Current issues in the economy are very relevant in determining the strategies, structures and practices to be assumed by organizations to achieve their objectives. Ensuring that organization are cognizant of the current economic issues forms a major step in determining the ability and levels of successes that will be realized via seeking the best strategies of addressing the issues pro-actively. Economists argue that organizations should regularly review and harmonize their management strategies to cohere with the highly dynamic economic system (Caren, 2009).
Using economic and management theories this paper evaluates the current issues in the global economy that affects organizations operations with an aim of establishing the best practices that can be used in addressing them. With examples, the paper explores challenges that firms are facing and particular practices that they are employing to counter the negative effects.
The current environment
Since the onset of the current economic slowdown in the global economy, organizations have found themselves in hard times that poses them with imminent loses and possible closures. Notably, firms in US and other industrialized nations have suffered greatly as demand for goods and services sharply took a downward turn resulting to massive losses.
According to Collins (2009), the current economic recession though at a lower quotient can only be compared to the great recession of 1930. Though economic analysts had sent a warning signal in US and UK as early as 2006, it was not until the last quarter of the financial year of 2007 did the United States National Bureau of Economic Research announce that the country was undergoing a recession. Collins continue to say that immediately after this announcement, cycles of events followed as organizations tried come to terms with the looming catastrophe.
Adopted from Collins, 2009
The first month of the year 2008, was possibly the most hostile with implied volatility and an extreme decline especially in the non-US companies shares in the stock market. On 21st January 2008, the global shares in the New York Sock Exchange almost crashed prompting the name black Monday. Organizations and individuals responded to this connotation by sharply cutting their expenses with only the most inevitable ones being considered. Besides, the situation was made worse by the immediate uncertainty of the length of time that recession would last. For countries that tried to estimate the extent of the disaster like UK, they greatly erred in their 2008 projection as the recession continue to bite well after the year ended.
Following the announcement of the downturn onset, the effects echoed globally as most of the firms took precautionary measures and became more careful with their spending. According to woods, whole situation grew worse by the year 2009 with the major cries being overheard globally. Notably, the price of the essential commodities like housing and petroleum especially in US and UK where the market forces dictate the prices went up drastically making large and well established in vestments like Royal Bank of Scotland to scrabble.
In January 2008 the prices of oil surpassed US $ 100 a barrel while in July the 2008, it was US $ 147.3 a barrel. Woods (2009) indicates that over 50% of the major firms in UK and US reported major downward trend in their profits for the year 2008. To add to that, woods adds that 40% more actually recorded losses while over 90% sought alternative means to address the problem.
Inflation for most of the countries has remained high since January 2008. More organizations continue to cry foul as recession show no indicators of receding. By March 2009, organizations had greatly downsized their employees and pushed unemployment to 8.5% (5.1 million people) in US. Industrial output in Russia, Germany and Japan dropped with 16%, 12%, and 31% respectively during the year 2008. This prompted US, UK, and EU governments to seek an end to the fast spreading phantom that was threatening to bring top the knees the whole globe by provision of stimulus packages to their economies.
Adopted from Woods, 2009, Petroleum spot prices between the years 1987-2009
Relevance of the topic
As indicated earlier, current economic issues are the main determinants of businesses ability to progress in a sustainable mode. Entrepreneurial firms are generally established with the main aim being to make profits for the shareholders. Though global downturn is an external force to the firm’s existence and operations, it is used to gauge the management’s preparedness and capacity to handle such situations. Through understanding of the current issues that affect the economy, organizations have been able to reposition themselves and readjust their operations in maintaining the overall profitability.
To add to that, it is necessary as it assists in tracking the progress of events for later disaster preparedness and countermeasures. According to economic recession theory, it is the main role of the central government to establish economic stimulating systems that reduces the overall levels of inflation in the globe (Collins, 2009). As a result, understanding the turn of events especially by organizations is a major icon in determining their stake in the stimulus boosting by the government. By appreciating the major setbacks, it becomes possible for the organizations to prioritize the recovery agenda systems effectively.
Effects of the current downturn directly or indirectly affect organizations and the public globally. According to Snowdon (2005), effect on any factor of production would affect the whole system in those firms’ departments and operations are highly interdependent. Snowdon continues to say that economic downturn has a greater magnitude in that it affects the commodity market, the household and the government with such impacts that may be centered on the business firm.
With most of the consumers being much more flexible in their personal balances which they easily adjust to cheaper substitutes, the firms are relatively fixed with possible vast quantities in their stores and demanding shareholders. Woods (2009) argues that, the firm should be able to study the market with speed and articulate the best measures that would consolidate the available customers, maintain the productivity of the firm and readjust to prepare for recovery after the downturn.
