The Role of Business Economists in Business Planning

Article excerpt

During the past two decades, several corporations, including IBM, Citibank, American Express and General Electric, eliminated their economics units. Many other companies discharged some of their economists. According to a recent article in The New York Times, the poor forecasting record of economists was a principal reason for such cutbacks.(1) A reexamination of the results of a survey conducted by the author found another possible explanation for corporate disenchantment with their economists. It appears that many business economists have not furnished information that can be employed in business planning.

COMPANIES SURVEYED

The survey that the author conducted was designed to obtain information about the interrelationship between business organizations and the economy. This included how economic information is employed in managerial decisionmaking, the ability of companies to adapt to economic change and the contribution of company economists to business decisions.(2) The rationale for conducting the study was the dearth of empirical information in the literature that dealt with these subjects.

Six-page questionnaires requesting 132 items of information were mailed to executives in 4,000 business organizations who were involved in or familiar with the planning process of their firms.(3) The managers in 13.5 percent of the companies that completed and returned their questionnaires provided a great deal of information about the role that economists play in the efforts of business organizations to adapt to changing economic conditions, including their contribution to tactical and strategic planning.

A total of 538 companies from a diverse group of industries were represented in the survey. The firms had as few as four and as many as 380,000 employees. The headquarters of 85.4 percent of the business organizations were in the United States. All but four of the companies engaged in planning and 90.7 percent employed some form of formal planning process.

Economics units were found in 37.4 percent of the business organizations. According to the respondents, 79.1 percent of the economics units were located in company headquarters, 8.0 percent were in divisions and/or subsidiaries and 12.9 percent were in both locations within the firms. Utilities, natural resource companies and financial organizations were more likely to have economics units than firms engaged in manufacturing. Corporations in the transportation and other nonfinancial services industries were least likely to have economics units.

Most of the economics units were very small. There was only one business economist in 19.7 percent of the companies, two or three in 34.3 percent and between four and ten economists in 30.9 percent of the firms that had economics units. The heads of the economics units reported to presidents or CEOs in 57.1 percent of the companies, the principal financial officer in 25.7 percent and the head of planning in less than 1 percent of the firms.

ECONOMIC INFLUENCES

The economy is only one of several sectors of the external environment that affect the operations of business organizations. Both the competitive and the political environments were reported to have more of an influence on business operations than did the economy. However, the economy was the only one of seven external environmental forces found to impact every one of the surveyed firms (see Table 1). The influence of the economic environment on business operations was reported to be moderate for 41.0 percent and substantial for 31.3 percent of the companies.

Evidence of the importance of the economy's influence on the operations of business organizations could be found in other survey responses. For example, unanticipated changes in the economy during the decade preceding the survey caused the earnings of 94.4 percent of the companies to deviate from their planning projections. Unexpected changes in economic conditions led 89.7 percent of the fares to revise their business plans.

The extent of the economy's influence on business operations was found to vary by industry. Economic forces had the greatest effect on firms engaged in finance and durable goods manufacturing. They exerted a more moderate influence on the operations of companies in the natural resource, utilities, transportation and other non financial services industries. Nondurable goods manufacturers and firms engaged in retail and wholesale trade were least affected by economic conditions.

Variations were found in the extent of the economy's effects on functional business activities (see Table 2). Economic forces had the greatest effects on finance and marketing and the least impact on research and [TABULAR DATA FOR TABLE 1 OMITTED] development. The level of economic activity was the economic variable identified as having the greatest impact on business operations. Interest rates ranked second. Although inflation was reported to affect the operations of all but two of the surveyed companies, only 64.5 percent adjusted their plans to reflect the effects of inflation.

Table 2

Influence of the Economic Environment on Nine Organizational
Functions and Activities

                           None to
Activity or Function        Slight     Moderate     Critical

Finance                     13.3%        63.6%        23.1%

Marketing                   18.5         69.2         12.3

Capital Spending            23.8         67.7          8.5

Mergers & Acquisitions      42.4         49.0          8.5

Resource Allocation
Among Business Units        42.4         53.3          4.3

Human Resources             46.0         51.6          2.5

New Product Development     46.1         50.0          3.9

Divestitures                52.9         41.4          5.7

Research & Development      58.3         38.6          3.1

Note: Business activities and functions listed in order of
importance based on means of responses.

ECONOMIC INTERRELATIONSHIPS

Managerial understanding of the interrelationships between business organizations and their economic environments can have an important beating on the ability of companies to adapt to changing economic conditions. Nonetheless, managers in only 42.0 percent of the companies were moderately to fully aware of the effects of economic change on their operations. They were no more than slightly aware of the identity of the economic forces that had a direct effect on their business operations in 50.7 percent of the firms. Managers in only 46.4 percent of the companies were reported to be moderately to fully aware of aggregate economic conditions in their principal markets. Managers in business organizations that employed economists were found to be significantly more aware of the identity of economic forces affecting their operations and economic conditions in their main markets than managers in other firms.

