them to withdraw their services or products from the country (Ho, 2010). It is central to bear in mind that the aim of any business entity is making profits and if this cannot happen then it becomes irrelevant to have the business operate. However, when the policies are favourable, then it becomes relevant for the business. For example, McDonald being a multinational organization has faced challenges such as being labelled as an organization that only aims at serving their interests. The economic environment is also crucial when it comes to decision making. This is because it refers to the capability of customers to buy products and services. In this light, multinationals are often exposed to different economic environments (Carnahan, 2004). Therefore, it implies that the decisions made have to take into consideration different environments as well as accommodating them. If this does not take place then, it places one organization that has been ignored in danger and thus the impact will also be felt by the other organizations. This requires an in-depth analysis of the economic environment so as to know how to go about the decision that is to be made. The last economic factor is social responsibility where organization should be obliged to the customer they serve. This is because every business is needed to act in the interests of the general public as well as for the common good (Chini, 2004). Therefore, when organizations are coming up with rules and regulations, they will need to consider the customer. Taking an example, of the banks in the United Kingdom where the legislation does not grant the banks permission to impose any fees, which may be interpreted as unreasonable. Conclusion It is important for multinational companies to have a clear understanding of the different economic factors their organizations are exposed to. This is important as it will enable the management to make decisions that are not only time conscious but also appropriate. Multinational organizations are facing different challenges and they have to take the step of controlling factors that are present in their environment. In addition, these economic factors give us an overview of why the management needs to come up with techniques that will ensure the process of decision making is smooth. Bibliography Anderson, D., Sweeney, D. and Williams, T. (2000). An introduction to management science. Cincinnati, Ohio: South-Western College Pub. Arnold, D., Birkinshaw, J. and Toulan, O. (2000). 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