PREVIEW OF CHAPTER: "Know Your Business Well"

Numbers are the fundamental language of business.  The bottom-line on the income statement is a number. The business plan is expressed specifically as numbers on the operating budget, numbers that may derive largely from statistical projections of revenues and costs.  Decisions to invest in assets that can accelerate the growth of the business are usually based on numbers that reflect the expected profits and risks of each alternative use of invested funds.  Success or failure of the business or any of its parts typically comes down to numbers.

It has been well established that quality is the key to long-run growth in revenues.  However measuring quality is not enough. Controlling the quality of productions in a manufacturing plant or the quality of customer service by inspecting and measuring goods and customer satisfaction does not eliminate the need to commitment-to-excellence programs, thorough training of production and service personnel, and preventive maintenance of equipment.

Regression analysis, and moving average method of time series analysis, are two of the most commonly applied forecasting tools used in business, largely because they are robust yet easy to use.  Other forecasting techniques range from qualitative approaches, such as juries of expert opinion, and subjective estimates of the sales staff, to highly sophisticated statistical methods of time series analysis, such as the box-Jenkins and spectral analysis method.

They are important in strategic planning to project consumer demographics that can be critical to your ability to anticipate future consumption patterns.  They are useful in marketing – to estimate the effects of changes in pricing policy on sales volume and market share.

No matter how you look at it, effective management is much more than just a matter of working with numbers. The successful manager relies on common sense and intuition; sensitivity to human factors that defy quantification; and creativity that transcends the numbers.

When the numbers send up a red flag, the successful manager looks beneath them to find out what is going on.  Most successful managers also know that the business cannot thrive without close attention to the numbers, and that tools designed to work with the numbers can be indispensable. 

Today’s successful manager understands that quantitative methods can be powerful agents for solving the problems of human institutions and human beings.

In capitalist economies such as that of the United States, Canada, and the Western European countries, managers of firms are continuously faced with numerous choices.  Managers of firms are assumed to have certain objectives, such as the maximization of profits of shareholder wealth, or the minimization of the cost of producing a given level of output.

Because managers and consumers are pursuing their own private interests and decisions are made in a decentralized manner, rather than by a central planner, a very important question concerning the coordination of economic activities arises. 

There are a few ways to manage this, one is microeconomics, and this method seeks to provide a general theory to explain how the quantities and prices of individual commodities are determined.  The development of such a theory will enable us to predict the effects of various events, such as industry deregulation and oil price shocks, on the quantity and price of output.

One of the most important properties of the competitive market equilibrium is that the quantity produced is the socially efficient quantity: The cost of producing the last unit of output just equals consumers’ marginal willingness to pay for it.  The supply-and-demand framework enables us to analyze or predict the effects of various events and government policy changes on the price and quantity of goods.

The other way to manage economics, is macroeconomics, this approach is concerned with the issue of how the quantity and price of output of individual firms or industries is determined. In contrast, macroeconomics addresses the determination of the entire economy or aggregate output and price. The most widely used measure of aggregate output is gross national product (GNP Index) – the market value of all final goods and services produced in an economy within a given time period.

One of the aspects of macroeconomics is the fluctuation of the existence of lack thereof, of trade-off between unemployment and inflation.  However in the 1990s the trade and investment flows between the US and other economies increased, there is another variable of great concern to businesspeople and policymakers: the exchange rate.  This can change substantially – by a few percent – in a single day.

Then there are interest rates; one important practical implication of the interest rate parity equation is that increases in the US interest rate cause the dollar to appreciate.  US macroeconomic experience of the early 1980s provides a graphic, though somewhat painful, illustration of the link between interest rates and exchange rates.  On the other hand, under fixed exchange rate regimes, one country usually assumes the role of lead country, and the other countries act as followers.

The ability of two countries to chart their own courses, or to pursue distinct, possibly even contradictory, macroeconomic goals, is much lower when those countries attempt to maintain a fixed exchange rate. This may be a blessing or a curse.  When exchange rates are fixed, and investors expect them to remain so, and interest parity conditions reduced, interest rates must be equal in the two countries. The central bank of the follower country relinquishes its ability to control interest rates and thereby achieve macroeconomic objectives such as reducing unemployment.

Before the development of the marketing concept as a management philosophy in the 1950s, marketing was defined essentially as selling.  The traditional view of marketing up to that time was that marketing was responsible for creating demand for what farms; factories, forests, fishing and mines could produce.

Marketing has also been viewed in the past as the function responsible for creating a satisfied customer and for keeping the entire organization focused on the customer.  However, marketing is one of the functions that must be performed by the management of any organization, amongst other functions such as manufacturing, finance, purchasing, human resources, R&D and accounting.

The most effective marketing concept considers more carefully how the company can match up its distinctive competence’s with a relatively undeserved set of customer needs and offer superior value to those customers.

Market segmentation, market targeting and positioning, ideas that were developed as part of the original marketing concept, become even more important strategically under the new concept.  The value proposition, matching up customer needs and wants with company capabilities, becomes the central communication device both for customers and for all members of the organization, focusing their attention on the company’s strategy for delivery of superior value to customers.

Superior marketing defined as customer-focused problem solving and the delivery of superior value to customers is a more sustainable source of competitive advantage than product technology per se in the global markets of the 1990s.  Marketing is not a separate management function; rather it is the process of focusing every company activity on the overriding objective of delivering superior value to customers.  It is more than a philosophy; it is a way of doing business.

In the final analysis, only the customer can decide whether the company has created value and whether it will survive in the hyper competitive global marketplace.