The influence of macroeconomic conditions on market participants - Essay Example

Introduction. The success of each company depends on many factors. Its management, financial sources, ability to advertise and communicate with itspotential and current customers plays an important role in the business activity of the every organization. Nevertheless, the company and marketing specialists should not focus just on microenvironment factors; macro-environment that comprises social, political, economic and legal factors is just as much important. None of the companies is able to control them, yet these factors may hamper or facilitate the business activities of many companies and the stability of the market in which the company operates in. The net profit of the company can be affected by the rate of inflation, tax policy of the government, import duties and export subsidies. The level of sales of the products or the services that company provides might be in correlation with current unemployment rate, business cycle and other important macroeconomic indicators. In today era of globalization and liberal trade between the countries, it is imperative for most of the companies to take into account some global issues as well. Multinational companies that invest in other countries, as well as manufactures that transform the production of cars, computers and other goods in less developed nations must consider political economic and social conditions before they take some actions. If the level of corruption is high and the tax and legal systems of the country are unsound, then few of the companies would be able to operate successfully in this environment; ethnic conflicts as well as terrorist threats can hamper business activity of corporations as well and reduce their intentions to invest in unstable countries overseas. The most successful macroeconomic environment for the company whatever products it produces and whatever services it provides would be the country with developed infrastructure, high growth rate of the economy and above all –stable and predictable tax and legal systems. Discussion. Purchasing powers. One of the most important factors that affects the business activities of companies is the Purchasing Power. If the purchasing power is low, as it is in less developed countries, then the company is not able to sell expensive products or the level of sales may be lower than expected one. However, the company should not focus on this factor alone. One should remember than in developing countries, the large portion of GNP may be produced in so called “shadow economy”, whereas gods and services are produced and not counted in official GNP. Workers employed at the enterprises can receive so called “under table wages” and thus the real Purchasing Power may be a little bit higher than the official one. Even in stable, developed countries, marketers should thoroughly evaluate the real level of Purchasing Power. One should remember that in spite of statistical increase of Purchasing power the real one may decrease due to several factors, such as the level of inflation (if it is high than the real purchasing power of consumers decreases).Marketers should evaluate these factors thoroughly before any operation is launched. Purchasing power is also affected by other factors such as the level of savings in the economy, this factor is especially important if consumers have some objective expectations about future prices (consumer might hold the belief that the prices on some goods and services will increase or decrease), future level of the incomes (if there is an expectations of the increase in the rate of unemployment and consequently decrease in the level of net incomes, consumers might postpone the purchasing of some products); the availability of the products and services ( if there are some grounds to believe that there will be the shortage of several goods and services, consumers might start spending and visa versa). Unemployment. The level of unemployment should be taken into account in developing of the marketing strategy of the company. High level of unemployment usually leads to the decrease in the production of luxury goods (such as expensive cars, refrigerators and other home appliances).On the other hand if the company produces inelastic goods (the goods on which demand is generally stable, such as food and electricity) than high level of unemployment may not affect its business activities. Interest rates and its affect on the decision making process of the marketers. Monetary policy –the changing of the interest rates is one of the most important and frequently used tools by economic policymakers, and as such it affects business activities of all companies. Monetary policy is a complex sets of activities, two of which- the operations in the open bond market and setting of the discount rate affect the interest rate ( during the last several years , discount rate is usually set to adjust to the market interest rates). (John.B.Taylor p.393). These activities are performed by Federal Reserve System which that attempts to change money supply in the economy in order to target some macroeconomic objectives. Low interest rate indicates the intention of the government to boost economy and make credits cheaper. This policy can affect business activities of the companies by increasing the possibilities to obtain credit; due to it companies have more financial resources for the expansion. Potential customers may receive cheaper credit and thus increase the demand on the products or services that companies provide. More companies are established and this might lead to the increase in the demand as well, especially if the company produces some intermediary goods or raw materials. However, one should not forget that this policy may entail the increase in the competition in the market as well, as more companies arrive in the market due to the availability of financial resources. During this type of monetary policy, marketers should develop the strategy to increase the sales of the company and to emphasize the uniqueness of their business in order to countervail the increase of the competition in the market. Restricted monetary policy (the policy conducted to increase interest rate), aimed at the tightening of the money supply in the economy may hamper business activities of the companies. Fewer persons would be willing to purchase the products (as it is more difficult to obtain the credit). This type of the monetary policy may hamper such industries as automobile, retail market and production of some luxury gods and services. During restricted monetary policy marketers should devise new strategies to lure potential customer and preserve current levels of sales. On the other hand this type of the policy may lead to less fierce competition in the market and thus despite the fact that it might be more difficult to obtain financial resources, it can be easier to compete due to the decreased number of the competitors and increased difficulties to get in the market for the starters. In this case the marketers should evaluate and estimate how this