Impact of Economic Changes on Managers - Case Study Example

How Managers in International Companies Have Been Affected By Recent, Radical Changes in the Economic Situation Table of Contents 0 Introduction and Economic Scenario 3 2.0 Impact of Economic Changes on Managers 5 3.0 Examples of Successful and Unsuccessful Companies 10 4.0 Conclusion 11 5.0 Recommendations 12 References 13 1.0 Introduction and Economic Scenario The economic and financial change is a matter of common phenomenon in a global business environment. A favourable economic condition may lead to a growth in the business sector of an economy and an unfavourable economic condition may result in rise in inflation rate, interest rate, wage rate and others. The current economic crisis of 2009 had greatly affected worldwide nations. Multinational companies in order to survive in the foreign market developed several strategies during the crisis situation. Multinational companies which operate in emerging economy of developing nations took certain steps in order to handle the situation. A drastic change in economic situation in a worldwide basis has created an impact on various business sectors around the countries. The boom in economy may result in growth and benefit in business and slump down of economy may lead to loss in business. When the economic situation is favourable, i.e. in low interest rate and in rising demand, there is a huge growth in economy (The Times 100, 2011). There were two current issues of economic crisis: one was financial crises and the other was related to production and employment. The financial crisis emerged from the US and it had an impact on almost all of the developed nations. The government performed the fiscal stimulus package to fill the gap of demand slowdown of public sector (Wray, 2009). Lehman Brothers Investment Bank had led to huge loss of several billions of dollars in the mortgage market of the US. The stock market of the US fell down due to collapse of Lehman Brothers and the banking shares were hardly hit. The failure of Lehman Brothers had adversely affected the stability of global financial system (BBC, 2008). The policy makers are failing to address the structural reforms as well as regulatory changes which are essential in order to make certain that a repeat of the crisis does not take place and international policy coordination is proving to be insufficient to the task. German, French along with British banks hold the debt of the bordering countries. By the end of 2011, it is predicted that there will be European banking crisis due to sovereign debt defaults (Carnegei Endowment, 2010). The economic along with financial crisis will be affecting the global business time-to-time. The US has been under the threat of pressure of economic downturn. The growth of the country has turned to be negative again from the end of 2010. The unemployment rate is also rising as 2 millions of American workers were laid off within six months (Global Europe Anticipation Bulletin, 2010). In this paper, various economic crises that had cropped up in the global market will be described by analysing the worldwide financial crises. The crises which have occurred in relation to economy and finance have greatly affected the multinational companies. The paper will also highlight different difficulties faced by managers while handling issues related to different people during financial crisis. 2.0 Impact of Economic Changes on Managers The financial crisis in the US from the period 2007 to 2010 had resulted in liquidity shortfall. It has led to ‘collapse of large financial institution’ and also ‘bailout of bank’ by means of national government along with downturn in the stock market worldwide. This crisis can be considered as one of the major economic crisis after the Great Depression which occurred in the year 1930. The managers associated with such organisations were in great hardship. The economic deficits had become a challenging factor for them. The economic downturn had also affected both developed multinational companies as well as emerging multinationals. In this regards, the managers belonging to these companies had to face challenging task in order to overcome the economic downturn. Companies required dealing with the falling demand along with tightening access to loans. As a result, crisis may negatively affect the emerging multinational companies for internationalisation due to lack of financial resources (Filippov, 2011). Though there is a negative impact on the emerging economy as well as on emerging multinational companies, the main global economic growth has been seen in emerging economies. The Economist Intelligence Unit makes a prediction on the recovery of the global economy in 2011 with the world economic growth of around three per cent. The managers who were working in emerging economy and multinational companies as well were struggling in each situation to overcome the problem of economy. Due to their efforts there was economic growth in those areas. The economic growth in developed economies will represent to a certain extent of above one per cent. In contrast, emerging economies will represent a growth rate of seven per cent. For example, instead of economic downturn Geely