The Economic Environment and Anatomy of Business - Essay Example

Economic Environment and Anatomy of Business Place In order to understand the market prices and identify how they can help shape certain production and consumption decisions, the companies should recognize the theory of supply and demand. The law of supply and demand determines the effect which the availability of a certain product or demand would have on price (Kirzner, 2000). While supply and demand are the driving forces behind the market economies that exist in the U.S. and across the globe, their analysis allows managers to understand the big picture in order to run their businesses. Thus, Samsung Electronics, SK Hynix and Micron companies are the biggest holders of the memory chips in the market, according to analysts at Bernstein. While this industry becomes an oligopoly, consolidation of manufacturer led to the aggressive enlargement over the last few years and resulted economic glut of a memory chip that pushed down prices and made negative impact on the weaker manufacturers. Such situation was notice for the Japan’s Elpida, the company acquired by Micron. However, demand is rising because of the growth in smartphones with their higher memory capacity. Besides, the cost of some D-Ram chips, wich are used in personal computers is predicted to almost double during the year, because the manufacturers switch production lines in order to meet the demand from the industry of smartphones. Moreover, the industry of memory chips is recovering and the SK Hynix company expects the demand for chips for mobile devices to increase as the supply for memory chips will be solid, because of the limited capacity (Mundy & Mishkin, 2013). The company also states that the shipment growth would slow casting doubt on medium- term revenue growth because of the change in product mix and a move to more intricate production technology. This change and a transition will limit growth in third- quarter shipments for the key DRAM business, which is important for the company. However, these are also positive results because they will lead to profit- taking activity. And the enlargement in budget and acceleration of a new fab construction. It will create opportunities for the additional capex to be designed for changes, used for the environmental and safety expansion. Hynix have strong rivals in such companies as Samsung Electronics Co Ltd, Japans Toshiba Corp 6502.T and Micron Technology Inc, However, it states about its operating profit. Notwithstanding the market conditions, the company has a seasonal pickup in demand for consumer electronics products. Analysts in turn are concerned about the supply glut that arises from Hynix’s plans for capital investment in 2015. They, however, expect the short- term earnings to remain stable and explain such causation with the launching of new mobile products that major companies do. The development of LTE- related demand in China will keep demand conditions strong. As soon as the consumers are focused on keeping the chipmaker of DRAM capacity, the demand for Hynix goods would maintain firm. In addition, the release of new smartphones and the larger- screen iPhone from the SK Hynix’s main client Apple Inc., will increase the DRAM and NAND chip sales (Lee, 2014). In the economics, particularly in the theory of competition, barriers to entry are those obstacles of the organization or company to enter a certain market. Sometimes it is the entire country that faces such blocks while trying to enter an industry or trade group (Barriers to Entry, 2007). Economic downturn with the new government regulation, which demand patents, education or licensing create entry barriers to the certain market. In addition, the existence of monopolies also aids by such barriers. However, of all successful American franchise companies, McDonald’s shows up, having long- term performers and rewarding their investors. For this company, there are no entry barriers, because it understands that there is great demand for at home options and it has built a huge success with its McCafé coffee in its restaurants. Besides the fast and convenient elements of the McDonald’s menu, it has distinguished itself by adding healthy and more natural elements. Today, McDonald’s goes on broadening its product portfolio proposing high quality coffee and other healthy drinks, by which it competes with the Starbucks and many other cafeterias, earning positive economic profits and creating certain barriers to entry for other organizations ( Mourdoukoutas, 2013). The company has no entry barriers as the products it offers are differentiated by the quality, because start- up organizations may not follow the same rues in running their business as McDonald’s does. Besides, the style of the American- based company is that unique that representing its products in other countries it has no rivals of the same restaurant type. With the long history, McDonald’s has no barrier to entry when it concerns the large costs in obtaining a new market, for example, an advertising, because it is already differentiated and it is closely to the oligopoly. With an ability to offer its consumers fast and fresh dishes, the company is closer to its consumers when it comes to the food preparation. They will simpler get what they want attending the restaurant rather than at home. However, there are barriers to entry on a global scale, as the competition is extremely high in this sector. Notwithstanding the predicted growth of the fast food industry in the next five years, the international expansion will be biggest source of revenue and profit. With the twelve percent of the market share, McDonald’s Corporation has strengths in its historical and forecasted performance, huge margins because of the unique franchising strategy and the experienced and proven management team. The overcoming of the global entry barriers would enable McDonald’s to create shareholder value in the emerged markets and increase sales of its products and coffee. Since the fast food industry is a monopolistically competitive, the company invests much money in keeping its brand name that would be able to differentiate it from all the others. Finally, since the company has already earned the reputation of the trusted company, its consumers know that they will be provided with the products of the consistent quality (McDonald’s Corporation, n.d.). Economies of scale are those elements that lead to the the average cost of producing of a certain products or services to fall as the capacity of its outputs enhances. Economies of scope allow production of a range of products cheaper instead of increasing of cost for the every item on its own. These economies come from such businesses as finance or marketing (Economies of scale and scope, 2008). It is believed that big corporation shift their production from one country to another for the cheapest sources of labor and technologies. In such a case, a globalization makes it easily for the multinational companies to run their activities. Transport costs and trade barriers disappear and it becomes easier to the companies to serve foreign markets exporting, but not establishing new factories and research centers across the globe. In addition, as capital markets are more integrated, it is easier for the companies to raise their profits by