Business Conditions Analysis

This article identifies five discernable areas conducive to the development and maintenance of a successful business environment. Using examples from the US and abroad, the essay defines and illustrates the following concepts as integral elements for business and economic development: Market demand, workforce development, political considerations, the cost of doing business and access to technology. Each of these components are manifest or lacking in many high-profile industrial development profiles, including Honda's US expansion in central Ohio, Google's 2007 operation in western North Carolina, and the US lodging industry in sub-Saharan Africa.

Keywords Business Climate; Corporation; Economic Development; Economic Stimulus Package; Market Demand; Public Policy; Tax Incentives; Technologies; Workforce

Economics > Business Conditions Analysis

Overview

In the early 1980s, residents of Midwestern America thought they were under siege. The prevalence of foreign-made automobiles, many of which were imported from a surging Japanese motor industry, intimidated US automakers and those loyal to them. United Auto Workers were rumored to be behind a rash of vandalism to Japanese vehicles, using keys to scrape the paint of privately-owned Hondas as retribution for purchasing a foreign car instead of an "American" automobile. In the eyes of these miscreants, the Honda plant that had opened in 1979 in Marysville, Ohio, took away jobs from American workers in greater Detroit, which is only a few hours north (Brat, 2006).

It did not take very long for attitudes to shift, however. "Rust Belt" communities like Marysville, have since enjoyed a thriving local economy due to Honda's operations there. More than 16,000 Ohio residents are currently employed by Honda, and since the plant's opening, layoffs have been virtually nonexistent. $1.1 billion is pumped annually into the Ohio economy. Two decades after Honda arrived in the US, the very same communities whose residents used keys to express their displeasure at Japanese vehicles were offering the keys to the city to the same company as it considers expanding Midwestern operations (Honda, 2004).

Determining a fertile business climate can be based on a simple word: Need. This refers to the needs of the market, the needs of the workforce, and the needs of company itself. This essay illustrates the areas in which these multiple "needs" manifest themselves as five quantifiable factors that contribute to a successful business model. These elements are market demand, workforce development and base, political considerations, operating costs and access to technology.

Applications

Market Demand

Arguably, one of the industries in which the concept of demand is most well-defined is automobile manufacturing. The significant rise in crude oil prices that began in the early 2000s in the US and abroad, coupled with increased public attention to the issue of global warming, spawned a trend toward fuel-efficient vehicles. After a sustained preference for large, low-mpg trucks and SUVs during a period of cheap fuel, car buyers began seeking smaller vehicles that use much less regular gasoline or diesel. Hybrid vehicles (which alternate between gasoline and electricity as fuel sources) became popular, and cars that operate on alternative fuel sources, such as biodiesel, hydrogen and 100 percent electricity, entered the market as well.

Periodic plateaus and declines in gas prices somewhat placated consumers' initial frenzy for jettisoning their gas guzzlers. One study at the time revealed that 50 percent of new car buyers were considering a hybrid, down from 57 percent in the previous year ("Hybrid," 2007). This slight decline in market demand was largely attributed to consumers' increased understanding that the fuel-cost savings offered by certain hybrids were not necessarily enough to justify the premium vehicle price when compared with some other conventional cars in the same class. In other words, consumers, who only two years earlier had decried the skyrocketing cost of fuel (and were more inclined to accept the hype surrounding hybrid vehicles), adjusted to those increases and became more critical when shopping for new vehicles. Car buyers remained concerned about fuel efficiency, however, and hybrids continued to be one response among many to the overarching issues of oil prices and environmental responsibility. As one industry analyst put it (North, 2007):

Indeed, Lienert (2006) reported that among the ten top-selling vehicles in the US, seven were small and mid-sized cars, each of which boasts better-than-average mileage. According to Forbes, "Gas prices used to be a consideration in car purchasing. Then they became a decisive factor. Now they are the decisive factor." Forbes's 2013 list of 20 bestselling vehicles in the US once again saw a boost in (considerably more fuel-efficient) trucks and SUVs, and small and mid-sized cars still dominated the list.

The example of environmentally friendly automobiles demonstrates the significance of market demand on a business's viability. Successful business development relies on the needs and concerns of the customer. In terms of the automobile industry, hybrid gasoline/electric vehicle sales soared immediately upon placement on the market due to the fact that those cars directly responded to the rising cost of gasoline as well as the issue of global warming. Interestingly, in this case, the concerns over oil prices and the environment created a market and even a product concept, rather than a single product that would address that demand. The "green" car market continues to evolve, with customer demand still strong.

