Microeconomics at play

When macroeconomics scenario is not well, it must be a time to focus on micro-economics. Why? Microeconomics deals with individual units in an economy like a firm, a household, an investor, a worker, a single market that makes up the broader economy. It deals with problem of demand and supply of particular goods and services, its price determination and examines how tax cut affects a firm's output. etc.

Microeconomics not only focuses on individual decisions and transactions under a free economy but also enlightens market failures while it tries to model reality at a larger scale. It observes how a country's economy work and finds ways to explain and predict the macro variables like GDP, labor, interest rates, etc.

Scarcity of resources, economic incentives available to individual units or persons within a unit, assessing impact of such economic incentives on the business controls and planning is domain of microeconomics. Microeconomics not only drives business transactions at grass root level but also determines culture and control environment of a business organization.

When all are talking about corporate governance, need of having independent directors, robust audit committees and transparency in financial reporting and disclosures, nobody is talking about an economically viable and sustainable business model post Satyam Scandal or in face of today's deflationary economic conditions.

Many are tempted by 'getting rich quick' schemes but when businesses are not able to grow with such schemes on a sustainable basis than the value created is lost. Many businesses ignore the fact that when they begin to drag their market place into the same sales outlets they shrink their market. Once they start getting confident, they offer guarantees that they can't hope to keep.

Knowledge of micro-economics is very useful while carrying Management Audit that can add significant value. Management Audit with microeconomics can warn you for the bad growth and recommend you to follow principles of sustainable business. When all resources are working at their maximum productivity and demand for the products cannot be further increased, a faulty incentive scheme may put more pressure on the resources and failure is inevitable. When slight volatility or crisis can hamper business planning then it is a time to get non-levered and not otherwise.

Targeted Management Audit and analytics can show the path of sustainable growth and thus optimize use of resources that makes certain that management share and enjoy the products of its labour.

Let's understand as to how analysis and audit using microeconomics can add value in area of purchases.

Traditional purchasing techniques largely rely on volume consolidation and rigorous negotiation tactics. Instead one may use analytically rigorous approach which is built on a keen understanding of the micro-economics of buyer-supplier relationships and can deliver significant savings. It's required to employ a reverse marketing strategy to create an intensively competitive, flat playing field amongst suppliers to exploit a range of analytical savings levers to drive down the prices without compromising specifications.

These savings levers focus on, for example, unbundling supplier pricing, eliminating non-value adding middle-men and gaining a clear understanding of the supplier's economics. The valuable insights from analysis are rolled into a comprehensive multi-round negotiation strategy for generating real savings from suppliers.

You know who can attract best of talents? Answer is the businesses that pay their taxes and dividends on time. Well, there is a connection. It's microeconomics at play.