Firms Strategy and Markets - Coursework Example

1. Discuss the view put forward by Milton Friedman (1970) that ‘The social responsibility of business is to increase its profits’. Milton Friedman (1970) said that “the social responsibility of business is to increase its profits”. He further clarified this statement by saying “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud”. To appreciate this view, an understanding of the term “social responsibility” is defined as “process of proceeding with an awareness that the actions of a person or organization affect others” ( “Social responsibility” n.d.) Proceeding with the discussion, we find that there are implications of the social responsibility that limits profitability and is in conflict with Friedman’s assertion First, in the corporate situation, the social responsibility of the corporate executives is to conduct the business to conform to the desires of the Board and the stockholders to make as much money while conforming to the basic rules of the society. This does not always holds true as there are some basic rules of the society that runs conflict with the desires of the Board to make as much money since there are actions that reduce return to income. For example, when corporations are required to contribute to the pollution control beyond the amount that is in the best interest of the corporation. Another example is when the company is restricted to increase their price to avoid inflation, which in effect, results to subsidizing price effect. These are additional expenses that reduce income of the stockholders, and as Friedman explain, “Spending the stockholders’ money”. This is to say that the conscience of “social responsibility in business” is only to profit maximization which is their social responsibility to their stakeholders as long as it is legal and acceptable. (w.c. 305Your Word Lists (View all word lists)) Add to a word list Link to this page 2. Explain how Porter’s Five Forces model may be used to evaluate the state of competition by a potential entrant to a new market. Above is a diagram of Michael Porters framework of an industry analysis. It is a valuable tool used in determining the competitiveness of the industry and to decide on the attractiveness of an industry structure. It is made up of five competitive structures as shown below.(“Porters Five Forces...” n.d.) A potential entrant to a new market faces the first barrier called entry of competitors as its entrance poses threat to the existing ones in the industry. Generally, a new entrant may find barriers both easy and difficult to start in the selected field. For example, entrance becomes difficult when there are government regulations that set monopolies or limiting the number of business in certain industry. Another example is the proprietary knowledge or patent of the product that creates a barrier to entry. It is easy to enter a market if there is common technology, when there is little brand franchise, when there is access to distribution channel or when there is low scale threshold. (Porters Five Forces “) New companies will find barrier thru the threat of substitutes, or when the product demand is affected by the price change of a substitute product or how easy can the product be substituted, when there is a change in price. (PFF) Bargaining power of buyers – The threat that comes along is how strong the position of buyers is, can they work together to order large volumes, and in this case buyer can set the price. (PFF) Another thing that new entrants should look into is the bargaining power of suppliers wherein supplier-buyer relations should be considered. For example, how strong is the position of sellers, are there many or few suppliers, is there a monopoly (PFF) Finally, the new entrants should study if a rivalry exists between players – A study of the intense of competition among players is needed to know, whether one player is very dominant or all are equal in strength and size. By using industry concentration ratio, the new entrants will know if there is low or high concentration. A high concentration means market is shared by largest firms and entrance is difficult, while a low one means no one holds significant share, and has many rivals. (PFF) w.c. 368 3. Compare how advertising budgets are set in micro-economic theory and practice, quoting any empirical evidence to support such methods. The economic theory of advertising according to Collins Stocking, (1931) suggests that in advertising, “producers of goods are rewarded in proportion to the success with they cater to tastes, for which, as producers, they are responsible of.” With this, he means that the private enterprise is able to manipulate tastes of consumers thru advertising efforts in order to drive profits. With this in mind, we will consider how advertising budgets is able to create awareness, interests, desire and action towards the products of the company. Companies use different approaches to determine how effective their advertising campaigns are in turning sales. For instance, a company may use the fixed percentage method in setting advertising budget, keeping in mind the economic theory of equitable distribution of