In order to take full account of the economic environment in planning, it is necessary to consider the indirect as well as direct influences that the economy exerts on the operations of business organizations. This includes the economy's effects on company stakeholders and on the political, social and technological environments of firms. Managers were moderately to fully aware of the identity of economic forces that impacted their customers in 42.2 percent of the companies and their suppliers in 25.0 percent of the firms. Managers were moderately to fully aware of the effects of changes in the economy on competitors' operations in 24.5 percent of the companies and on other external environmental forces in 16.5 percent of the business organizations that were surveyed. Managers in firms that employed economists were reported to have a significantly greater understanding of the economy's various indirect influences on business operations than managers in other companies.

ECONOMIC FORECASTING

The success of a business plan often depends upon economic conditions when the plan is implemented. This helps explain why 78.8 percent of the surveyed companies included economic forecasts in their planning assumptions. Nonetheless, managers in only 41.8 percent of the firms were reported to be moderately to fully aware of the economic outlook for their principal markets. One possible explanation for the disparity in percentages is that many companies that utilize economic forecasts do not furnish them to managers who are not involved in planning.

Short-term economic forecasts were prepared by 76.2 percent of the firms and long-term forecasts were issued by 73.2 percent. Many companies appear to ignore the axiom, "If you must forecast, forecast often." Short-term economic forecasts were prepared once or twice a year by 50.9 percent of the companies and 69.9 percent issued long-term forecasts annually. The mean periods of time covered by the short- and long-term forecasts were 1.7 and 5.4 years, respectively. These intervals did not correlate closely with the time periods covered by their business plans, suggesting that many of the forecasts were prepared for other purposes besides planning.

In most of the companies, the chief planning or financial officers furnished the forecasts and other economic information utilized in planning. However, the respondents indicated that such economic forecasts were inferior in several respects to forecasts prepared by business economists. The latter were reported to be (1) more accurate, (2) less biased, (3) based on more reasonable assumptions, and (4) more easily understood than economic forecasts provided by others. This helps explain why managers with access to forecasts and other economic information furnished by their companies' economists were more aware of the outlook for the economy than managers in other firms. Nonetheless, 58.7 percent of the firms with economics units turned to other sources for forecasts and other information about the economy that could be utilized in their planning.

The economic forecasts employed by 29.6 percent of the companies were considered to be less than satisfactory in terms of fulfilling the needs of business planners. One possible explanation for this dissatisfaction is that managers in only 13.7 percent of the firms were furnished with economic forecasts that often or always identified appropriate strategic and tactical responses to predicted changes in the economy. This left managers in 86.3 percent of the companies with the responsibility for determining what actions should be taken to adapt to forecast changes in economic conditions. Most of them appeared to be ill equipped to meet this challenge. Managers in only 20.4 percent of the companies were reported to be moderately to fully aware of appropriate strategic and tactical responses to changes in the economy. The managers that were most likely to be aware of how to adapt to changing economic conditions were employed by companies that also employed economists.

In spite of the risks associated with basing business plans and strategies on a single economic forecast, only 29.5 percent of the firms often or always employed alternative economic scenarios in their planning. This helps explain why only 17.5 percent of the surveyed companies often or always developed contingency plans based on economic scenarios. The business organizations that were most likely to utilize economic-based contingency plans were those that employed economists or were among the 53.7 percent of the firms that utilized econometric models in their strategic planning.

ECONOMIC INFORMATION

Although the respondents noted that the economy exerted a moderate to substantial influence on the operations of 382 of the companies, they reported that 216 or 56.5 percent of these firms employed little or no economic information in their strategic planning. The foremost reasons for this neglect were the extremely short-term focus of business managers and a lack of knowledge about how economic information should be used in business planning (see Table 3).

The economic information that business organizations did utilize came from several sources. Newspapers and periodicals and industry associations were the principal sources of information about the economy for managers in many of the companies. Only a small proportion of the firms relied on economic information services and economic consultants for much of their information about the economy. This may be one of the reasons why insufficient economic information was reported to be a problem in many companies. Managers in 45.7 percent of the firms were reported to be furnished with less than an adequate amount or no information about the economy. Planners in only 29.9 percent of the companies were furnished with all of the economic information that they required. Managers in business organizations that employed economists were more likely to be furnished with a sufficient amount of information about the economy and to make the most use of economic information in strategic planning than managers in other firms.

Table 3

Reasons Why Companies With Operations Moderately or Substantially
Influenced By The Economy Do Not Employ More Economic Information
In Their Planning

                                              Percent in
Explanation                                    Agreement

The focus of corporate managers is
extremely short-term                              44.9

Planners do not know how to utilize
economic information effectively                  42.1

Planners are not fully aware of the
economy's impact on business operations           31.9

The additional economic information that is
available is irrelevant to planning               28.7

Planners have all of the economic
information that they require                     25.0

The cost of obtaining additional
information would be too high                     19.9

Planners do not know where to obtain
additional economic information                   10.6

Note: The respondents were asked to identify all of the reasons
that were appropriate for their firms.

