ASSESSING THE BUSINESS ENVIRONMENT

Two Perspectives Current and Likely Future Competitive Conditions for… Your Firm’s Economic Environment Macroeconomic Perspective/Strategic Questions: Expand into new market because of favorable income trend? Stop producing because of unfavorable demographic trend? Your Firm’s Industry (Product/Market) Microeconomic Perspective/Tactical Questions: Who are my competitors? Value and price characteristics of comparable products? Are there Under-served/Unserved Market Segments?

USEFUL QUESTIONS Competitive Markets Require Good Decisions Bad Decisions don’t go Unpunished Obtain and Use Relevant and Reliable Information Getting the Best Answers and Information starts with Asking the Right Questions: What do you need to know? How it is being measured? What does it mean?

Macroeconomic issues FOUR MEASURES TO FOLLOW Gross Domestic Product (GDP): National, Regional and Local Unemployment/Employment Rate: Job Growth, Wage Levels and Labor Supply Inflation: Consumer Price Indexes Interest Rates: Leading Indicator that is Principal Tool of Monetary Policy

Notes and Comments GROSS DOMESTIC PRODUCT Does Not Include International Output Difficulty of Measurement raises Reliability Concerns Coarse-grained Measure: National Income Trends may not reflect State or Local Conditions

Notes and Comments UNEMPLOYMENT RATE Is Trend caused by Job Growth (Numerator) or Changing Labor Supply (Denominator)? High Unemployment Rate may be Politically Undesirable but Favor Economic Development What was Oregon’s Unemployment Rate when Intel announced it would build its first plant?

Notes and Comments INFLATION RATE What are the Products or Services in the “Basket”? What’s the Geographic Area covered by the Survey? Many Types and Forms of Consumer Price Indices

Theory and applications INTEREST RATES Leading Indicator for Future Economic Conditions and Business Capital and Operating Costs Market-derived “Rent” for Use of Capital Budgeting must include Two Components of Debt: (1) Interest at Rate for Borrowing Term and (2) Repayment of Principal (Amount Borrowed)

Theory and applications INTEREST RATES Interest Rate reflects Risks of Waiting to be Repaid Business Risk: Likelihood Borrower will Repay in Full and on Time “Bird in the Hand”: Effects of Inflation during Loan Term Opportunity Cost: What happens if “Better Deal” comes along?

Theory and applications INTEREST RATES “Lag” between Actions Taken and Economic Impacts: about 9 Months Independence of Federal Reserve: Conflicting Actions – Raising Rates may stem Inflation but dampen Business Borrowing Greenspan’s Chairmanship ending January 31 after nearly 18 years; Princeton Economics Professor (Ben Bernanke) succeeding Greenspan

Yield curve: Market dynamics Black Line: June 2, 2004 “Normal Relationships” Longer-term Rates higher than Short-term Rates: Higher Reward demanded for Risk of Longer Term Red Line: Jan. 13, 2006 “Inverted Curve” Result of Fed Policies raising Short-term rates and Surplus Global Liquidity invested in US Economy

Information Sources The Wall Street Journal Portland Business Journal The Economist Harvard Business Review Oregon Labor Trends