Workforce Base & Development

Joseph Joubert once proffered: "Genius begins great works; labor alone finishes them."

Indeed, without a strong workforce on which to hang a business's hat, a corporation cannot thrive very long. An interesting example of this premise can be found in the lodging industry. To the casual observer, a hotel's employees are few and identifiable: The front desk employee, the housekeeper, room service and a small handful of miscellaneous staff. In fact, the lodging industry employs an extremely large number of staff, each of whose talents require specific training and whose pay scale spans from minimum wage through the highest echelons of management. The lodging industry employs millions of these personnel in locations around the globe.

To illustrate this point, one may look at one of the larger international hotel chains, the Hilton Hotel Company. In addition to its well-known eponymous properties, Hilton owns such brands as Doubletree, Embassy Suites and the luxurious Waldorf Astoria. There are more than 2,500 managed and franchised hotels under the Hilton purview, employing an impressive 105,000 men and women worldwide.

Unfortunately, recruiting well-trained staff for a hotel is no easy undertaking. Most US colleges and universities that offer hospitality degrees are located near major lodging and tourist centers: New York, California and Florida. Despite the plethora of hotels, motels, inns and B&Bs that operate in greater Washington DC, there are only six programs that offer hospitality certifications within an hour's drive of our nation's capitol (there are eight law schools and 10 MBA programs in that same radius).

In the case of the lodging industry, it is clear that jobs are available in great numbers. The problem is two-fold. First, while there are enough people to fill posts, they may not choose to do so because of the low pay and/or benefits. Economist David Rosenberg echoes this concept. Those who claim there is a shortage of employees, he argues, may be overlooking the fact that the manpower is there — employers are simply not willing to pay for what they seek (Herbst, 2007).

The second issue is exemplified in the model offered by the lodging industry. Training is absolutely pivotal to ensuring the success of any business, and in an arena that requires sales, culinary arts, engineering, management, marketing, administrative and customer service training (as is the case in hospitality), it is always a challenge to draw a pool of eligible workers from any region. Adequate training of staff is therefore essential, if not drawing from another base. As is the case in a variety of large-scale industries, the lodging industry sometimes calls upon foreign-born workers to perform some of the more low-level jobs. Despite the relatively basic parameters of these minimum wage positions, some training is required (including, for many, coursework on English as a Second Language). On any level, a well-trained workforce can make the difference. This point remains sage and yet challenging for any major industry.

Political Considerations

"I would have voted for a 100% tax incentive if that's what it would have taken to land them," said Herbert H. Greene, a County Commissioner of Caldwell County, of which the small city of Lenoir, North Carolina, is the county seat (Burns, 2007). Commissioner Greene was understandably excited for Lenoir. Earlier in the year, that community of about 17,000 residents was skyrocketed into the public arena, thanks to its newest local business: Internet giant Google.

Mr. Greene was not alone in his excitement about luring Google to the Blue Ridge Mountain environs of Lenoir. The community was still reeling from the loss of seven furniture factories and, with those closures, 2,100 jobs over a three-year period. Communities like Lenoir do not recover so quickly from such a hit; the arrival of Google, which remains a stable leader of the volatile world of Internet commerce, represented a cure for such ills.

Drawing this corporate icon to Lenoir was easy and certainly not without expense. Google negotiated $212 million in tax incentives and infrastructure modifications from North Carolina. Using one of the large factory spaces left vacant by the departing furniture industry, Google adapted the space as one of its "server farms," filling it with row after row of computer systems and recruiting a mere 212-person staff to run the facility.

Nevertheless, the notion of reversing a downward trend, creating sustainable jobs and, of course, enhancing the town's profile as a "business friendly" environment made the investment in accommodating Google worthwhile for Lenoir's leaders. Lenoir is hardly the first community to adopt such an attitude when it comes to luring big name corporations (and industries) to their city limits (and away from other competing communities). Marysville, Ohio, discussed earlier in this paper, is one such example. Freeport, Maine (home of outdoor apparel giant LL Bean) is another. Virtually any community that seeks to generate local corporate tax revenues and spur job growth will do what it can to entice a potentially lucrative business to locate there.

As the example of Google demonstrates, however, a small community cannot always afford to entice a major corporation on its own. In addition to local tax exemptions, the state is quite often called into action to assist. This aid often comes in the form of tax exemptions, infrastructural improvements (such as roadway repairs, building refurbishment and related projects) and even development grants.