selling bonds or shares. The most common explanation for such growth is the economies of scale. Under the economies of scope, effective production demands a company to produce several products jointly. As the multiproduct organizations do not have much market power than those companies, which produce a single product, economies of scope engage huge companies, providing greater access to the capital markets where they can receive investments and funds. Thus, for the Coca Cola company economies of scope refers to is decision to use its current equipment, technology and labor to produce more beverages, such as Sprite, Fanta and Minute Maid in order to vary its products and lower their costs. By lowering the cost for production, the company refers to the economies of scale that enables it to produce more by enhancing the result standards of its machines and staff. Thus, if Coca Cola ships more beverages utilizing the same vehicle, it saves money on shipping as the more products it ships the more effective it can become (Gallo, 2014). Scale is not a big advantage on the producing side of this kind of business that engages blending water, gas and a special syrup. Scale economies comes into play in other spheres, such as promoting the brand on a global marketing. Such scale effects have led Coca-Cola to the position of a highly multinational company. The operations that Coca Cola runs in more than two hundred countries, enables it to set up the partnership with the organizations locally and on the global level. It also has its distribution network, connecting retail customers. Price discrimination includes a range of practices which are targeted to extract rents from a base of diverse consumers. Whether the consumer types are private information and the monopolist knows their distribution, one finds the optimal non linear rate that contains solving a bound variational problem (Miravete, 2008). While price discrimination appears for the identical goods or services to be sold at different prices from the same provider, its main purpose is to cover the more of the markets consumers, as it allows the company- seller to form the most revenue possible for such a good or service. If the company knows the absolute maximum price that every consumer is able to pay, then the company uses the first degree of price discrimination.  Whether the price of the goods or services changes depending on the demanded quantity, that company- seller utilizes the second degree of price discrimination. The organization uses the third degree of price discrimination when it sets price of its goods or services by such attributes as location, age, sex or the economic status. The Walt Disney management is aware of what its consumer want and understands its different demographics, each group’s availability to pay for entering the company’s theme parks. Thus, the company uses the third degree of price discrimination as it takes into account the geographic location of its consumers. While tourists from around the world come to visit the Disney, one group of people left does not attend the theme park often. This group is the Florida residents. That is why Disney uses the discount for Florida residents as a prime example of price discrimination. Floridians have already liked the Disney parks, however these consumers are not willing to pay exorbitantly high prices. Such situation would lead to missed profit for the Disney Company. As long as Disney is able to estimate above the marginal cost of its each guest’s visit and hold the integrity of the price structure for the people with higher reservation costs, who cannot gather to the lower price, it is in the best interest of Disney to charge less (Schatz, Gottlieb, Wainberg, & But, 2014). The other innovation connected with the price discrimination is the launching the technology for fingerprinting it Disney’s customers. Such thing raised certain privacy concerns as people wondered why the company needs that sort of information and what it is going to do with it. The explanation is that Disney sells multi- day tickets at a discount price. According to its policy, it does not want people buy a ten- day ticket and use it for two days with the further possibility to resell the ticket to someone else. Disney sells five separate two- day tickets, however, this is not convenient and to avoid this, the company fingerprints the consumers of such tickets in order to verify the fingerprint and associate them with a ticket. However, price discrimination may lead to privacy worries, s some strategies are associated with an ability to identify individual customers and the seller would know about the charged price. With the development of modern technologies, such privacy worries grow as more availabilities to keep records emerge and it is easier to get information about the customers to create and manage price discrimination strategy. However, some forms of price discrimination do not depend on customers’ identification. Speaking about the Disney Company, its type of price discrimination policy means that it does not need to know who the consumer is. All the company needs to know is that one is the same person who bought and used the ticket the previous day. Whether it is possible to create such fingerprint- based system that would store information that will enable the company to verify a newly- presented fingerprint or the one that already used the services of the company, it would let Disney to get what it needs to avoid tickets resale. References Barriers to Entry, 2007. Available from http://www.venturenavigator.co.uk/content/barriers_to_entry Baye M., n.d. Managerial Economics and Business Strategy, the d., McGraw Hill Davies D. & Lam, P., 2001. Managerial Economics, 3rd edn, Prentice Hall Economies of scale and scope, 2008. The Economist, Available from http://www.economist.com/node/12446567 Gallo, A, 2014. The CEO of Coca-Cola on Using the Company’s Scale for Good, The Harvard business review, Available from https://hbr.org/2014/05/the-ceo-of-coca-cola-on-using-the-companys-scale-for-good/ Kirzner, I., 2000. The Law of Supply and Demand, The Free web site, Available from http://fee.org/the_freeman/detail/the-law-of-supply-and-demand Lee, S., 2014. UPDATE 2-SK Hynix sees chip sales slowing, posts dip in Q2 profit, The Reuters, Available from http://www.reuters.com/article/2014/07/24/sk-hynix-results-q-idUSL4N0PW0EN20140724 McDonald’s Corporation, n.d. The University of Oregon Investment Group, Available from http://uoinvestmentgroup.org/wp-content/uploads/2010/10/MCD1.pdf Miravete, E., 2008. Price discrimination (theory), Dictionary of Economics, Available from http://www.dictionaryofeconomics.com/article?id=pde2008_P000333 Mourdoukoutas, P., 2013. Starbucks and McDonalds Winning Strategy, The Forbes, Available from http://www.forbes.com/sites/panosmourdoukoutas/2013/04/25/starbucks-and-mcdonalds-winning-strategy/ Mundy, S., Mishkin, S., 2013. Falling prices to be just a memory for chip manufacturers, The Financial Times Limited, Available from http://www.ft.com/intl/cms/s/0/b10b96f2-b539-11e2-ace9-00144feabdc0.html#axzz3IMDxes24 Schatz, D., Gottlieb, J., Wainberg, B. & But, A. 2014. Disney’s brilliant usage of price discrimination, Available from http://www.overtcollusion.com/pricing/2013/2/14/disneys-brilliant-usage-of-price-discrimination.html Read More