A
great number of industries –although not all of them- are highly dependent on
the economic climate for the growth of their business. A decline of economic
activity will make consumer spend less, due to increased joblessness or a
wide-spread feeling of uncertainty about the future prospects of people. Since
people will consume less, overall trade will decline as well. The decline in
trade will then affect transport and logistics, as well as the manufacturing of
consumption goods. This will then impact the manufacturers of machines and
resources that are designed to manufacture consumption goods, etc. Our
global economy –even our local one, this is not necessarily a phenomena that is
only due to globalization- is so mingled that virtually any company will experience
the impact of a negative evolution on its business.
Hence
the importance of monitoring this business environment. To be prepared, and
eventually act on changing factors in your business environment that might
impact your very own business. However, not every corporate decision taker is
necessarily an economic expert, neither does he necessarily find the time to go
through a vast number opaque economic reports. Nor should he. There are easier
ways to assess one’s business environment.
If
your business is located in Europe, for instance, you could benefit from
checking the official statistics database of the European Commission, Eurostat,
on a regular basis. In its database you will find a vast array of data about
the economic condition of the European Union member states and, for some
metrics, even of other countries, in all possible forms and timeframes.
The
example hereafter aims at showing how this information could be relevant for
your business. One of the indexes you can find in the Eurostat database is the
so-called ‘Economic Sentiment Indicator’. This index is based on a monthly
survey conducted with the main economic actors, both companies and consumers,
and reflects the confidence these actors have in their short-term economic prospects.
Any number above 100 indicates that there are more economic actors that are
confident about their prospects in comparison to those that are negative about
it.
The
importance of this index is that it is published at the end of each month and,
as shown in the graphic below, there is a strong correlation between this
Economic Sentiment Indicator and the overall European economy (shown here as
the % quarter on quarter change of the Gross Domestic Product):
One
does not have to be an economic genius to observe a strong similarity between
both parameters, they grossly behave the same way. But the importance here is
that the Economic Sentiment is a figure that is released at the end of each
month, while the official GDP changes are released one or two months after each
quarter! In other words: the Economic Sentiment becomes a leading indicator for
the overall economy, since its patterns are likely to predict the patterns of
the overall economic evolution.
Hence,
if your business is closely impacted by economic growth, you might get early
signals of how you will fare in the near future by looking at the Economic
Sentiment Indicator on a monthly basis, instead of waiting for the official GDP
figures to be published.
But
how can you know for sure if –and to what extend- your business is dependent on
the economic evolution? Here again you don’t have to be a mathematician to
uncover this relationship. If in the chart above you would replace the
quarterly GDP evolution with, say, the turnover growth of your company or
business unit, you would virtually see whether there is a correlation or not.
Admittedly,
in many cases you would need some statistical skills to uncover the exact
nature of this correlation, but mapping it on a chart is something you can do
yourself, and it provides you at least with a first hint of the existence of
such a correlation. Furthermore, the overall economic growth and the Economic
Sentiment Index might be metrics that are too general to look for correlations
with your business. You might have to drill down into the components of the
Economic Sentiment (as a reminder: manufacturing; retail; services;
construction and consumers), or you might need to look for a completely
different metric altogether, like the Baltic Dry Index of you are in the
shipping business, the Purchasing Managers’ Index if you are in manufacturing,
the Industrial Orders Index if you are in the business-to-business industry or
services. If the public sector constitutes an important part of your sales, you
might want to monitor public sector spending metrics more closely.
So,
you might spend some time finding out which metrics you should use to monitor
your business environment. But once you found them, they will prove an
invaluable management decision tool.
It
is important however to notice that the type of correlations to look for are
not necessarily direct, one-to-one correlations (where the patterns of two
metrics follow each other in the same time lapse and to the same extend). For instance, in many
cases the impact of a change in index (say, the economy of a specific country,
or GDP) will have a delayed impact on one’s business, like in this hypothetical
example, where it takes one quarter before the economic shifts impacts our
turnover:
Another
situation arises when the index is impacting your business only in the
direction it takes, and not in the intensity of this impact. In the
hypothetical example beneath, the evolution of the economy has an impact on our
business only when it changes direction:
Chances
are that there will be no single metric that unambiguously predicts where your
business is heading in the near future. Most likely you will have to combine a
number of metrics with some impact (of some kind) on your business. But this
combination will provide you with a solid early warning signal of times to
come. Furthermore, as the example above tries to demonstrate, you could do it
with relatively few efforts and at virtually no cost at all.
Did these examples debunk the myths about market intelligence?
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