Step 1
Dr. Bill Conerly is rare as a professional economist who understands business.
After earning a BA, MA, and PhD in economics, teaching college economics for three years and working as a corporate economist four years, I decided that I didn’t need to learn more economics—I needed to learn more about business. I joined a corporate planning department, earned the Chartered Financial Analyst (CFA) designation, and started a business.
He begins each project by learning the company. That includes reading materials about the company and its markets, as well as meeting with senior executives. This step usually results in a short-list of issues where his expertise in economics and business strategy can be applied. Sometimes he cannot help with the particular issues that are of top importance, but usually he can.
Step 2:
He uses a basic framework to begin with, which is captured in this graphic:
The importance of a specific element varies from company to company. The process of learning about the company enables him to identify the elements that will have the greatest impact on a company’s profitability.
Bill adds to this framework his view of the economic outlook. Depending on the company, he may be able to use “off the shelf” forecasts, but it’s common for him to do more detailed statistical modeling of input costs or sales potential.
Examples of the kind of insights that come from this analysis:
- You optimized the mix of information technology and labor back when labor was cheaper and IT was more expensive. It’s time to automate more processes.
- This segment of your business always turns up after the other segments. Stay calm, keep your leadership team in place, and wait for the segment’s sales to turn up.
- Your primary market will rebound sharply in the recovery, but you haven’t estimated the financing you’ll need to fully exploit the opportunity. You should do cash flow analyses and then meet with your lenders.
The internal feedback element in the graphic illustrates the importance of measuring activities. People who are not used to pushing numbers around often underestimate the power of numerical feedback, and they often overestimate the difficulty of setting up a feedback system. For example, do your estimators regularly learn what actual project costs were? The workings of feedback systems are an integral part of economics, an often low-hanging fruit for improving a company’s profits.
Step 3
The strategic approach works with the same framework as the tactical approach, but with a few differences:
- Strategy does not depend on the short-term economic outlook
- Strategy does not take for granted the company’s major facilities, divisions or markets
Market outlooks for strategy are driven by long-term trends of demographics, globalization, income distribution, and technological change. Issues related to inputs include these same issues plus others related to materials price and availability.