economic resources. An example, is the advertising budgets set aside by pharmaceutical companies which is 20% of sales, while car manufacturing business like Ford and Toyota allocates only 1% budget of sales. Advertising budgets differ in scale depending on their structure. When there is a stable market, companies set a fixed percentage of advertising budget. For example, a company may set 20% of projected 2010 sales to advertising. The difficulty seen under this method is that when sales go down, the budget to advertising correspondingly declines at the time when advertising is needed to boost sales. (“Advertising...” n.d.) Another method of setting advertising budget is by finding the industry average of spending, and configures the budget according to the average. This method goes well when there is a predictable sales pattern in the industry, but criticism against this method is that companies do not exert any more effort to increase their market share because of complacency. (“Advertising....:” n.d.) Still another method is when the company sets a marketing objective, such as achieving a specific goal. For example, when the company launches a new product, or when the company has set a financial average of sales. In this case, advertising budget is related to the marketing activities the company is going to do. w.c. 337 4. Explain how transaction costs affect the firm’s governance structure. Provide some examples. There are two general definitions about transaction cost. First, it is a fee charged by financial intermediaries for a transaction. Intermediaries are banks, broker or underwriter. Second is the economic cost associated with exchange of goods and services such as communication charges, legal fees, informational cost of finding the price, quality, transportation costs, etc. (“Transaction Cost”) Transaction costs affect governance structure of the firm and are most important consideration when making a buy or make a product decision. In our first definition, it is the commission earned by banks or brokers in a market stock transaction. Commission of broker here is defined on a certain percentage, and owners have a definite expectation of profit. On the second part which is the economic cost, it helps to evaluate the transaction costs to find out if it will be favorable or not for the company. For example, company will have to weigh advantages or disadvantages of setting up of a new subsidiary abroad by computing the transaction costs required and equating it with the margin of profitability needed to start the project. Margaret Polski (2001) shed light on the transactional costs in the banking industry. She stated in her study that in 1998, transaction costs were 77% of income, 8% larger when compared to 1934 figures. In recent times where there is great intense of economic and institutional changes, Polski figured a 90% increase of transactional costs to total income. Her study established the link of transactional cost with that of institutional changes. This means the margin of profit gets smaller with the increase of transaction costs. In a separate study of Rasheed & Scott (2001), decisions are made between outsourcing and internalizing, similar to the make or buy decisions. Findings of study showed use of firm’s resources have significant effect on the decision making, in that a firm that relies heavily on sales intermediaries uses less of electronic resources, while that with lesser sales intermediaries uses more of technical resources. Implication here is to find the best balance of transaction costs that would be more favorable to the company. W.c. 348 5. Compare and contrast the market shares and the market profits game. Do they differentiate from the prisoners’ dilemma game? Explain. Market share, market profit game theory and prisoners’ dilemma are not different from each other in such a way that it is applied in business situation. Market share is a term used by businesses to know its relative position in the sector as compared to other companies in the same sector. It helps you account your company’s performance on a year to year basis, and looks at the market conditions that may cause the sales to go up or to go down. When market share is measured, company gets information whether it is doing better or worse as compared to other companies in the same situation. By knowing this, company is faced with decisions on what to do to improve its market share. ( “What is Market share?” ) When a company is faced with the dilemma of what to do under a difficult situation, it enters the prisoner’s dilemma, a game theory that shows how people behave in strategic situation. For instance, they must consider the effect of their own actions to other people. In prisoners’ dilemma, the best strategy for a given player is often one that increases the payoff to one’s partner as well and often, there is no single best strategy and the maximization of one’s payoff will depend on the strategy adopted by one’s partner. For example, a company may consider advertising to improve its market share, or to reduce its selling price to create demand for the product. In this scenario, company believes that its profits depend on the action of another company that may contradict its strategy. This situation invites the companies to a “prisoners’ dilemma”. The prisoners’ dilemma is a game that shows why it is hard to get cooperation among players even when it is done for the best interest of all players. Here, players are portrayed as playing their own dominant strategy for “shortsighted” personal gain, that eventually leading them both in a situation where they are “worse off than before”. (“Game theory and prisoner’s dilemma. 