Holding Group took an initiative for the acquisition of Volvo car from Ford motor Company and the agreement was made on March 28, 2010 with a value of $1.8 billion (Filippov, 2011). Several companies in Europe and the USA were facing difficulties while accessing the credit due to rise of global financial crisis. They were deactivated in their operations by this credit crunch. Due to the global financial crisis, inter-banking lending system was also affected. The developing countries’ bank which was depended on the bank of developed countries for credit crunch faced tremendous problems while making the operation. The managers of the bank were also in high dilemma for managing such situation and as a result they took several risk management strategies in order to manage such situation (Njoroge, 2009). The financial crisis of the US had an impact in international companies as well as its managers in other parts of the world. For example, one of the largest automobile sectors Toyota was majorly affected by the financial crisis. The company achieved one third of its total sales from the US but the recession led to decline in the sales of Toyota up to 37% in 2008 and in 2009 the sales declined by 32%. As a result the company shutdown several plants and the employment rate also slowed down. The managers were facing difficulties to reduce the turnover rate in the company and sustain the job of the workers. In this context, another example is of Caterpillar the ‘world’s largest manufacturer’ of heavy construction tools and vehicles, which attained 60% of sales growth from the external parts of North America but in the late 2008 the sales growth slowed down considerably. As a result the construction of roads and other buildings was declined in the US and other parts of the world. The company also reduced the employment rate and 20,000 workers lost their job. In this company the managers were also in critical situation to manage the company’s resources and to reduce layoff (JA Worldwide, n.d.). The economic crises had also affected the managers of the multinational companies to face various challenges in the global market. In China, the HR managers of the MNC had been facing problem with wage inflation rate. The attrition rate was also on the rise which had increased from 8.3% in 2001 to 16.7% in the mid 2010. The high rate of discharge of the employees’ also affected the reputation of the companies (Knowledge Wharton, 2010). Due to change in economic and financial environment the managers face certain challenges. The managers need to understand the fluctuation in currency value change in international business transaction. The managers have to learn about various financial and economic tools. The economic factors which have an impact on the international business are GDP, GNP and per capita income. In economic crisis, the managers had to maintain certain criteria of employees. For example, in Western Europe the managers maintained higher minimum wages, healthy unemployment benefits and employment protection laws of the employees in order to produce job growth. This is a challenging factor on the part of managers to handle such criteria in time of crisis (Reference for Business, 2011). The global economic crisis compelled the managers of small medium enterprise in developing countries to look at the total value chain and develop the strategies in order to gain efficiency of the organisation (Business briefing, 2009). The current economy and financial crisis around the world has an impact on the corporate social responsibility from the part of managers in multinational organisations. As CSR is considered to be a threat for the survival of a company in financial crisis, thus during such situation a manager needs to develop the objectives related to the expectation of the society. In the time of economic downturn, the extra potential cost for the CSR activities act as a challenging factor for the manager of an international organisation. Owing to such situation the CSR activities have decreased to a large extent in the international organisation. In the USA, the CSR projects were decreased to a greater extent than Europe due to financial downturn (Giannarakis & Theotokas, 2011). The economic crisis has affected the automobile industry in the US. By considering the case of Ford Motors it has been observed that the company stopped production of car for one month by the end of the year 2008 due to decrease in demand of car. As a result around 5000 workers of the company and 1000 additional workers faced ‘economic and temporary unemployment’. The manager of the company also faced challenges to retain the employees. In February 2009, the production was again stopped in the company. The government adopted measures to reduce the labour tax in order to protect the automobile sector. The company possess necessary management and leadership capabilities in order to work in challenging environment (Eironline, 2009). The managers and employees both were affected by the economic crisis but the financial managers of the company were in great difficulties during the period of crisis. The financial manager of Ford borrowed money in expectation of decline in sales as well as profits of the company. They also sold stock along with bond in order to increase the money that the company would be required at the time of crisis (Pride, 2011). Walmart is one of the largest departmental stores in the US. During the economic hardship the retail store did not slow down and maintained their sustainability. In such situation they even grown to be much stronger and redouble their efforts. Such a scenario of Walmart was due to the effective efforts from its managers as well as employees’ support. The managers in Walmart are well organised to manage unfavourable situation during economic crisis. The industry develops their worker and manager in such a way that they can manage such situation effectively (Walmart, n.d.). 