To the central authorities, the understanding is necessary as a mode of seeking the best possible alternative system for addressing the problem. According to Funnel (2009), government is the key central management and the director of all the establishments and developments in a country. As a result, it is a key icon in determining the ability of the downturn to easily be addressed. Therefore, it forms a platform and a road map for effective recovery by cooperating with the local firms that are at the grassroots.
Besides, the government is able to keep a strong oversight and therefore assist the firms in getting back to track. After the US stimulus package that has been seen as the major step in addressing the impacts of the downturn in US, other economic unions like EU, and countries like Japan have been on the drawing board on mission to establish the best techniques for addressing the escalating problem.
Problems or challenges
Following the intensifying downturn since the last quarter of the year 2007, firms and managers have been confronted with major challenges related to internal or external demands which calls greater efforts and creativity to address them. These problems include;
- Upward shift in the cost of raw materials and production services
- Lack of enough credit sources as banks are unwilling to lend more due to inflation. Most of them are closing down for bankruptcy while the few remaining ones have adjusted their rates extremely high to unsustainable levels.
- Decreasing sales as consumers coil back to cut down expenses.
- Maintaining the staff and employees and effectively motivating them during the downturn period.
- Maintaining profitability and customer loyalty even during the time of economic recession
- Preparing for recovery after the downturn
Current practices to address the problems
- Downsizing and lay offs
Globally, mention of the term economic recession has come to be directly associated with loss of jobs by the people. Though analysts have differed over the notion of layoffs and downsizing as major efforts to counter the recession, many firms see it as the most simplistic way of cutting down unnecessary expenses. Since the onset of the current economic downturn, firms have laid down millions of staff globally. As indicated earlier, by March 2009, US had lost over 5 million jobs through downsizing by majority of the firms. In Ireland, unemployment rates reached 8.5% while that of England is considered to be almost equal to that of the 1930 great recession (Collins, 2009).
In the banking industry, most of the financial institution started reducing their staff as early as January 2008. Royal Bank of Scotland has possibly been one of the worst hit by the recession which made it to record one of the biggest losses in its history during the year 2007. Following the onset of downturn in UK with great impact, Royal bank of Scotland has laid off about 2700 people and plans to effect more 9000 employees reduction by the end of the year 2009. Through this reduction, the bank aims at saving an estimated US $ 3.7 billion in the next three years (Caren, 2009).
According to the management of JP Morgan Chase ; Co, the firm intends to lay off about 9, 200 of its employees by the end of the year 2009. This will be accompanied by a holistic restructuring of the firm to operate in a lean mode with less staff. To add to that, the bank of America Corp plans to endorse major restructuring through a merger with Merrill Lynch ; Co a system that will see over 10, 000 investment banking jobs lost by the end of the same year (United Nations, 2009). Besides, Wells Fargo and Wal-Mart have embarked on similar tones which they have emphasized would reduce the overall cost of operation.
While lay offs and downsizing the employees has been the most notable aspect after the onset of the current recession, analysts have called for greater cautions into the same vice. Although many organizations have managed to effect their layoffs and achieve the required objectives, others have found themselves in much worse situations by failing to meet the expected objectives.
Notably, most of the affected employees are those serving in the lower levels and their payments are usually very small. Therefore, it is mostly used as a shield by many organizations for the management in a sycophantic mode to indicate their ability to address the downtown. According to Funnel (2009), organization cultures are very hard to establish and should be nurtured at all stages to ensure sustainability and profitability of any business enterprise.
Ethically, layoffs should be articulated in the most humane mode that indicates concern and care of an organization for the employees. According to Schumann (2001), employees are the most important component in any business unit. Schumann continues to say that organizations that do not give preferences to their staff operate on a highly perilous edge. Layoffs should be preceded by effective communication and preparation by the management for their exit. To ensure that the staff is able to cope with harsh reality of the management, training and compensation should be given to them as a sign of good will.
Layoffs have been linked with major breakdown of employees’ morale a notion that originates from their inner circles. Effective operations in organizations are generally effected through teamwork systems at all levels of management. Therefore, elimination of some staff creates vacuums that have far reaching effects to the image, productivity, and eventual profitability of an organization. In a cyclic mode of reaction by the employees, the initial feelings are related to possible work overload as they have to take up the left positions. In addition, many of the senior staff may be required to do most of the assignments that were previously done by the laid off junior staff.
