Economic Scenarios and Strategy for Larson Inc. Batteries

Overview of Economic Recovery Scenarios

The three economic futures facing Larson Inc. are a U-shaped economy characterized by uncertainty, a V-shaped economy characterized by a sharp recovery, and a W-shaped economy characterized by a double-dip recession — from the first of which the company is just now emerging. The U-shaped economy is characterized by uncertainty: the economy's future is relatively unknown. Economic recovery is delayed, leading to adverse consequences such as the stagflation that gripped Japan in the early 1990s and lasted for several years. This possibility carries the lowest probability of the three, given that GDP increased strongly in each of the last two quarters, indicating that the economy has already pulled out of the bottom of the U.

The GDP increases hint at a V-shaped recovery over the course of the next five years but do not guarantee it. Two quarters of economic growth do not make a recovery. However, the probability of a V-shaped recovery is high for a couple of reasons. The first is that the credit crunch has eased. The second is that the Federal Reserve has kept interest rates at rock bottom in order to spur borrowing and investment (Federal Reserve Bank of New York, 2010). In addition, major American trading partners such as China and Canada did not suffer the same intensity of downturn and are ahead of the U.S. in the recovery curve.

This does not preclude the possibility of a W-shaped "double dip" pattern in the next couple of years. There are several reasons why this could occur. The first is the problems with the euro — especially in Greece and Spain — which could destabilize the European currency union (Kirschbaum, 2010). This would lead to a flight to the U.S. dollar, making American exports uncompetitive on world markets and exacerbating the trade deficit. In addition, instability in Thailand, while country-specific at the moment, could have a destabilizing effect on Southeast Asia (CNN, 2010), or all of Asia, to the detriment of global economic growth. Lastly, China's capitulation on its currency peg appears to be only partial and may be largely for show. If the yuan is kept artificially high, gains in the U.S. economy could be offset by increases in the trade deficit and decreases in the savings rate — evidence of which has already emerged, with the rate falling from 5.4% in Q2 2009 to 2.7% at the time of writing (BEA, 2010). This is to say nothing of the jobless recovery. In short, there is substantial cause for concern about the course of the global economic recovery in the next couple of years; a double dip is a strong possibility, ranking just behind a V-shaped recovery in likelihood.

Impact on Battery Demand

The economic climate has not significantly affected demand for batteries, so Larson's sales have not been hit hard. However, if the economy improves, demand for new electronic products will increase. In tough economic times, consumers may still need batteries, but they are less likely to purchase new equipment. With economic recovery, new equipment sales — computers, cell phones, MP3 players, smartphones, and similar devices — are expected to increase. This rise in equipment sales will drive an increase in demand not just for batteries, but for improved battery performance.

Inflation and Input Cost Considerations

Two economic consequences are likely to occur, particularly in the event of a V-shaped recovery. The first is that the Federal Reserve will wait to increase interest rates until the last possible moment, in the hopes of spurring greater investment and thereby job growth. This means that some inflation is expected. Inflation will cause factor input costs to rise. Larson can gain a competitive advantage if it is able to hold its wholesale costs stable in the face of rising input costs, since competitors may be forced to increase their prices. Careful control over its cost structure will allow Larson to do this while maintaining profitability.