3.0 Examples of Successful and Unsuccessful Companies The Southwest Airline is one of the successful airline industries in the USA. The economic downturn in 2009 had lowered the demand of airline industry and thereby creating a significant impact on the industry. The rise in fuel price in the year 2008 and 2009 led the industry to reduce the capacity. The managers of Southwest Airline had to take into consideration this crisis as fuel is an integral component of airline industry. Managers of Southwest Airline used the option of fuel hedging to tackle the rise in fuel price in 2008, which contributed to cash saving of $1.3 billion (Brooks, 2001). The global economic crisis had severely affected the US economy. The bankruptcy of the Washington Mutual can be observed as a significant occurrence which reiterated the economic crisis related scenario. The scenario can be observed from the statements provided below: “US reeled under the news of the biggest bank failure in its history, as federal regulators seized the largest American savings and loan institution, Washington Mutual (WaMu), which came to symbolize the excesses of the mortgage boom. Regulators brokered an emergency sale of the assets to JPMorgan Chase for $1.9 bn. WaMu’s assets were $307 bn and it was also the sixth largest US bank, behind Bank of America. With this acquisition, JPMorgan will now have about $900 bn in deposits” (Directory Journal, 2008). 4.0 Conclusion With reference to the above report it can be concluded that economic downturn brought crisis in various nations as well as multinational organisations. From the above analysis, it has also been observed that the global economic failure has led to sufferings of both developed and underdeveloped nations. The multinational companies operating in developing nations faced tremendous challenges due to lack of financial support. The managers in the international companies also faced several hardships in the long run. The economic crisis in the US and Europe had an impact on several developing nations. Due to economic downturn, the country had faced various problems in unemployment and productivity as well. The maximum rate of layoff of the employees may lower the reputation of a company. The turnover also brought sufferings from the side of an individual. It can be concluded that the multinational companies need to act effectively during such economic hardship. 5.0 Recommendations The economic downturn can arise at any situation and therefore the managers of the international businesses should be prepared to face the upcoming challenges. The managers must learn to develop the strategies in order to manage the situation during economic crisis. The managers operating in the foreign countries must understand the changing situation of the global environment as they are dealing within different types of labour force in the organisation. The managers are also responsible for managing the employees’ turnover, incentives, hiring and others during the economic downturn. During such economic downturn managers may reduce the bonuses and gratuity in order to balance the economic shortage. The managers must observe carefully that, resource of the organisation should not be wasted and must be in proper use. The concern must also be given in case of cutting the working hours along with maintaining the work standard and productivity. The managers through various procedures must develop the skills and also train the employees in an organisation to overcome such challenges. Maintaining the situation during economic crisis is a challenging task on the part of the manager of international organisation thus they must be well prepared to face such situations. References BBC, 2008. Lehman Bros Files For Bankruptcy. News. [Online] Available at: http://news.bbc.co.uk/2/hi/business/7615931.stm [Accessed March 29, 2011]. Brooks, R., 2001. A Life Cycle of Enterprise Risk Management the Case of Southwest Airlines Jet Fuel Hedging. Economics, Finance and Legal Studies. [Online] Available at: http://www.cba.ua.edu/assets/docs/efl/WP_10-02-01.pdf [Accessed March 29, 2011]. Business briefing, 2009. The Impact of the Global Economic Crisis on Developing Countries, In Particular LDCs, And the Role of Trade Financing. Financial Crisis. [Online] Available at: http://www.intracen.org/btp/wtn/newsletters/2009/fc1.htm [Accessed March 29, 2011]. Carnegei Endowment, 2010. 2011 Global Economic Outlook: The Euro Crisis, Currency Tensions, and Recovery. Issues. 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