Microeconomic Conditions of an Organization - Essay Example

Evaluate the impact that external macro environments have on the activities and performance of organizations.

Microeconomics is a branch of economics that deals with the relation and behaviors of individuals and firms and their decision-makings (Suchanek, 2004). It also relate to the interaction of buyers and sellers including the factors that influenced them. It also includes the interrelation of supply and demand as well as determination of price and output in individual market of a specific industry (Suchanek, 2004).

This essay deals about microeconomic conditions and its impact to Carphone Warehouse, a leading retailer of electronics, mobile communication facilities and accessories based in United Kingdom.

Understanding Microeconomy

Microeconomics deals about the economy in miniature. It focused on specific sector or industry, and the interaction of households and firms within this market. It relates to price theory e.g. price of goods and services. Such relate to the specific condition of supply and demand as well as the roles of consumers and businessmen’s decision-making in relation to the economy. An example of this is when they decide the amount of purchases and the price of specific commodity desired to be brought. Such relate to the law of supply and demand. Under this precept, the quantity demanded rises as price falls and conversely, quantity demanded falls as price rises (Colander, 2001: 83)

Other factors associated with supply and demand, other than price, are shift factors. These shift factors of demand include income, prices of other goods, tastes and expectations (p. 99). Shift factors for supply include the price of inputs, technology, expectations, taxes and subsidy (p. 99). Statistician posits that a change in quantity demanded (supplied) is a movement along the demand (supply) curve; a change in demand (supply) is the horizontal sum of all individual curve (pp. 83-89). As such, when quantity demanded is greater than quantity supplied, the price would surely rise. But when quantity supplied is greater than quantity demanded, the price is low (p. 100). When quantity supplied and quantity demanded are similar or equal, the price wouldn’t change. Economist calls this equilibrium (p. 97). This also maximizes the combination of consumer surplus and producer surplus. Consumer surplus means the net benefit gained by the consumer by purchasing goods while producer surplus is the net benefit a producer gets from selling a good (p 98).

In microeconomics, persons rationally decide based on concept of utility, level of satisfaction and whenever such good provides them some sense of happiness (Reynolds, 2004). The business operations on the other hand, make decisions based on market competition. The more competition present in a market on a specific industry, the less leverage it will have for pricing (Reynolds, 2004). In both cases, the cost of the product is seriously considered specially in making decisions. Other than cost, consumers also decide about the significance and beneficiality this product. This means that the appeal of benefit will persuade consumer to buy it at a cost (Reynolds, 2004).

Consumers have varied utilitarian precept to every good. Such also institutionalized different levels of demand (McKenzie & Lee, 2006). Economist once said that total utility is the total satisfaction of consumer’s consumption. Utility is not easy to measure and difficult to gauge on consumer’s behavior (McKenzie & Lee, 2006). Each consumer felt different to each product. Whenever consumer felt decreasing satisfaction on specific product, such is theoretically considered as the law of diminishing marginal utility (McKenzie & Lee, 2006). The latter illustrate how consumer spends his money or his resources.

Microeconomics also deal about opportunity costs, a precept applied to a consumer’s decision on purchasing or producing specific goods at the expense of buying or producing something else (Fisher, 2005). Economist and financial analyst use the production possibility frontier (PPF) in describing the opportunity cost (Fisher, 2005) and its influence in decision-making. In production, if the company decides to produce less than its capacity, this so happened considering the amount of demand. The company would decide to limit production depending on what is demanded in the market and the nature of competition present (Fleischhauer, 2007).Theorist further expound that whenever there is failure in allocating resources because of an ailing economy, such meant market failure (Wolfstetter, 2000). This illustrates scarcity of resource or whenever there is general disparity or mismatch between supply and demand (Wolfstetter, 2000). Market failure often relates to the competition in the production of goods and services, or maybe due to asymmetric information or from a misjudgment of a particular external action (Bouman, 2000). These external mattes may also micro environment: suppliers, customers, marketing intermediaries, financiers, and the public as well (Karier, 1990).

