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.

Breakthrough in Recessionary Risks

You may lose your head but may not like to bow it. Risk perceptions have changed so as the returns and the negotiation process. Negotiations are heated and getting quite messy these days. Is it a time to be more diplomatic or appropriate? Recession has its greater impact when people lose faith in the system. Although system has not failed totally; businesses are not able to breathe peaceful transactions for sure.

Capital resources are funneled in safe projects after due negotiation, competition reduces for challenging and more profitable projects. And, where there is no competition opportunities to create blue oceans exist. Let's talk about some risky projects that are unheard in recent times, which can produce a huge return on your investments.

Are you invested hugely in inventories? What do you think your action plan should be to get rid of the pile you gathered all these days? My suggestion to all of you who are stuck with this pile is - not to find root causes as to why inventories got accumulated but to capitalize on it by pushing it to a totally new avenue or market place. You may scrap it or sell it at discount but there are other opportunities which can be experimented with.

Are you facing a good amount of challenge to recover your debts? My suggestion is to know more about your debtors and their businesses. It's a very good opportunity for you to explore your value chain. There are hidden opportunities waiting for you. You may like to re-engineer the industrial value chain and thus create higher value. Returns can be enormous.

Now talk about capacity utilization in your industry. Many times it is not easy to utilize your excess capacity when there is no demand. Now there are opportunities to create demand internally and thus remove bottleneck in your value chain. Many people are not able to deliver where as many find it difficult to utilize their capacity to fullest. Go grab the opportunity.

Are your investments valued below your purchase price? Many think that option is to minimize loses or wait till the arrival of good times. Now you are not realizing that the above options have hidden opportunities as otherwise it is impossible get rid of such investments. Let' take example of real estate. I think there is huge opportunity in real estate. Industry as a whole needs to understand that this is a right time to commoditize the product. Its time to sell volumes and increase supply as you may notice that all the Companies in real estate segment follow more or less the same strategy. It's a time for them to create new market space by following blue ocean strategy.

Recession is not all evil, but brings with it a lot of opportunities too and the one who has proper insight can bank upon these opportunities at the right time and create value for the business. A real entrepreneur takes right advice to plan its resources and assets for creating higher wealth for himself and the society. Breakthrough is possible for sure.