Business Environment and Market Structure of Sainsbury - Case Study Example

Business Environment BUSINESS ENVIRONMENT Evaluate the Impact of Competition Policy and Other Regulatory Mechanisms on the Activities of Sainsbury Sainsbury is the UK’s 3rd largest supermarket chain with a 16.4% share of the supermarket sector. Being a company, which operates in a highly competitive sector, competition policy and other regulatory mechanisms have a significant impact on its operations. The main aim of competition policy is and to enhance business competitiveness in the UK (Macculloch, 2013: p71). Competition policy ensures wider choice for consumers, as well as effective price competition for the suppliers. Regulators enforce competition rules and policy and oversee resulting outcomes for consumers and producers. The Competition Commission and the Office of Fair Trading are the main regulators in the UK and are involved in the regulation and monitoring of prices, ensuring customer service standards, and removing entry barriers to open up the market (Macculloch, 2013: p71). The Competition Act 1998 impacts on Sainsbury as an important source of competition law. It provides a framework that ensures Sainsbury cannot abuse their dominant position in the supermarket sector through restrictive business practices. Thus, Sainsbury cannot collude with other supermarket chains to prevent, restrict, or distort competition (Macculloch, 2013: p74). This Act provides the Office of Fair Trading with the responsibility to prosecute any firm that is engaged in such activities. However, if Sainsbury can demonstrate they are increasing efficiency of the market, they can be exempted from prohibitions set out in Chapter I of the Act. These prohibitions include price fixing and exclusive distribution agreements. Chapter II, on the other hand, prohibits firms like Sainsbury from excessive pricing, predatory pricing, price discrimination, and vertical restraints to restrict competition or gain competitive advantage (Macculloch, 2013: p74). The Enterprise Act 2002 would also impact on Sainsbury with respect to potential insolvency bankruptcy and mergers. The Act’s main policy objectives are to redress injured parties in competition distortions, create a deterrent against anti-competitive behavior, root out different types of anti-competitive behavior, and to raise competition policy profile in the UK (Macculloch, 2013: p77). Directors of companies attempting to form cartels are liable to jail terms of up to 5 years, while the Act also widened the scope of the competition commission to cover investigations concerning entire industries, rather than sole firms. In this case, if Sainsbury was to form a cartel with other supermarket chains, the competition commission would have the power to investigate the entire supermarket industry. Finally, the Act also amended administration procedures in case a company fails to enhance a “rescue culture” (Macculloch, 2013: p77). The Office of Fair Trading, in its role to protect consumers from specific business activities, also impacts on Sainsbury’s operations. The office makes sure that companies are operated fairly and do not mislead the consumers (Macculloch, 2013: p81). The OFT especially seeks to clamp down on unfair business practices like cartels where supermarket chains may collude to set preferential market conditions. In addition, it also seeks to clamp down on scams aimed at the consumer, such as when a supermarket targets vulnerable consumers and misleads them about their actual purchases. Finally, it also clamps down on mergers that do not serve the interests of the public, for example where it would result in significant decline of competition or even create a monopoly (Macculloch, 2013: p82). As such, the OFT protects the consumer from unfair practices adopted by companies like Sainsbury. Illustrate the Way in Which Market Forces Shape Organizational Responses Major market forces include demand and supply, elasticity of supply and demand, consumer actions and perceptions, cost and output decisions, and economies of scale. Sainsbury responds to these different market forces in various ways. Supply and demand is the market economy’s backbone and the relationship between the two underlies how organizations allocate resources (Carl, 2012: p32). Sainsbury has to make decisions on supply by considering the market demand. Therefore, where there is high demand, then Sainsbury will produce a high volume of goods. As a result, Sainsbury and other similar companies will always avail supply by considering the market’s demand position. Their pricing will also be a reflection of demand and supply. The degree to which the supply or demand curve reacts to price changes is referred to as the elasticity of the curve. For Sainsbury, elasticity will vary for different products since some may be essential to consumers. Products that are necessities are less sensitive to changes in price, while a price increase for products that are not necessities will deter consumer purchases as the opportunity cost increases (Carl, 2012: p34). Products are considered highly elastic when slight price changes result in a sharp change in supplied or demanded quality. Inelastic products, on the other hand, are those where price changes result in modest changes in supplied or demanded quantity if any. For customer perception and preferences, the globalized economy increased competition, meaning that product differentiation is becoming more difficult. As competitive offerings against Sainsbury increase due to globalization of logistics, sourcing, production, and information access, their products also face competition from new offerings from industry outsiders like grocery stores (Carl, 2012: p36). As