However, the most destructive notion is lack of uncertainty by the employees. Organizations like Ford Motors, JP Morgan Chase & Co have indicated their desire to effect more lay offs. According to the management of UK Royal Bank of Scotland, though lay offs may effect the ability to reduce the overall cost, the bank may get itself in a situation where it is left with poorly motivated employees and therefore unable to effects its long term goals of being the best bank globally (Caren, 2009).
Due to the anticipated negative impacts by the organizations from layoffs and downsizing, firms have established alternative systems where they can reduce their operational costs with minimal negative effects to the employees. Postponing projects involves withholding the projects that were intended to kick off until such a time when the economy will improve. Most of the organizations are run with long-term management plans that have projects which have to be accomplished in every financial year.
Shell Oil Company postponed plans for a pilot test project on Bitumen carbonates in South America for the yearn 2008 (United Nations, 2009). Others like Aramco indicated its intension of delaying the inviting bids which were earlier meant to get the company invest in South Africa oil processing and cement manufacture. Though analysts have differed on the best mode to approach the main idea of cutting down costs, delaying projects appears to be a better option.
By delaying the new projects, most of the companies are able to put greater emphasis on the most productive systems that assist the businesses in continuous profitability. As indicated earlier, recession period is actually a test of how well the management can be able to address crisis that is externally instigated. With the main problem being reduction in buying capacity of the employees, many companies venture into greater marketing and improvement of the consumer value in their products.
Since maintaining consumers has been considered to be much easier than getting new ones, the delayed projects funds have been applied to solidify the royalty of the consumers. However, care should be taken to ensure that it is only those projects that have minimal effects to the normal production of a company are delayed.
This system’s success is determined by the ability of an organization to identify the correct project to be delayed and fix its funds to the best position that would enhance greater profitability. By delaying various projects and maintaining the employees in the company, it makes it possible to keep the organization culture and raise the employees’ morale. Unlike in layoffs and downsizing practices, delaying projects assist to retain the most profitable and experienced employees in a company (World Bank Group, 2008).
Human resources development being a long process that consumes vast resources of a company, it is necessary for management to guard this investment for the periods of economic recovery. This system will therefore guarantee the management greater resilient capacity after the recession is over due to the presence of experienced workforce.
Payments cutoffs and maintaining staff at home
Payments cutoffs and maintaining staff at home are method applied by companies to ensure that they maintain their staff, the production, and sustain profitability of a company. As indicated earlier, economic downturns is generally one of the most trying moments for the management of different firms. Globally, over 90% of the workers understand the implications of a recession to their companies and their countries too. Therefore, with constant consultations, payment cutoffs have turned out to be an effective method of reducing the costs without unnecessary layoffs.
Southwest Airlines management indicated that due to effective communication, the staff proposed their wages and salaries cutoffs well before the company had announced its strategies for countering recession. Where consultations and effective communication is absent, the proposition is usually taken negatively and may result to killing of morale for the employees.
On the other hand, maintaining staff at home has been assimilated mostly by organizations which are able to transact their businesses online. Presently, information technology has facilitated marketing of products and services online with great efficiency. Therefore, with internet connection, some of the employees are able to make inquiries and market companies’ products from their homes without incurring extra coast accrued by similar operations being operated from office (Woods, 2009).
Though this notion appears quite easy and promising, it requires great care, commitment and discipline to operate from home. Home environment is in most of the cases not always conducive for business operations due to disruptions by other family members especially children. Besides, it lacks effective supervision and the companies might loose control of the management processes of their companies. However, it is very effective when operated on a contractual basis where quotas and targets are set for the online marketers.
Given the current economic situation most of the firms have assimilated several methods simultaneously to guarantee the ability to counter the negative effects and maintain sustainability. As an entrepreneur however, I would seek a merger with a major competitor in my firm’s field of operation. Though mergers are long-term ventures that have to be well thought off, it is equally important to focus on how to address the problem by reaping maximally during the same season.
With mergers, it becomes easier to consolidate the resources of two different companies as banks raise their lending rates to unsustainable levels. To add to that, the merger would act to bring together two companies innovative capacities and therefore devise better products which are compatible with the consumers capacity to buy.
Though Home Systems Company and Intrahome Technologies had plans for merging, it is the current recession that prompted their faster integration. By combining their revenues, the merger was able to raise US $ 4 million which is intended to capitalize on the market when other companies are taking a diversionary route. To add to that, merging would bring together the two managements giving it the impetus for long term focus by establishing a strong springboard for recovery after the recession (United Nations, 2009). However, the system should be applied with other simpler practices that aim at improving the customer value, maintain their loyalty and guaranteeing the employees’ motivation at all times.
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