The Theories of Microeconomics - Term Paper Example

? Competitive Strategy - Hansen Natural Corporation This rationale of the paper is the real life application of the microeconomic and macroeconomic theories. In this paper we will deal with the theories of microeconomics like perfect competition, monopolistic competition, monopoly, cost and also with some macroeconomic theories. The purpose of the paper is to show how a small firm can raise its market share and become a dominant player. In other words in terms of economics we will show how a firm can transform itself from a price taker to a price maker by formulating and implementing certain competitive strategies. An US firm Hansen Natural Corporation which markets soft drinks and beverages is considered for the purpose of our analysis. Soft drinks market is a highly competitive market in US and there are numerous small and large competitors already present in this industry. Policies are also suggested which will be useful for the company in the value creation over the next four years. One of the most critical issues regarding a business is the identification and development of a sustainable competitive advantage. It is much more critical when the business in concern is a small and emerging business where the market is already infested with numerous existent competitors. It has been found that many small businesses have often failed to develop competitive advantage over their competitors in the market. The entrepreneur of the business has to take steps in order to gain competitive advantage in their business. It is noteworthy to mention that the business community never welcomes new entrepreneurs with open arms rather prevent the new entries from appropriating the market share from them. Thus development of competitive advantage is critical for a firm right from the entry stage to the end of the life of the business (Bressler, n.d., p.192) . Areas where the firms need to intervene in order to develop competitive advantage Small businesses are unable to compete with the large firms in terms of price as the price mechanism behavior remains in their hand due to market reputation as well as historical sales background. A typical behavior of a small firm can be given by an example in this case. Suppose a restaurant is opening and when asked its entrepreneur about the prospective a common answer is that, “we will offer good food at good prices” (Bressler,n.d.,p.193). Marketing mix elements can be viewed to deliver competitive advantage to the businesses. The elements of the marketing mix include product, price, place, and promotion. The companies have to concentrate on these variables in order to gain competitive advantage. Cost also plays an important role in the competitive advantage paradigm (Rothaermel, n.d., p. 201). Big companies can negotiate lower costs and have advantages over the smaller companies. However there are possibilities of lowering the costs with the help of less capital equipment, location, overhead, lower distribution cost, lower labor cost, and lower investment cost. Before explaining them in brief with economic theories first of all we will discuss the characteristics of the market of soft drinks in US and its relevance with the Hans Natural Corporation. Characteristics of the soft drinks market in US In the present situation the soft drink industry is highly competitive for all the corporations involved in this business (Davies, n.d.). The soft drinks industry faces pressure from rival seller, new entrants to the industry, substitute goods, suppliers, and buyers. In the US soft drinks industry Coca-Cola, Pepsi Co and Cadbury Schweppes are the largest competitors. In 2004, Coca Cola’s working capital was around $1.1 billion and Pepsico’s total sales were $18.4 billion. Many small companies are also there like Facedrink, Arcadia Brewing Co, Banko Beverage Company, Carolina Canners Inc etc.( Beverage Companies, n.d.). The market is almost saturated and the growth is small. It is pretty difficult prospect for the new entrants in the industry. Another significant barrier for the entrants is the high fixed costs for warehouses, trucks, labor and economies of scale (Deichert et al, 2006,p.7). Thus having an overview of the US soft drinks market it can be said that the dominant players like Coca Cola, Pepsi have the price mechanism behavior in the industry in their hands with huge market share and sales. On the other hand there are also numerous small companies competing among each other. Now we will discuss the nature of market forms relevant to the US soft drink industry and will try to relate them with economic theories. The relevant market structures which need to be discussed here are the markets of perfect competition and monopolistic competition. The most relevant market structure which can be related with the US soft drinks industry is the monopolistic competition. Perfect competition is an abstract concept however it needs to be mentioned in order to explain the notion of monopolistic competition. Perfectly competitive market A perfectly competitive market is a hypothetical market but it can be regarded as the base structure of all the markets. All forms of market structure are seen to be deviations and modification from the perfectly competitive environment. In this type of market there are large number of buyers and sellers and the commodities bought and sold in the market are homogenous in nature. The firms have perfect knowledge about the market and the other firms. The firms are generally price takers i.e., they face an infinitely elastic demand curve and the prices are fixed at a certain level. There are no transportation cost and zero government intervention (Principles of Economics, n.d., p.1). The structure of the market is shown in the following diagram below: F Fig. 1 In the above diagram the left panel shows the equilibrium of the market at the point E where the aggregate demand and supply meet. In case of the firm the equilibrium is attained at the point E1 where Price (P) = Average Revenue (AR) = Marginal Revenue (MR) = Marginal cost (MC). The price in this case is determined by the industry through the interaction of demand and supply. The demand curve which the firm faces is horizontal which indicates that the firms do not have the influence to change the price. There is no scope of charging higher price and the firm will not charge a lower price which is not rational. The shaded part shows the revenue which will increase with the fall in Average cost (AC) and vice versa. Hansen Natural Corporation and monopolistic competition The market structure which the Hansen Natural follows is that of a monopolistic competition. In a perfect competitive market there is no scope of profit maximization in the long run however in the short run there is some incentive as shown in the figure1 as long as the other firms or the rivals enter the market. Monopolistic competition is a slight modification of the perfectly competitive market in the sense that in this market the homogenous commodities are made different by various product differentiation techniques like marketing, advertising, research, and development of the products etc and market segmentation( Market Structure: Monopolistic Competition, 2003, p.131). These product differentiation techniques help the firms in this