type of the policy may affect the business of the organization. Business cycles and their effect on the marketers. Unfortunately, the economic growth has rarely been steadfast. Both the United States and other developed and developing countries have lived through the periods of economic instability and crisis. These fluctuations in economic growth of the countries are called business cycles. Business cycle comprises several phases: 1) Peak of the business cycle (Economy is at the full employment as well as the level of the GNP). Restricted monetary policy is possible. On the other hand, the purchasing power of the customers is high as well as the expectations from economic growth. During this phase the marketers can devise the strategy to expand the operations of the company; however they should be aware that there is a possibility of high inflation and the tightening of the monetary policy by Federal reserve System. The inflation during this phase might cause some problems as the customers may not perceive the prices as the quality indicators (because the prices are rising and the products are priced due to the increased nominal costs). The inflation might also efface brand loyalty (the brands usually compete on the prices as the prices reflect high inflation the brand loyalty can be erased). On the other hand inflation might lead to the effect of the “hot money”, where the incomes of the consumers are spent once they have received them. There can be a tendency to spend as quickly as possible, because there are expectations that the prices on the goods will increase. 2) Recession. Employment might decline as well as economic output. In this case the spending of the consumers might decline as well, as more and more customers would postpone the purchasing of more expensive goods. 3) Trough (depression). The employment as well as the GNP is on the lowest possible level. This type of phase is widely regarded as economic crisis. Marketers develop the strategy based on current difficult economic conditions. 4) Recovery. In this stage the employment as well as the GNP is growing, which in turn leads to higher spending and growth in consumer confidence. Marketers can devise the policy to expand in the market. However, they should be aware that inflation might occur with negatives consequences of the peak phase. In spite of several definite phases, one should remember that business cycles have many variations and thorough or depression is a rare phenomenon in today’s world. Wealth. Past incomes, earned by the persons who are retired should be taken into account in devising of the marketing strategy as well. There is a possibility of the loosing of the part of the income, if the company becomes a bankrupt. Older persons rely on their social security incomes as their income is from Social Security Pensions. As the population of the United States is aging due to the improved standards of living, the marketers should devise the strategies based on the consumer patterns of older people and the proportion of their incomes spent on various goods and services. New proposals in Social security area might lead to decrease in the spending by older people. Consumer expenditure level. This level is closely correlated with macroeconomic indicator GNP/per capita. However, one should take into account that rising cost in several indispensable services, such as housing, health care or cost of the colleges can reduce the consumer expenditure levels as more consumer intend to spent their incomes on the services mentioned. It is imperative for marketers to study this factor in order to understand the incentive of the persons to consume. When the company intends to invest overseas the level of the consumer expenditures is one of the most important indicators, as people in countries with low per capita level have less financial resources to spend their money on some goods and services. Marketers of the companies should devise their strategies, based on the trend in the expenditures levels (the level might be low, though it may rise substantially in following years). They also should remember that due to social, historical and traditional factors there may be different consumer patterns among several countries ( consumers may spend more on one product in one country than in the other nation, even if their levels of consumer expenditures and GNP/per capita are similar). Usually the willingness to pay for the products depends on several factors such as the price of the products-companies try to reduce the prices on their products and services (marketers should not forget however, that the price competition should have some limits as the customers might associate the level of the price with the quality of the products or services); value of products( depends on technological and many other factors); experience with previous products (marketers should monitor how people evaluate the products of the company, whether they require some improvements, whether they have some observations and etc). International marketing. When the company decides to invest overseas several factors should be considered by marketers. Such indicators as per capita incomes, level of corruption and level of economic growth are of extreme importance. In low-income countries, there is more incentive to purchase low-costs goods; as the costs of labor in these countries are low, goods may be manufactured there but only part of the products is sold locally. Potential to growth as well as the availability of the infrastructure (electricity, good roads, clean water and etc) plays an important part in the decision- making process. Conclusion. Economic factors play an important role in decision -making process of each company. The company should certainly try to improve its technological facilities, management procedures and financial operations but the successful activity in micro-environment can be sustained only if the company reacts quickly to macroeconomic factors and adapts its policy accordingly. The marketing strategy will fail if such factors as interest rates, level of unemployment, legal social and demographic factors are not taken into account, as none of the companies is able to operate in environment and outside it. Current political conditions as well as level of corruption might influence the decision making process as well. When investing in other countries, one should always remember that they have different economic conditions as well as different economic potential. More low-cost goods can be sold in less developed countries of Asia and Africa, whereas more expensive ones can be sold in Europe, Australia or North America. Understating of macroeconomic factors and their influence on the business will facilitate the decision making process and improve marketing strategy of the company. Works cited. John.B.Taylor, Robert E.Hall, Macroeconomics, W.W Norton & Company, 1997. Ke Bin Wu, Sources of Income for Older Persons in 2003 Research Report AARP Public Policy Institute November 2005. Available from < http://www.aarp.org/research/family/lifestyles/dd125_income.html>. Read More