The role of business economists in business planning

Business Economics, July, 1996 by John J. Casson

During the past two decades, several corporations, including IBM, Citibank, American Express and General Electric, eliminated their economics units. Many other companies discharged some of their economists. According to a recent article in The New York Times, the poor forecasting record of economists was a principal reason for such cutbacks.(1) A reexamination of the results of a survey conducted by the author found another possible explanation for corporate disenchantment with their economists. It appears that many business economists have not furnished information that can be employed in business planning.

COMPANIES SURVEYED

The survey that the author conducted was designed to obtain information about the interrelationship between business organizations and the economy. This included how economic information is employed in managerial decisionmaking, the ability of companies to adapt to economic change and the contribution of company economists to business decisions.(2) The rationale for conducting the study was the dearth of empirical information in the literature that dealt with these subjects.

Six-page questionnaires requesting 132 items of information were mailed to executives in 4,000 business organizations who were involved in or familiar with the planning process of their firms.(3) The managers in 13.5 percent of the companies that completed and returned their questionnaires provided a great deal of information about the role that economists play in the efforts of business organizations to adapt to changing economic conditions, including their contribution to tactical and strategic planning.

A total of 538 companies from a diverse group of industries were represented in the survey. The firms had as few as four and as many as 380,000 employees. The headquarters of 85.4 percent of the business organizations were in the United States. All but four of the companies engaged in planning and 90.7 percent employed some form of formal planning process.

Economics units were found in 37.4 percent of the business organizations. According to the respondents, 79.1 percent of the economics units were located in company headquarters, 8.0 percent were in divisions and/or subsidiaries and 12.9 percent were in both locations within the firms. Utilities, natural resource companies and financial organizations were more likely to have economics units than firms engaged in manufacturing. Corporations in the transportation and other nonfinancial services industries were least likely to have economics units.

Most of the economics units were very small. There was only one business economist in 19.7 percent of the companies, two or three in 34.3 percent and between four and ten economists in 30.9 percent of the firms that had economics units. The heads of the economics units reported to presidents or CEOs in 57.1 percent of the companies, the principal financial officer in 25.7 percent and the head of planning in less than 1 percent of the firms.

ECONOMIC INFLUENCES

The economy is only one of several sectors of the external environment that affect the operations of business organizations. Both the competitive and the political environments were reported to have more of an influence on business operations than did the economy. However, the economy was the only one of seven external environmental forces found to impact every one of the surveyed firms (see Table 1). The influence of the economic environment on business operations was reported to be moderate for 41.0 percent and substantial for 31.3 percent of the companies.

Evidence of the importance of the economy's influence on the operations of business organizations could be found in other survey responses. For example, unanticipated changes in the economy during the decade preceding the survey caused the earnings of 94.4 percent of the companies to deviate from their planning projections. Unexpected changes in economic conditions led 89.7 percent of the fares to revise their business plans.

The extent of the economy's influence on business operations was found to vary by industry. Economic forces had the greatest effect on firms engaged in finance and durable goods manufacturing. They exerted a more moderate influence on the operations of companies in the natural resource, utilities, transportation and other non financial services industries. Nondurable goods manufacturers and firms engaged in retail and wholesale trade were least affected by economic conditions.

Variations were found in the extent of the economy's effects on functional business activities (see Table 2). Economic forces had the greatest effects on finance and marketing and the least impact on research and [TABULAR DATA FOR TABLE 1 OMITTED] development. The level of economic activity was the economic variable identified as having the greatest impact on business operations. Interest rates ranked second. Although inflation was reported to affect the operations of all but two of the surveyed companies, only 64.5 percent adjusted their plans to reflect the effects of inflation.