Short Run and Long Run Strategies in Business - Essay Example

 Introduction A business is any activity that is carried on with the perspective to gain something from it. Different types of businesses have different approaches to earn these profits and these approaches would be identified later on in this paper. This paper would also concentrate on how business focus changes in the long and the short run and what strategies are implemented in the short run to achieve the long run goals for any organization. Short Run Strategies It is important to define what the short run is because what may be the short run for one industry is not the short run for another industry and hence it is important that a clear and concise definition of the short run us given. The short run is a period usually in which factors of capital other than labor are all fixed and cannot be changed, the short run for the shipping industry may be 3 years and the short run for a smaller business like handicrafts may be 6 months but generally the short run is considered to be one year. The ultimate goal for any company other than not for profit is to earn a considerable profit for its stakeholders but at times market conditions are such that this objective has to be kept behind and other strategies have to be pursued in order to meet the long term objective of making a profit for all the people who are concerned with the business. Some of these environmental situations are explained below. Competition At times in the face of strong competition that might threaten the business in the long run and the short run as well businesses tend to forget the objective of making profit until they drive the competition out of the market, there are several strategies that a business could use for this. One of the most popular strategy that businesses use to drive out competition from the market is dumping, since the company which is just entering the market have higher production costs because of lower efficiency due to a variety of reasons such as not knowing the best suppliers and not having a reputation and a rapport would mean that costs for the company automatically are higher than a company which is already existent in the market. Hence established firms take advantage of this and start selling their products at well below their marginal costs, the new entrant into the market can ill afford that and is forced to move out of the market. When a firm deploys this strategy to drive competition out of the market, is it earning a profit on the products that it is selling? No it is not in fact it is selling at a price lower than what it cost to produce one extra unit, hence there would be no profit in the short run but in the longer run there would be more profits because the competition has been driven out of the market and a higher market share has been guaranteed. Another strategy that firms use is that they threaten the distributors and shop keepers that if they store the products of the new entrant then they will not be able to do business with the established firm and this can be a severe blow to the new entrant but this could also tarnish the image of the established company in the market and it runs the risk of losing some distributors and shops but it does not deter it from taking the risks in the short run because the long run profits would be much higher. These strategies are obviously subject to market structure but then again they have been used in different market structures time and again with varying levels of success. Achieving Sales Targets At times achieving targets other than profits is more important because these targets may ensure the longer term growth of profits but in the short run would result in lower profits. For example to achieve a particular sales level companies may come up with different schemes such as buy one and get one free, this would generate much more sales traffic but that would not necessarily mean that it is generating higher profits. Seasonality Do Coke and Pepsi have higher sales in summers or in winters? They have higher sales in summers and lower sales in winters and that is the seasonality effect on the cola industry. This seasonality hurts the profits of both the major players in the industry, but seasonality brings about a change in strategy as well as in objectives of the company. In summers the objective is to achieve a higher profit but in winters the objective would change from maximizing profits to may be maximizing or achieving a particular sales level so that a loss is not incurred or so that the company does not lag behind the competition. Customers To some companies customer loyalty is extremely important, especially those companies who sell highly specialized goods and have a limited consumer base. These companies, when they are starting off they do not concentrate on making a large profit out of each and every customer because customer retention is much more important than making a one-time profit. This too is a short run strategy that lowers profit but in the long run ensures that profits would be made due to retention of customers and high quality goods. Some larger companies often undertake this strategy to build a rapport with the customers and have them visit their store or buy their products only, it is an extremely important strategy where repeat purchases are extremely important and customer loyalty has to be there for it to exist. Long Run As mentioned above all firms except for not for profit organizations aim to maximize their profits in the long run but there might be situations where there might be a possibility that in the long run profits cannot be made and hence the focus is on short run profit making and not on business stability. But these instances are very limited and generally every firm strives to achieve long term profits for all the people concerned with the business in any way. Some of the instances have been listed and explained below. Price Skimming In markets where companies fear that there is no respect for intellectual property it is beneficial to introduce new concepts and new technology at a very high price and gain maximum profits in the shorter run because in the long run competitors are going to imitate the technology and the product and then the market would be saturated. So in such a situation it is ideal that profits be maximized in the short run only. Niche Markets When smaller firms target a niche market and generate profits from those markets, it gains the attention of the larger firms existing in the market and they tend to move into those markets and it is better for the smaller firm to move out of that market once the larger players start to come into play because it would not have the power to compete with the larger firms, hence here is another possible situation where firms may be looking to earn only short term profits. This concept of going in and out of a market very quickly has often been used by firms and this does not mean that they only earn a very small amount of profit, if the product is right and it has been marketed to the right segment of the market, these small firms have the potential to earn a lot of profit and this is where the larger companies notice them, as soon as a company earns a huge profit, everyone starts taking notice of what it is doing, how is it doing it and what is the potential of other firms entering the market and sharing the profit with that company. Conclusion Short run and long runs are distinctively separate from each other in a lot of terms and hence the strategies that are needed to pursue certain objectives are also very different. In the short run firms can afford to have losses if in the longer run they are securing a better market position and higher profits for themselves and this is what firms basically do and this is what every firms long term objective is because people invest in these firms so that they can get a return on it, that is the most basic definition of doing business teaches us. As with all other cases there are certain exceptions to this case as well, not all firms look for long term growth and profits but yes they do look to earn a profit for all the people concerned with the business but in the short run only because the conditions allow them to do so only in the short run, two prime examples as explained above are that of price skimming and niche markets where companies hit and run the market for profit making purpose. References 1. BAKAN, J. (2004) The Corporation: The Pathological Pursuit of Profit and Power, London. 2. BANNOCK, G. (1972) The Juggernauts, Penguin, Harmondsworth. 3. GALBRAITH, J. (1972) The New Industrial State (2nd edition), Penguin, Harmondsworth. 4. GALBRAITH, J. (1973) Economics and the Public Purpose, Penguin, Harmondsworth. 5. MADELELY J. (2000) Big Business Poor Peoples: The Impact of Transnational Corporations on the Worlds Poor, Zed, London 6. SLOMAN J. and HINDE, K (2000). Economics For Business Read More