differences between products closes, Sainsbury is attempting to win over customers through reductions in price. Sainsbury considers customer perceptions and the actions the consumer will take prior to purchasing a product. Where customers are highly sensitive to changes in price and quality, Sainsbury would have to find a way of improving quality while keeping prices under control. Economies of scale refers to ways in which large organizations like Sainsbury can reduce costs due to their large operational size, which offers them an additional advantage over smaller competitors (Carl, 2012: p38). For instance, because they sell so many products, Sainsbury can charge lower prices per unit. Prior to producing products in high volumes, companies have to take into consideration economies of scale, specifically because they have a significant direct effect on their decision to make or sell products in large volumes. In this case, Sainsbury is able to leverage their economies of scale by making available large product volumes when there is high demand for the product. Finally, regarding cost and output, costs are mainly related to the organization’s choice of inputs in the process of production. Essentially, the short-run is composed of variable costs and ¾ fixed costs, in which fixed costs are those that remain constant regardless of produced amounts (Carl, 2012: p41). For example, if Sainsbury was paying rent on a monthly basis for their stores, the rent remains constant whether they sell 1 or 1,000 units. On the other hand, variable costs are those costs that change in relation to units sold or produced. For Sainsbury, costs of labor are variable costs since the more sales they make, the more labor they need. Explain How Market Structures Determine the Pricing and Output Decisions of Business The market structure concept is best understood as market characteristics that influence the outcomes and behavior of organizations operating within the market. These market characteristics normally focus on those that affect the nature of pricing and competition. Traditionally, the market structure’s most important features are the number of organizations, the largest organizations’ market share, the nature of costs such as ability to exploit economies of scale, the degree of vertical integration in the industry, extent of product differentiation, and customer turnover (Kuenne, 2011: p48). Market structure can also be defined in terms of whether an industry is monopolistic or competitive. For a perfectly competitive industry, the quantity and price of production is set at the level where the product’s price is equal to marginal costs of producing the product for the firm. Perfect competition achieves the most desirable or efficient output levels for any economy. In this case, there are many organizations that operate in the industry and these companies are locked in extreme competition. Sainsbury operates under perfect competition in the supermarket industry since there are many supermarkets that operate at high efficiency (Kuenne, 2011: p49). Under perfect competition, Sainsbury does not choose its product’s pricing strategy, although it chooses the volume of output sales considering overall costs, such as the opportunity cost of invested capital. With regards to the level of output, Sainsbury analyzes the market based on possible loss or profit from sales decisions, what the organization should sell at the moment, and whether it is possible to stay competitive in the industry (Kuenne, 2011: p52). Therefore, Sainsbury usually focuses on their products’ demand, while pricing is determined on the basis of the consumer’s willingness to purchase at a specific price and the pricing’s competitive position. If Sainsbury were in a monopoly industry, on the other hand, it would have the power lower output and raise prices to levels that are desirable and efficient for them. In this case, they would set prices at the level where their marginal revenue would be equal to their marginal costs. If Sainsbury were in a monopoly, their marginal revenue schedule would be just below demand schedule’s determination of the price schedule (Kuenne, 2011: p53). In such a monopoly market structure, one or two organizations would have the capability to impose pricing in order to maximize profits without considering the price consumers are willing to pay (Kuenne, 2011: p62). Maximization of profit would be achieved by Sainsbury setting prices such that marginal costs were equal to marginal revenues. The monopolist, however, would still be constrained by the industry’s demand curve. If Sainsbury were in a monopolistic competition, this would be almost the same as in pure competition, although the organizations would have brand recognition and other distinguishing features that would give them an additional price advantage. Still, the market would be basically competitive. Finally, if Sainsbury was in an oligopoly market structure, this would be similar to monopolistic competition but the organizations would be in more intense competition. However, if the oligopoly becomes a cartel, the organizations in such a market structure would behave as in a monopolistic competition market structure (Kuenne, 2011: p62). Here, Sainsbury would consider top level pricing systems and consumer demand. As a result, prices would be set at a lower price as a message or signal to other competitors or potential entrants in order to defend market share. References Carl, S. (2012). Market Structure. Delhi: Orange Apple. Kuenne, R. E. (2011). Readings in applied microeconomic theory: Market forces and solutions. Malden (Mass: Blackwell. Macculloch, A. (2013). Competition law and policy in the EU and UK. S.l.: Routledge-Cavendish. Read More