How well did managers utilize economic information to adapt to changing economic conditions? Their performance was rated good to excellent in 8.9 percent of the firms, satisfactory in 31.3 percent and less than satisfactory in 59.8 percent of the surveyed companies. A significant relationship was found between the extent of the economy's influence on the functional activities of business organizations and how much economic information was utilized in their function planning and decisionmaking. Information about the economy was employed most in support of finance activities and least in research and development (see Table 4).

Managers were moderately to fully aware of the identity of economic issues important to their companies in 40.5 percent of the companies. They were, however, moderately to fully aware of the specific consequences of these issues for business operations in only 28.5 percent of the firms. Managerial knowledge about the identity and consequences of economic issues was reported to be significantly greater in business organizations that employed economists than in other firms.

Table 4

Employment of Economic Forecasts And Other Economic Information In
Strategic Planning And Decision Making

                           None to
Functional Activity         Slight     Moderate     Extensive

Finance                      19.3%       62.0%        18.7%

Marketing                    33.9        58.8          7.4

Capital Spending             33.9        60.4          5.6

Mergers & Acquisitions       46.4        47.8          5.7

Resource Allocation
Among Business Units         52.6        45.4          2.0

New Product Development      56.9        40.2          2.8

Divestitures                 56.5        39.7          3.8

Human Resources              62.2        36.3          1.6

Research & Development       66.6        32.0          1.4

Note: Business activities and functions listed in order of
importance based on means of responses.

A lack of knowledge apparently did not deter some companies from attempting to manage economic issues. Government officials were lobbied about economic issues by 82.6 percent the firms and 69.2 percent took public positions on economic issues. On most of these issues, management activities were infrequent. Only 35.0 percent occasionally or often lobbied government officials about such issues and only 18.9 percent of the companies occasionally or often took public positions on economic issues. How often companies engaged in managing economic issues was positively related to three factors: the size of the firm, how aware its managers were of the identity and consequences of economic issues and whether the firm employed an economist.

Employing a business economist was not found to guarantee a company success in managing economic change. How well companies utilized economic information to adapt to changing economic conditions was found to be positively related to the extent that their economists contributed to the planning process of these firms. However, the respondents indicated that 70.9 percent of the economics units in companies contributed little or nothing to business planning.

STUDY CONCLUSIONS

A survey of executives in 538 business organizations revealed that the operations of every one of the firms were affected by the economy. Nonetheless, managers in most of the companies were found to know little or nothing about (1) the economic environments of their companies, (2) the effects of the economy on their businesses, (3) how economic information should be utilized in planning and decisionmaking, and (4) what actions companies should take to adapt to changing economic conditions.

The survey responses revealed that business economists, by furnishing information that can be employed in planning and decisionmaking, are capable of making important contributions to the ability of companies to take advantage of the opportunities and overcome the difficulties brought about by changes in the economy. However, the majority of business organizations that were surveyed did not benefit from the ability of business economists to assist in managing economic change. Most of the companies did not have economists on their staffs. Of those that did, only a small number benefited from the ability of their economists to help them plan. The survey found that business economists are capable of participating in the planning process in several ways. These include furnishing information about the economy that can be employed in tactical and strategic decisionmaking and suggesting appropriate responses to changing economic conditions. Business economists can enhance their value to their employers by making such contributions to the planning process. Such assistance will increase the ability of companies to take advantage of the opportunities and surmount the problems brought about by economic change.

FOOTNOTES

1 Passel, Peter. "This Model Was Too Rough: Why Economic Forecasting Became a Sideshow," The New York Times, February 1, 1996, D1.

2 Exceptions can be found in several articles that have appeared in Business Economics (see references).

3 The author wishes to thank The Strategic Leadership Forum for providing logistical and financial support for the survey.

REFERENCES

Casson, John J., "The Use of Economic Information in Corporate Planning," Research Review, (November 1990), p. 39.

----- "The Contribution of the Economic Forecast to the Business Plan," Business Economics, (April 1989), p. 14.

Marx, Thomas G., "The Role of Business Economics in Strategic Business Planning," Business Economics, (April 1989), p. 20.

Mayer-Whittman, Karl M., "Economic Analysis and Corporate Strategic Planning," Business Economics, (April 1989), p. 27.

Naylor, Thomas H., Managerial Economics: Corporate Economics and Strategy, New York: McGraw-Hill, 1983.

Weston, J. Fred., "Strategy and Business Economics," Business Economics, (April 1989), p. 5.

John J. Casson is Associate Professor of Management at Kean College of New Jersey, an Associate Editor of this journal and an NABE Fellow.