Economic Factors

Economic Factors

What are Economic Factors?

Definition: Economic factors can have a strong influence on a company’s performance. Interest rates, tax rates, government policies, and the availability of labor could affect a company’s business results. These economic factors could be favorable or unfavorable and are usually not within a firm’s control.

What does Economic Factors mean?

Every business organization has to ensure that it provides its customers with high-quality goods and services at a competitive price. If it fails to do this, its clients could move to the competition, and over a period, the company could see its sales and profits falling.

Tackling quality issues and providing efficient customer service is within a firm’s control. But there are several factors that a firm cannot influence. These include:

⇨ The level of demand in the economy.

⇨ The employment level.

⇨ Consumer confidence.

⇨ The availability of finance and interest rates.

These are referred to as economic factors. A company cannot influence them, but they play a crucial role in the success of any business. For example, the demand for a product could fall steeply because of a recession. This could lead to a crisis in the company that manufactures the product.

What can be done in such a situation? Well-managed companies know that they cannot change the external environment. Instead, they concentrate on adapting to the new circumstances to survive and remain profitable. For a manufacturing company, this could mean exploring export markets or making alterations to their product line.

Example of Economic Factors

Gordon Manufacturing Inc. specializes in making refrigerators. Its products have a sound reputation and enjoy strong demand in the markets in which it operates.

The company can keep costs low as it imports various components and raw materials from low-cost suppliers across the world. It gets its steel sheet metal, which is used to make the cabinets and the doors of its refrigerators, from China. The prices that Chinese manufacturers offer are 35% lower than those of local suppliers.

However, the company’s costs shoot up when the U.S. government imposes a 25% tariff on steel imports from China. Gordon Manufacturing Inc. is forced to raise the prices of its products. Consequently, its sales decline and the company starts making losses.

A change in government policy, which is a critical economic factor affecting businesses, has led to a reversal in the company’s fortunes.

Summary

Economic factors play an essential role in a company’s performance. Successful firms try and anticipate the possible changes in the external environment and have contingency plans in place for various scenarios.