Question

After reading the opening case in chapter 1 (page 3-4), discuss how both microeconomic and macroeconomic factors influence the global automobile industry. Also, discuss a real business case scenario in which you or someone in the management position in your company needed to consider both the macro and micro-economic factors to analyze a business problem. If you don't have such an experience, please consider a hypothetical scenario. This is from the book Economics for Managers ISBN-13: 978-1-32-301585-8

Answer 1

Macro:

Macro environment refers to the overwhelming and external factors that the firms cannot have the influence on which can affect its business if not addressed. The economy of Malaysia has been in a healthy growth, however it the year of 2012 has dropped. In addition, the inflation rates of the year 2012 have dropped from a whopping 2.7 to satisfactory 1.3 during a year.

These factors have directly affected the inflation and unemployment rates of Malaysia, this is because the inflation rates have fallen and the unemployment rated have fallen as well.

Micro:

Micro environment refers to the internal factors that relates to a business environment which can affect the business’ operation. These factors are suppliers, shareholders, competitors, customers and distributors. These factors have played a very big rule in the performance of proton, where proton has a big problem with their suppliers, as well as a drop in its market shares, as they have a big competitor in the market which is Perodua, the other factor that has affected proton is the customs, where Proton is facing difficulties in dealing with their customers, in fact proton is losing its customers due to the lack of service and lack of trust.

Cross Culture and Global Issues:

Being an automobile industry, this firm has to deal with other cultures on a daily basis. Cultures are hard to define values, norm, and traditions. Understanding culture is an extremely complex concept. Various theories have been made on culture but the most projecting perhaps is of Greet Hofstede’s.

Hosfsted’s Cultural Dimensions:

Collectivism and Individualism: This refers to the extent to which people of a country a willing to work together. In collectivistic societies people tend to better put the groups needs first eliminating personal goals, whereas countries with invidualistic culture have follow personal or individual attainment over the groups.

Power Distance: this refers to the extent to which people accept the hierarchal position to be authority in the business environment. Meaning in high power distance societies like Pakistan, India, Bangladesh, people tend to respect the authority because of their hierarchal of social status other than personal achievement like that in the low power distance societies like France, Italy.

Uncertainty Avoidance: Refers to the extent to which people accept change in the society. Countries like Indonesia, North Korea, and Japan represent a high uncertainty avoidance whereby they dislike change.

Masculinity and Feminism: relates to the role of women in different cultures, masculine culture believes Male to be the dominant part of the family and the only one allowed to support the family financially. Cultures with low masculinity dimension show females to be an important part of the workforce.

Suppose I am a manager in a company

Two Perspectives: Microeconomics and Macroeconomics

1. Microeconomics: Branch of economics that analyzes the decisions of individual consumers, firms and industries. Microeconomics is analogous to viewing a detailed picture of the economy under the microscope.

• Prices, amounts of money charged for goods and services in the economy, influence the behavior of consumers and producers.
• Prices of outputs and inputs (land, labor capital, raw materials, entrepreneurship) affect production decisions of firms.

1. Managerial Economics: Microeconomics applied to managerial decisions of businesses.

• Macroeconomics: Branch of economics that focuses on overall economic activity. Macroeconomics is analogous to viewing a big picture of the economy from 30,000 feet in the air.
• Changes in the overall price level and amount of unemployment affect consumers and producers at the aggregate level.

1. Microeconomic Influences on Managers

• Relative Price: The price of one good in relation to the price of another good.
• Consumers respond to relative prices (prices of Japanese cars relative to those of their US competitors)
• Businesses choose their input combinations based on the relative prices of the inputs (wages in Japan relative to wages in the US; the price of one material versus the price of a substitute material and so on)

2.Non-price factors and their impact on the cost to the consumer (the cost of financing a car purchase)

• Product specifications and the consumer preferences (Chinese market versus US market)

1. The strategic decisions of managers depend on the market structure.

1. Markets: The mechanisms used for the buying and selling of products. There are four markets used in microeconomics, ranging from perfect competition, monopolistic competition, oligopoly, to monopoly.

1. Perfect Competition: Market structure characterized by a large number of firms that sell an undifferentiated product, with easy entry into the market and complete information available for all participants.
   1. Each firm is considered a “price-taker” that has no influence on the market price of the product.
   2. Profits signal new firms to enter the market until all profits are competed away as new firms enter the market to capture the excess profit.
   3. Profit: Total revenue to the firm from the sales of its product minus the total cost of production.

1. Market Power: Ability of a firm to influence the market price of its product and strategies to earn large profits over time.

1. Imperfect Competition: Market structures of monopoly, oligopoly and monopolistic competition in which firms have some market power.

1. Monopoly: Market structure characterized by a single firm producing a good with no close substitutes.
   1. Barriers to entry (structural, legal or regulatory) exist that prevent other firms from entering the market easily.
   2. A firm with market power is considered a “price maker” and has to lower prices to sell more output.

• Monopolistic Competition: Market structure in which many firms have some degree of market power and produce differentiated products.

• Oligopoly: Market structure in which a small number of large firms dominate the market. These firms have market power but must consider their rivals’ actions into account when developing strategies.
• In the case of analysis, Ford, GM, Honda, Toyota and their major competitors are multinational firms that have significant market power and are not perfectly competitive
• The goal of firms is profit maximization. Firms develop strategies to earn the highest profits possible.

• Macroeconomic Influences on Managers

• The circular flow model demonstrates the flow of expenditures between households and firms at the aggregate level.

• Consumers buy goods and services produced by firms in the output market.

• Consumers supply inputs (land, labor, capital equipment and entrepreneurship) to firms in the resource market. They receive payments for these inputs in the form of wages, rent, interest and profits.

• Absolute Price Level: Measure of the overall price level in the economy.
• The circular flow model is used to analyze spending behavior in the economy.

• Gross Domestic Product (GDP): The comprehensive measure of the total market value of all currently produced final goods and services within a country in a given period of time by domestic and foreign supplied resources:

• Personal Consumption Expenditures (C) by households on durable and non-durable goods and services.

• Gross Private Domestic Investment Spending (I) on non-residential structures, equipment, and software in addition to residential structures and inventories.

• Government Consumption Expenditures and Gross Investment (G) at the federal, state and local levels.

1. Net Export Spending (F), or Export Spending (X) minus Import Spending (M).

• GDP=C+I+G+F or GDP=C+I+G+(X-M)

• Factors affecting macro spending behavior.

1. Changes in consumption and investment behavior in the private sector.

1. Monetary policy and fiscal policy.
   1. Monetary Policy: Policies adapted by the country’s central bank that influence the money supply, interest rates, and the amount of funds available for loans, which , in turn, influence consumer and business spending.
   2. Fiscal Policy: Changes in taxing and spending by the executive and legislative branches of a country’s national government that can be used to either stimulate or restrain the economy.

• Changes in the foreign sector including the exchange rate (the US dollar exchange rate against the Japanese yen and the implications on the behavior of the Japanese auto makers).