How does the average taxpayer feel about "spending money to make money"? States often employ so-called economic stimulus packages to enable otherwise underperforming regions and communities to generate business and, therefore, local revenues. The Massachusetts Legislature passed two comprehensive stimulus packages between 2004 and 2006 ("Mass economy," 2006). Among the areas addressed in those initiatives are $3 million in grants "to promote defense industry-related development in Southeastern Massachusetts," an area that lost a major military reservation at the suggestion of the Base Realignment and Closure panel only one year earlier. Pennsylvania offers assistance for companies expanding in so-called "Keystone Opportunity Zones" this aid can be found in the form of complete exemptions from state and local taxes. These economic development initiatives provide local residents with tangible resources for their local businesses, and as a result, taxpayers seem more than happy to see such assistance.

Clearly, government can play a significant role in an industry's health as well as the long-term viability of an expanding corporation. There are risks and rules, of course, as seen in the examples I have just illustrated. First and foremost among them is a simple, inherent precept of a capitalist economy: There will be competition. Google was able to secure millions of dollars in tax exemptions and rehabilitation of their targeted expansion site, a deal that even some local residents complained was excessive, simply by reminding the people of Lenoir that there were other interested communities who were willing to give Google just what it asked of Lenoir, if the latter was reluctant to acquiesce. Put simply, government assistance is often available when a company is seen as a vehicle for breathing new life into a stagnant regional economy. Such packages can, however, be developed to the detriment of that same local economy. Nevertheless, such government involvement works to the benefit of the business itself and can spur new economic growth in that very same region.

Cost of Business

Of course, a truly representative assessment of a business climate cannot be conducted without taking into consideration the cost of business itself. This area of economics is arguably one of the more difficult concepts to truly grasp, as a wide range of mitigating factors play a role in "costs," and for some, certain areas are more cumbersome than others.

Thanks to Google, one may simply use "cost of doing business number one concern" as his or her search parameters to illustrate this point. Among business owners, these cost concerns include legal expenses (for regulatory compliance), health care and, of course, energy and fuel. Corporate and commercial taxes on the federal, state and local levels are also cited, as are wages.

The varying costs businesses see as serious impediments to their successful operation make it difficult to assess what climates are more fertile for business growth. Indeed, one study presents a very diverse picture of the most business-conducive states: Hawaii, New York and Alaska are cited as the most difficult states, in terms of costs, in which to do business. South Dakota is considered the least cost-cumbersome state. Two neighboring states, New Hampshire and Vermont, are cited as on opposite ends of the taxation spectrum, with Vermont's corporate rates far more business-unfriendly than they are across the Connecticut River in New Hampshire.

The aforementioned study, conducted by the Milken Institute, identifies several significant costs: Taxes, wages, electricity, industrial space and office space. Absent are health care and oil prices, which are consistently cited among most American business leaders as the most impactful costs in 2007 (Marketwire, 2007).

Is there a single concern that weighs on business owners' minds, or is there a group thereof? In all likelihood, the cost of doing business, while a very real concern, is about as multifaceted and diverse as the range of businesses themselves.

Technologies & Infrastructure

If the cost of doing business in a region is so paramount a factor for entrepreneurs, why are the locales that most effectively mitigate those costs, such as New Hampshire and South Dakota, not attracting major corporations on the same scale as areas like New York, California and Massachusetts? One factor might be the technologies available to run the business itself.

Along with a region's workforce base, the cost of doing business and the fiscal support of the local and state governments, the infrastructure and technology needed to effectively perform that business is a major factor affecting the business climate.

In the case of Lenoir, North Carolina, Google simply needed space, inexpensive utilities and cooling systems. Google headquarters, however, is located in the greater San Francisco area, with nearly every resource available to it. Marysville, Ohio, located in central Ohio, has exactly what that facility needs: Adequate factory space, nearby airports, rail and highway transportation.

An outstanding example of the need for technology and similar resources comes from one of the world's larger economies. Since the end of the apartheid era, South Africa has emerged as the largest economy in sub-Saharan Africa. Foreign investment and business partnerships have surged into this once-isolated country. In 2007, communications giant Cisco announced that it was expanding operations in South Africa, enabling many black citizens to become part of junior, mid-level and even senior management (Cisco Systems, 2007). Unfortunately, with the exception of the safari and ecotourism industries, the economic success of South Africa is largely centered around cities like Johannesburg and Cape Town.

