As a new business manager, the first thing you must be in tune with is the state of microeconomics and macroeconomics. While we are trained to pay attention to the former, the latter can often catch us by surprise and sink our business instantly.
Microeconomic factors are company-specific trends. These are the factors in your business that keep it afloat. Revenue, earnings and margin are the key micro factors at your company. The size of your workforce, the production volume of your products and your advertising campaigns are all micro factors as well. In short, micro factors are parts of your business that can be fine-tuned and changed by the management.
Macroeconomic factors are national and global events which are out of your control. The September 11th terrorist attacks, the financial meltdown of 2008-2009 and the European sovereign debt crisis of 2009-2011 are prime examples of macro factors. Macro factors are dangerous and unpredictable, and a savvy manager must be agile to sidestep a cascading macroeconomic crisis to keep the company intact.
Negative macro factors tend to occur in a cascading chain reaction. For example, increased unemployment in the United States may lead to lower consumer spending, which in turn leads to reduced imports from China, which also causes the Chinese GDP to decrease. A lowered Chinese GDP then leads to lowered expectations for growth, and leads to a decreased demand for natural resources, such as crude oil, iron or silver. This causes commodities to plummet globally, which can adversely affect the profits of miners in multiple countries.
Positive macro factors occur in the same way. For example, as crude oil costs drop across the world on lowered demand, the average American consumer starts spending more on retail goods due to cash saved at the pump. These increasing retail numbers will increase demand for Chinese exports again, causing the Chinese GDP to rise. This in turn leads to a more robust Asian stock market and stronger prospects of industrial expansion. As a result, commodity prices rise again.
Macro trends are largely cyclical, but are impossible to accurately time. Like a captain of a tiny schooner on the open seas, you may be able to watch for warning signs of a brewing storm, but it is impossible to gauge its full impact until you are smack in the middle of it. Negative macro factors tend to uniformly sink all companies across a market, “throwing babies out along with the bathwater” – while positive macro factors uniformly aid all companies across the market, since a “rising tide raises all boats”.
In order to navigate the macro environment successfully, your management team must be in tune with recent market developments on a day-to-day basis, even if they aren’t invested in mutual funds or individual equities. This doesn’t mean watching CNBC religiously and fixating on the crisis of the week; rather, set aside time at monthly meetings to review the most important macroeconomic developments in the world in the past month. Discuss the projected impacts of these macro factors on your business, as well as forward projections to the direction of global markets and industry demand, and if they will cause problems down the road. Staying in tune to these industry-shaking events will help your company batten down the hatches long before your industry rivals, allowing you to weather the storm.