market to have some discretion in the price setting mechanism and attract more consumers towards them (Monopolistic Competition, n.d.). If a monopolistically competitive firm increases the selling price of its product then a part of the business will lost but not all the part, which in case of perfectly competitive market will lose all its business (Monopolistic Competition and Oligopoly, n.d.). A diagrammatic explanation is necessary here. Fig.2 In the above diagram the Average Revenue (AR) or the demand curve and its corresponding marginal revenue (MR) curve faced by the firm is shown. In a perfectly competitive market the demand curve was horizontal showing the price taking behavior. But in this case the demand curve is not so steep but steeper than the horizontal curve which shows some degree of price making behavior of the firm. The equilibrium is attained at the intersecting point of the marginal revenue and the marginal cost curve. In the competitive market the equilibrium was attained at the pointand here the equilibrium is attained at the point and the price is higher than the competitive market and it is attained at the point where the price corresponding to meets the Average revenue (AR) or the demand curve. The price thus obtained is higher than the perfectly competitive price (From the 19th century to 1940, n.d., p.6). In the 1930s, Hubert Hansen and his three sons started the business of selling fresh non-pasteurized juices in Los Angeles, California. Their company’s name was Hansen Juices which subsequently came to be known as The Fresh Juice Company of California. In September 1999 the company acquired all the rights to manufacture, sell and distribute non-pasteurized juice products (HANSEN NATURAL CORP, 2005, p.5). Some methods of product differentiation by the company is discussed in the next segment. Methods of product differentiation & marketing mix adapted by the company Guerilla marketing Hansen Natural Corporation has changed its name to Monster beverages and has adopted the Guerilla marketing strategy. The teams of the Monster ambassadors distribute samples of the products at the concerts, beach parties, sponsors motocross, surfing, and skateboarding competition etc. The representatives in Black Monster vans helps in supplementing the company’s network of 300 independent distributors by store displays and restocking in specially designed store coolers. Senior vice-president of All-American Bottling Corp, a Monster distributor in Oklahoma City states that, “A lot of companies say they will do that; [Hansen] really delivers” (Hansen Natural, 2005). Competitive edge About 90 % of the company’s revenue comes from the energy drinks category and the company has outperformed Red Bull and all the competitors in the energy drink category (Lachesis, 2011). The strongest point of sales of the company is the convenience and gas stores (C&G). The sales of its major competitors are declining while the company’s share remained constant at just above 29 percent (Lachesis, 2011). Direct store delivery (DSD) Another successful model followed by the company is the Direct store Delivery (DSD) Direct which is the company’s primary distribution model for its energy drinks ( Lachesis, 2011). Risks and uncertainties faced by the company and its impact The management of the company has formulated various expectations regarding the future operating results including revenues and profitability. They have identified various risks to which the company is exposed which can adversely affect the company’s future financial health (Monster Beverage Reports Record 2012 First Quarter Financial Results, 2012). The risks faced by the company are many; however some of significant risk exposition is discussed below: Changes in consumer preferences may reduce demand for the company’s products There is an increasing awareness of obesity and health issues among the people. It can act as a hindrance and decrease in the revenue generation of the company with respect to the company’s non-diet beverages (Hansen Natural Corporation, n.d.p.21). Revenue decrease may also affect the GDP as a whole if we see in a broader angle. The GDP equation is given by Where, Y= Aggregate Income C= Aggregate Consumption I= Aggregate Investment G= Government Expenditure (X-M)= Trade Balance; X= Export, M=Import Now if the consumption falls and we hold the other parameters in the GDP equation as constant, it will reduce the output (Y) as a whole (Petrushka,n.d.). Significant changes in government regulation may hinder sales The company’s production, sales, and distribution are subject to various federal rules and regulations. In the current situation the rules are also changing. Thus if any product of the company fails to comply with the norms then it may result in penalties and decrease in the sales (Hansen Natural Corporation, n.d.p.21). Fluctuations in foreign currency exchange rates may adversely affect the company’s health The company financial operations are exposed to foreign currency exchange risks and the company has not yet devised any robust hedging technique in order to neutralize this risk. This area needs to be concentrated as this risk can adversely affect the company’s financial health in future (Hansen Natural Corporation, n.d., p.22). Failure to estimate demand correctly The ability of the company to estimate demand is imprecise particularly with new products and times of rapid growth particularly in the new markets (Hansen Natural Corporation, n.d., p.24). Strategies for sustaining the growth rates and revenue for the next four years Analysts have pointed out that the company needs to expand the internal sales and marketing team as the primary target of the company’s international market is small. The management has also acknowledged of the inexperience of the company in the new markets. Apart from that the company needs to formulate and implement proper hedging techniques in order to reduce the foreign exchange risks. DSD is the sector on which the company relies heavily for its mammoth revenue generation and the company has to rely heavily on the bottlers and distributors. So maintaining good relation is also another strategy for future sustainability. The company also needs to formulate optimal demand prediction strategies and work out properly in their non diet products for future sustainability. Conclusion The laws of economics play a dominant role in analyzing the structure of the markets in the real world. In this paper US soft drink company Hansen Natural Corporation (presently Monster Beverages) is taken and with the help of the notion of perfect competition and monopoly we are able to show that how the company has able to become a dominant player with competitive advantage in the US soft drinks market. Various risks faced by the firm are also analyzed and how it can affect the GDP identity is also mentioned. Finally the optimal strategies like formulation of proper hedging techniques, proper estimate of demand, and stress on foreign ventures are advised as to attain future sustainability for the next four years. 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T, (n.d.), COMPETITIVE ADVANTAGE IN TECHNOLOGY INTENSIVE INDUSTRIES, Retrieved on May 11, 2012 from: http://mgt.gatech.edu/directory/faculty/rothaermel/pubs/RothaermelCompetitiveAdvantageFinal.pdf Read More