Economist categorized four types of competition in the market. These are (a) perfect competition, (b) monopolistic competition, (c) oligopoly and (d) monopoly (McKenzie & Lee, 2006). Perfect Competition happens wherever a number of firms produce a good for a large number of market consumers (McKenzie & Lee, 2006). With many companies producing similar products, there is less room for product’s distinction; hence these companies cannot affect prices due to low market share (Fisher, 2005). Monopolistic competition on the other hand, refers to a number of companies who are able to produce goods but with quality distinction (Reynolds, 2004). There are also few barriers to entry. Meanwhile, oligopoly competition refers to few numbers of companies producing goods and they are able to differentiate their respective product from its competitors (Reynolds, 2004). There is a high barrier of entry here. Monopoly means a lone company controls the market as well as market’s entire share (Reynolds, 2004). These companies determine their respective prices of produce by the level of competitiveness in this industry and they are adjudged how they are able to balance costs to revenues (Reynolds, 2004). The more competitive the industry, the less choice the individual firm has when it sets its price.

In UK, home, private domestic demand grew robustly in the first three quarters of 2010, motivated partly by temporal support elicited from an end of the period of de-stocking (Bank of England, 2011 and IMF, 2011).  But fixed investment also increased strongly, partly financed from companies’ substantial positive cash flows.  And, abstracting from quarterly volatility, households’ consumption grew at a moderate pace, despite stagnant real incomes.  The impact of this strength in domestic demand on UK output was partly offset by rapid growth of imports.

Indeed, the relations of every household and of producing company are determined by interplay of supply and demand. This also define the price index in the market. But from holistic perspective, the economic discourse in miniature are always affected by the general condition of the macroeconomic market since all stakeholders of microeconomics are also key players a larger market. Ultimately, it is the consumer who define his decision on the basis of cost and benefit.

Microeconomic Conditions’ Impact for Carphone Warehouse

Carphone Warehouse posed as the largest independent mobile retailer in Europe with reported 7,000,000 units sold annually (Carphone Warehouse Group Companies,2011) with 20% market share and 6% annual growth rate. It wanted to become Europe's leading connectivity specialist (CWGC, 2011).

In this part of the essay, we will delve into Carphone Warehouse as a business company and the microeconomic implications to its operations (CWGC, 2011).

Carphone Warehouse Business Size

The company operates in an oligopolistic market structure with 800 stores in UK with customer support services that accommodate 5 million calls per year and it has employed 1,200 advisors, employees and team members (CWGC, 2011). It has 700 employees at West Midlands, its main site. The warehouse store, process, and then distributes products to its chain of 780+ retail stores. The warehouse business expansion is also done online (CWGC, 2011). It also has Reverse Logistics team which repair all customer returns and faulty handsets which has reached to about 1.3million handsets. The company has 80 Express Repair Technicians dispersed in stores nationwide (CWGC, 2011).

Competition & Market Structure

Carphone Warehouse is 50% shareholder of The Best Buy, a Europe-based retail group that is managing a chain of business relating to electronic, computer and accessories sales at Wireless World (CWGC, 2011). The company also fixed line and mobile broadband; handsets, laptops, music and gaming; and associated software and content. Its largest store has 3,000 square feet, compared to the traditional format, which have an average size of 500 to 600 square (CWGC, 2011). It also offered broader product range, wireless devices and other technologically-advanced products fits. Since 2010, there are already 73 'Wireless World' stores. They also maintained an online transactional website for marketing (CWGC, 2011). To date there are six Best Buy 'Big Box' format stores in the UK. The first store opened in Thurrock (Lakeside) on 30 April 2010, followed by Hedge End (Southampton), Merry Hill (Birmingham), Aintree (Liverpool), Croydon and Derby (CWGC, 2011). The 'Big Box' initiative, on the other hand, draws on the combined experience of Best Buy Co. Inc. Best Buy planned to expand with five additional stores planned for 2011 in Cribbs Causeway (Bristol), Hayes, Rotherham, Nottingham and Enfield (CWGC, 2011).

Best Buy's aimed to develop a high level of in-store interactivity and a comprehensive range of technology support and advice services. The product and service range includes audio and visual equipment, computing technology, entertainment devices, appliances, mobiles, music, movies, games and the connections – including fixed and mobile broadband – content and services to really enable customers to get the most out of their technology (CWGC, 2011). The Best Buy Mobile store-within-a-store format has also expanded across United States, currently with stores reaching a number of 1,099. It has also applied for the establishment of 158 standalone stores in 2010 (CWGC, 2011).

