An economic analysis is like performing a check-up on a business: it assesses internal conditions, external influences and provides recommendations for improvement. Stephen Morris, Nancy Devlin and David Parkin, authors of “Economic Analysis in Health Care,” explain that this type of an analysis weighs decision-making in terms of its potential benefits or disadvantages. The ultimate goal of an economic analysis is to determine if a business is allocating their resources in the most effective manner. In most cases, a business always has room for improvement, be it through overhauling outdated computers or improving the delivery ordering system.
An internal staff member can perform an economic analysis, though hiring a consultant to provide an outsider’s view of the organization tends to be a more common approach. If a consultant is hired to give a review, she may spend months observing how the company functions. At the end of it, she drafts a report and delivers it either orally in front of the company management team or submits an extensive written evaluation. The analysis highlights the areas for improvement with regards to efficiency and what hurdles the organization might have to overcome from external economic conditions.
An economic analysis interprets internal economic conditions facing the company. The economic goal of an organization is to maximize its output and efficiency given its constraints. Internal economic conditions affecting an organization include the quality of its labor force, machinery, capital and innovation. Common constraints include adhering to a budget and drawing from a limited labor pool. For instance, a company is not being economical by hiring MBA graduates and paying them a high salary for work that could be performed by a high school graduate for significantly less money. Similarly, hiring too many unskilled workers will inhibit growth in the long run due to a lack of innovation. An economic analysis might also reveal the company should pay to upgrade its machinery or computer systems. Such a recommendation is made after assessing the level of output, expected consumer demand and the potential profit derived from having higher-caliber machinery.
External conditions include the effects of the overall economic climate, changes in technology, presence of competition and globalization. Each of these factors affects the performance and long-term well-being of the company. Hal Root and Steve Koenig, authors of “The Small Business Start-Up Guide,” explain that legal issues and growth trends in the industry are other examples of factors to consider. A downturn economy decreases consumer confidence and could decrease profits. Changes in technology could render a product line of the company obsolete, as was the case for companies manufacturing cassette tapes, for example. An economic analysis pinpoints which of these external conditions pose the biggest threat to the corporation and how the company should best prepare for these impending changes.
The bulk of an economic analysis is the recommendations section. In it, the person advises which tangible steps the company can take to improve its operations. These recommendations are justified with the use of graphs, equations, statistical forecasting models and flowcharts. This section also explains how to implement these recommendations by listing training requirements, possible vendors who can provide better products and the expected labor requirements to accommodate the changes.
Since 2008 Catherine Capozzi has been writing business, finance and economics-related articles from her home in the sunny state of Arizona. She is pursuing a Bachelor of Science in economics from the W.P. Carey School of Business at Arizona State University, which has given her a love of spreadsheets and corporate life.