The macro-environment contains several conditions and factors that systematically present opportunities or pose threats to organisations in their effort to gain competitive advantage. The factors in the macro-environment for the purpose of effective analysis are grouped using PEST-model which represents political, economic, socio-cultural and technological factors. Understanding of these factors will influence the kind of strategies business organisations would formulate.
Required:
State and explain FIVE (5) economic factors which determine the nature of opportunities or threats that organisations may face. (10 marks)
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- Economic growth rate – the growth rate of an economy is measured by Gross Domestic Product (GDP) and it is the basic indicator of the general health of the economy. The increase in the GDP rate from year to year means that economic activities are expanding, and more money is being spent in an economy. This presents an opportunity for organisations to expand their business and make more profit. The reverse holds where economic growth is in decline the goods and services produced in an economy reduces largely due to reduced spending by various units including government, private sector and consumption by households. This situation is usually referred to as recession.
- Inflation – this refers to the general increase in the prices of goods and services. Some level of inflation is required in an economy to generate necessary demand for goods and services. Inflation becomes a threat where the rate becomes to high. What is high is relative but here in Ghana, Bank of Ghana charged with price stability has set the right inflation range at 8%+/-2% (i.e. 6% – 10%). This means inflation beyond 10% will be considered a threat to businesses since it negatively affects the purchasing power.
- Interest rate – this is the price or cost paid for borrowed funds/monies and it is part of cost of doing business. When interest rates are generally high the interest cost paid on debt capital becomes high and since the interest cost is fixed companies with low profits will significantly be affected negatively.
- Fiscal policy – this refers to the use by government of taxation and expenditure to regulate economic growth. Generally, when taxes are increased, and government expenditure reduced at the same time to balance the budget businesses get reduced cash flow for further business and goods and services of the organisation demand drops since government is one of the buyers in the economy. However, when taxes are reduced, and government increase expenditure this free up the cash flow and increase demand for goods and services of the business respectively and that is a good opportunity.
- Budget deficit – when government expenditure exceeds revenue it results in budget deficit which must be financed. Budget deficit is financed through borrowing from capital market (both domestic and foreign) and from central bank where money is printed for government. Borrowing from domestic capital market increases interest rates and thereby crowds out the private sector and central bank financing may fuel inflation since increase in money supply is not backed by real productivity.
(Any 5 points)