Market Dominance

Figure 1. Company’s Earnings April 2011 which express competitive status.

These chains of retail stores are likely to gain market dominance using its key strength as organization, to wit (CWGC, 2011):

• Best Buy is posing as world's leading consumer electronics retailers;
• Managers and employees have wealth of expertise and innovative marketing skills which resulted to a positive outcome of delivering profitable growth. Best Buy Europe Group maintained strong relationships with major Western European network operators.
• It has significant market share;
• It has grown unaffected to financial downturns in 2010 and has underwent consolidation in European mobile phone retailing;
• It has a portfolio of strong retail brands and has maintained the quality in the market as preferred product of the consumers (CWGC, 2011).

PESTLE Analysis of Carphone Warehouse

This is strategic management analysis that uses the tool of political, economic, social, technological, logistical and environmental business scanning. This provides a holistic view of the status of the company.

Factor

Description

Political

The Government has acknowledged the retail industry’s contribution to economic growth but at the same time, pressuring retailers to provide a wide range of jobs to meet demand of rising unemployment.

Economic

The economy as of the present is uncertain and volatile. The increase of prices in crude oil, fluctuation of forex exchange rates, and budget cut spending that redefines the economy in every home, would likely affect the prices and profits business like Carphone Warehouse. This may have implications to supply and demand of goods retail but the company can also like reverse the downtrend by investing for mobile reloads too as communication industry remained significant in times of conflict and despite unstable economy.

Social

The current social trends is that people would own two or more mobile phones for different networks and that people are more inclined in maximizing information technology in schools, offices, homes and even whilst enjoying leisure.

Technological

Information technology is will likely increase its sales. There is also growing awareness on the use of technology for research, communication, social networking, linkaging and leisure. As such, being a company selling information technology tools, it is expected that it will earmarked growth rate provided that all systems of management are in place.

Legal

The company will observe commercial laws, business laws, labor laws, forex trading risk management, environmental laws, and on policies relating to global expansion and trading. The company must also observe the National Minimum Wage law, taxation and other related regulatory permits.

Environment

In observance to climate change and environmental concern, the company must undertake measures to recycle useless mobile phones and communication gadgets. Many of its parts came from minerals extracted by industries, thus copper, iron, and the like should be recycled and should not be thrown away. This is also in consonance to policies legislated by governments relating to environmental protection.

As it is practicing oligopoly competition in the market, it is likely that the company is engaging in priced advertising than a monopolist (Sloman, 2005) although if its manned with transformational leaders, they can maximize supernormal profit for research and development (Sloman, 2005). In this state, it is possible that new entrant in the industry will not be able to compete because this companies chains have strategically spread out in the market. There maybe those who might attempt to offer lower prices of product cost to determine its competitive edge against Carhouse Warehouse, but company will struggle to gain leverage with low income. Theoretically, it was perceived that under an oligopoly demand curve, if an oligopolistic firm cuts its price, the rival companies are compelled to follow to protect its interest of maintaining costumers. Also, if oligopolistic firm raises its price, rival companies can’t follow because they need to enjoy the figure of customers who’s turn around against rising price of products (Sloman, 2005). As a company that is taking competitive command in the market, Carphone Warehouse can be flexible with its prices too. The formula for elasticity is: price elasticity of demand = (% change in quantity demanded) / (% change in price). The equation for the price elasticity of demand measures the relative responsiveness of quantity demanded to a change in price, (Sloman, 2005). It is however presumed that considering market volatility and its problems, the chain of stores must in all fairness exercise prudence in its products. All these nonetheless, will relate to the interplay of supply and demand in the market arena. As such, prices may increase, decrease or at an equilibrium. But what is important is that its done with prudence, fairness and based on standards.

In conclusion, it can be inferred that despite economic conditions of the global and domestic market, Carphone Warehouse is not so much hit with the prevailing problems being a store for information technology--instruments of communication, which maintained its relevance in conflict and peace situations. It may have some downturns with unstable forex trading in the market, but such risk can be managed. It may have it dilemma too in managing concerns in the transportation of goods with the increasing prices of oil and gas, but noting its financial viability, the company can still withstand financial shocks in the next five years.