In rural areas, poverty and fiscal malaise remain commonplace. Some economists postulate that this disparity exists because of a lack of access to the technologies the modern world takes for granted: Telecommunications (Skuse, 2007). A simple lack of access to cellular technology has prevented the establishment of interpersonal as well as business networks. Since the late 1990s, telecommunications companies, government and international development groups have endeavored to correct this "digital divide," but progress has been slow. Nevertheless, the promises presented to rural South Africans in terms of enhancing their potential to find financial equity are significant enough to remain an ongoing endeavor.

While worlds apart culturally, geographically and socio-economically, the examples of underdeveloped rural America and undeveloped South Africa have a common thread relative to the central message of this essay: Without the technological tools (and at times even the access to such resources) necessary for a business to thrive for the long-term, stagnant business environments will likely remain so.

Conclusion

Only a few years ago, immense sport utility vehicles (SUVs) enjoyed great sales estimates. The Ford Explorer and the Hummer, as well as a number of large pickup trucks, were among the most popular vehicles on the road. Of course, when the recession of the early 21st century took hold, gas prices began their upward climb. It was simply becoming more difficult for every day citizens to afford to fill up their tanks, and SUV and truck sales slumped among everyday Americans. Adding to the mixture was the increased public awareness of global warming, caused largely by auto emissions. These two heavy issues could have hurt the automobile industry, but it did not — it merely fostered the demand for a new breed of car.

Nearly 25 years after Honda opened its doors in Marysville (much to the consternation of a handful of xenophobes), the plant is a roaring success. For many residents of that once-sleepy community, it is hard to imagine life before Honda moved to Ohio. That plant has proven a shining example for others to follow, and others have: Marysville is now home to such thriving companies as Scotts Miracle-Gro, a Nestle research company, a Goodyear plant and even Lamborghini Ohio.

Lenoir, North Carolina was also a town hurting for business before 2007. With a painful unemployment rate, people and investors were leaving town before Google moved into the community this summer. Now, dozens of companies are seeing new life and potential with Google's arrival. Employees of that "server farm" are seeing salaries nearly double what Caldwell County is used to seeing.

The successes enjoyed by these business environments are exceptional, to be sure, and yet reflective of five major tenets of business analysis. The first is market demand, whose sources are so numerous that they might be the subject of a separate paper altogether. Interest in the product, whether real or as-yet unrealized, is essential to the health of a business climate.

The second factor is prevalent in every example provided in this essay. Without a well-trained workforce, a business cannot survive. Marysville, Lenoir, the hotel industry and even the presently undefined business landscape of rural South Africa, all serve as illustrations of the potential benefits of a local workforce suited to the needs of a successful business.

Third among the strongest determinants of the health of a business environment is the input of the government. This factor is pervasive throughout the other four elements of this paper, as government intervention has protected against high tax rates (and therefore business costs), provided grants for workforce development and technology and even, in the case of global warming, spurred market demand. While conservative rhetoric may involve calls for government to keep its hands out of business, clearly, many economies owe their success to government assistance.

There are many forms of the fourth arena: Whether commercial taxes, energy and fuel prices, facilities expenses, health care, salaries or regulatory compliance, there are countless costs associated with business. Some can be effectively mitigated; others remain a perennial thorn in the side of entrepreneurs. All are factors to be considered in the analysis of a business climate.

Finally, whether two hours from the nearest airport or dozens of miles from the nearest cellular phone tower, technology and resources that are easily obtained in more established commercial and urban centers, represent a major contributor to an entrepreneur's decision to operate in a certain environment. Even the simplest of resources, placed in an otherwise cost-effective area with an abundance of workers and even the assistance of the local, regional and national governments, can mean the difference between a business mistake and a commercial success.

Terms & Concepts

Business Climate: An environment in which conditions are conducive for the development of independent commerce as well as industrial development.

Corporation: A business entity established for the purposes of providing goods and/or services to customers for profit.

Economic Development: The practice of creating a sustainable business climate within a certain geographic area, industry or group of industries.

Economic Stimulus Package: Legislation or regulations designed to spur economic growth within a particular geographic, socio-economic or industry area.

Market Demand: Consumer interest in or need for a product or service offered by an entrepreneur, corporation or industry.

Public Policy: Legislation, laws or regulations generated at federal, state, county or local levels.

Tax Incentives: Special arrangements between government entities and private entities wherein the latter are exempted from certain taxation requirements at local, state and/or federal levels in exchange for conducting business under certain agreed-upon conditions.

Technologies: Hardware, software, products and networks designed to foster interconnectivity, efficiency and convenience.

Workforce: Current and potential employees of a certain industry or economic region.