2007) . w.c. 338 6. United Biscuits and Anthony Alan Food are two firms that supply biscuits and cakes to the UK market. Briefly compare and contrast the way they configure their product chains. United Biscuits (UB) configure its product chains thru family heritage, partnerships, acquisitions and mergers. It got the name United Biscuits through merger or the unity of two biscuit makers, the McVitie & Price and Macfarlane Lang & Company in 1940s. The product chain was developed thru hiring of fine bakers and salesmen and thru the effort of the owner himself. The merger of two biscuit makers provided the company a tested list of biscuits that they sold in the UK markets. Two more bakeries were acquired in later years that made the UB a formidable biscuit maker in UK. Acquisitions mean new products and new technology added to the company. One strategy that fortified its leadership in biscuit making is concentrating on one product per plant. UB maintained its leadership in snack food items as it began expansions, acquisitions and partnerships and solidify it with acquiring international brand names of biscuit manufacturers. For instance, instance UB purchased another European biscuit business by purchasing from Campbell Soup Company, the Delacre and had operations in the Netherlands, Belgium, Germany and France Anthony Alan Foods is barely a young baking company when compared to United Biscuits, having been established only in 2001. It configures its product chain by working a partnership and gaining a license from the Weight Watchers in UK. It differentiates its cake products by developing a niche market among those who watches their weights and diets and offering them a low fat cake. Their brand of cake is offered to a range of UK bakeries who in turn sell this to multiple grocers across UK and Ireland. The company has developed several products along this line that are sold in main UK supermarkets and other retailers. The two companies both developed a differentiated product that would cater to the segmented taste of their customers in UK. Alan is for the health conscious; UB is for the sophisticated tastes of customers. Both companies started small and perfected a product from a recipe they have own-developed. UB which is more mature in its stature configures product chains thru mergers, partnership and acquisition. By this, their expertise is fortified by technology transfer from the acquired companies that makes it ready to compete in larger market and offer its food products in a wider range of customers. Alan Foods Company feels it is ready to move on to a larger scope of market but has not defined its market strategy. It has about 9 years experience in the segmented market targeting the health conscious customer. It has been successful under this approach, and there are still million health conscious people that the company can reach. w.c. 441 List of References “Advertising - setting the advertising budget” In tutor2u. Retrieved May 15, 2010 from http://tutor2u.net/business/marketing/promotion_advertising_budget.asp Friedman, Milton. 13 Sept. 2001. The Social Responsibility of Business is to Increase its Profits. The New York Times Magazine. Retrieved May 15th, 2010 from http://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html “Game theory and prisoner’s dilemma” n.d. In Basic Economics. Retrieved May 15, 2010 from (http://www.basiceconomics.info/oligopoly-market-structure.php “Prisoner’s Dilemma (n.d.) In serendip. Retrieved 15 May 2010 from http://serendip.brynmawr.edu/playground/pdref.html “Porters Five Forces: A Model For Industry Analysis “ PFF (n.d.) In QuickMba. Retrieved May 15, 2010 from http://www.quickmba.com/strategy/porter.shtml. Polski, Margaret, 2001. Measuring transaction costs and institutional changes in the U.S. banking industry. Indiana University. Retrieved 15 May 2010 from http://pdfcast.org/pdf/measuring-transaction-costs-and-institutional-change-in-the-u-s-commercial-banking-industry. PDF Cast.org) Rasheed, Howard S. & Geiger, Scott W. 2001. Determinants of governance structure for the electronic value chain: resource dependency and transaction costs perspectives. In Journal of Business Strategies  Retrieved 15 May, 2010 from http://www.entrepreneur.com/tradejournals/article/81296798.html “Social responsibility”. (n.d). In Business & Money. Retrieved May 15th, 2010 from http://www.yourdictionary.com/business/social-responsibility “Transaction cost.” n.d. Definition in Business Dictionary. Retrieved May 15, 2010 from http://www.businessdictionary.com/definition/transaction-cost.html What is Market Share? n.d. In Wisegeek.com Retrieved May 15, 2010 from http://www.wisegeek.com/what-is-market-share.htm Read More