Effects of the Economic Environment on Managers’ Decision-Making Activity

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The economic environment consists of many concepts including interest rates, inflation, economic growth, unemployment levels, wage rates, sources of finance and balance of payments (Cartwright, 2001; Worthington & Britton, 1997). As the world becomes increasingly global, an organisation must consider these factors in many different countries and economies.

Interest rates undoubtedly have an effect on the way managers operate. The rate of interest is how much it costs to pay back a loan. Worthington and Britton (1997) state that if the rate of interest is lower, managers are more likely invest their money, for example, they might build new factories or buy new equipment. By deciding to invest when interest rates are lower, a firm will find it easier to make money back on their investment. Additionally, when rates of interest are lower, consumers are also more likely to borrow money. Generally, this means that demand will increase and therefore sales will also rise. Consequently, when interest rates increase, it will discourage firms to invest or expand.

Unemployment can have a great impact on businesses’ decision making, the impact can be both beneficial and costly. High unemployment levels can help managers by providing a larger pool of workers during the recruitment process, typically at lower wage levels than when there is lower levels of unemployment (Worthington & Britton, 1997). However, high levels of unemployment can also lead to a decrease in demand, and therefore sales. As levels of unemployment rise, an increasing number of people will be on lower or no income, therefore, they will not have the disposable income to purchase what they want. For managers, this leads to the ultimatum of either decreasing prices, or to increase spending on marketing in order to attract more customers. By decreasing prices, a firm must either decrease its own costs making production cheaper, or it must suffer from lower profit margins.

Another factor that affects managers’ decision-making is economic growth. Growth is normally measured by using gross domestic product (GDP), which Worthington and Britton (1997) define as “an economy’s annual output of goods and services measured in monetary terms” (p. 89). By measuring growth, this allows managers to plan and develop strategies for the future. A growing economy signifies steadily rising standards of living (Palmer & Hartley, 2006), therefore consumers will have more disposable income, leading to a potential increase of sales for organisations. For example, China’s growing economy has meant that Chinese consumers have more money to spend on luxury products. Therefore, companies like Nike and other designer fashion brands have started operating in China because of the demand.

ECONOMIC RECESSION

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