Bibliography

Advantage West Economic Development Group. (2007, July 11). New jobs, new opportunities click in Caldwell County. Retrieved September 10, 2007, from http://www.advantagewest.com/news-events/news-detail.cfm/news%5fid/115

Atherton, A. & Fairbanks, A. (2006). Stimulating private sector development in China: The emergence of enterprise development centres in Liaoning and Sichuan Provinces. Asia Pacific Business Review, 12, 333-354. Retrieved September 9, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=21894568&site=ehost-live

Brat, I. (2006, June 22). Indiana town woos Honda. CNNMoney.com. Retrieved September 6, 2007, from http://money.cnn.com/2007/07/17/autos/jdpower%5fhybrid%5fsurvey/index.htm?postversion=2007072015

Burns, N. & Cowan, C. (2007, July 23). The high cost of wooing Google. Business Week, (4043), 50-56. Retrieved September 9, 2007, from EBSCO Online Database Academic Search Premier. http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=25767904&site=ehost-live

Cisco deepens commitment to economic transformation in South Africa with Black economic empowerment initiative. (2007, September 4). Cisco Systems, Inc., Retrieved September 10, 2007 from http://newsroom.cisco.com/dlls/2007/prod%5f090407.html

Company history. (2004). Honda of America Manufacturing, Inc. Retrieved September 10, 2007, from http://www.ohio.honda.com

Economic stimulus programs. (2006). University of Massachusetts/MassEconomy.org. Retrieved September 10, 2007, from http://www.masseconomy.org/html/2%5f1p%5foverview.html.

Herbst, M. (2007, August 22). Labor shortages: Myth and reality. Business Week Online, 1. Retrieved September 9, 2007, from EBSCO Online Database Academic Search Premier. http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=26358094&site=ehost-live

Honda's Marysville auto plant at 25 Years: Historic yet 'new.' (2007, August 26). Topix. Retrieved September 10, 2007, from http://www.topix.com/forum/autos/TD3D2KFB4H08FC0V2

Hospitality schools and universities. (2007). American Hotel and Lodging Association Education Institute. Retrieved September 10, 2007, from http://www.ei-ahla.org/links%5fschools%5fusa.asp

Hybrid lovers: The honeymoon may be over. (2007, July 20). CNNMoney.com. Retrieved September 9, 2007, from http://money.cnn.com/2007/07/17/autos/jdpower%5fhybrid%5fsurvey/index.htm?postversion=2007072015

Keystone opportunity zones. (2007). Commonwealth of Pennsylvania Department of Community and Economic Development. Retrieved September 10, 2007, from http://www.newpa.com/default.aspx?id=345

Lienert, D.(2006, September 15). Best-Selling Cars of 2006. Retrieved September 9, 2007, from http://www.msnbc.msn.com/id/14803544/

Luger, M. & Bae, S. (2006). Speaking falsehoods to power: States' misguided use of 'cost-of-doing-business' studies in economic development policy. Review of Regional Studies, 36, 15-43. Retrieved September 9, 2007, from EBSCO Online Database Academic Search Premier. http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=24885121&site=ehost-live

Milken Institute. (2007, August 16). Hawaii, New York and Alaska most costly states for business, according to Milken Institute. Marketwire. Retrieved September 9, 2007, from http://www.marketwire.com/mw/release.do?id=761389

Muller, J. (2013). The best-selling cars of 2013 aren't really cars at all. Forbes.Com, 12. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=92025285&site=ehost-live

Skuse, A. & Cousins, T. (2007). Managing distance. Journal of Asian & African Studies, 42, 4. Retrieved September 10, 2007, from EBSCO Online Database Academic Search Premier. http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=25087699&site=ehost-live

Suggested Reading

Forsyth, J. S. (2007). Soaring rents pinch businesses across U.S. Wall Street Journal — Eastern Edition, 250, A1-A10. Retrieved September 12, 2007 from EBSCO Online Database Academic Search Premier. http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=25586807&site=ehost-live

Kramer, L. (2007). Training local workers instead of outsourcing. New York Times, 156(54027), 19. Retrieved September 12, 2007, from EBSCO Online Database Academic Search Premier. http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=26420337&site=ehost-live.

Owen, B. & French, N. (2007, July 21). Getting it together. Estates Gazette, , 138-139. Retrieved September 12, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=26136822&site=ehost-live

Vemuri, Ashok. (2007). Technology as an Agent of Change. American Banker, 172, 7. Retrieved September 12, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=24099748&site=ehost-live.