Micro & Macro Economic Analysis - Electronic Arts - Coursework Example

? Micro & Macro Economic Analysis – Electronic Arts Micro & Macro-Economic Analysis – ElectronicArts The concerned report explains the dynamics of the Demand and Supply theory of a product, the market structure in which the company exists and the elasticity of its products. The report has been divided into two major sections, analyzing the impacts produced on Micro and Macro economy of a company and its market. Further the report, details aspects relating to the efficient use of resources and strategies that can be opted to attain competitive advantage. In Economics, the relationship between a prospective seller and buyer of a product is known as demand and supply. The price of a product is directly proportional to its demand. This means that if demand for a product goes up its prices are more than likely to rise. Similarly if one variable falls, the other is destined too as well. Today In the modern world, the theory of demand and supply seizes more emphases of business analysts in decision making. Demand and Supply theory in the modern world of fierce competition enfolds a great deal of attention for strategic planning to achieve competitive advantage over rivals. The phrase “Demand and Supply” was first used by James Denham-Steuart in his book named “Inquiry into the Political Economy” which was published in 1767 (Steuart Denham et al, 1966). The theory discussed above is supplemented by the characteristics of the market in which the company exits. Conventionally there are four basic types of market structures. Perfect competition: such markets have many buyers and sellers, none being able to influence prices. Oligopoly: several large sellers who have some control over the prices. Monopoly: single seller with considerable control over supply and prices. Monopsony: single buyer with considerable control over demand and prices. The company with its gaming products operates in the Oligopolistic environment. Where there are several large producers but have a tendency to dominate major markets across the globe and influence some change in prices (Sloman, 2010). The concept of elasticity comes into play here. Elasticity is the measurement of how changing one economic variable affects the other. Elasticity of demand can be of three basic types; Price elasticity of demand – measuring the dynamics of the quantity demanded by the change in price. Income elasticity of demand – measures the dynamics of quantity demanded by changes in consumer income. Cross elasticity of demand – measures the responsiveness of quantity demanded by changes in price of another good. The concept in itself is a complete strategy. When ascertaining price of a product these elasticity’s should be kept in mind (Sloman, 2010). A detailed analysis of the Micro and Macroeconomic environment of Electronic Arts Inc is conducted below in detail, to explain the subject without obstruction. MICROECONOMIC ANALYSIS The demand and Supply theory as discussed above are amongst issues one needs to cater before planning product launch, indulging in price wars and budgeting for marketing. As the demand and supply curve has serious implications on the pricing strategies being adopted, there should be reasonable understanding of the subject matter before decisions are made. For the purpose of explaining the subject effortlessly, let’s consider the example of the world’s largest video game developer Electronic Arts, Inc. Electronic Arts (the company) is America’s largest developer, marketer, publisher and distributor of video games. The company has a well diversified portfolio of products and geographical presence all over the globe. Under such circumstances the demand and supply implications are more severe for planning purposes as different conditions will be faced by the business analyst across geographical horizons. (Electronic Arts, 2011) Demand and supply has remained unchanged and unchallenged till date. There has always been a gap in the demand and supply of a particular product due to various reasons. The company has a wide range of home computing games in its portfolio projecting a good example of elastic nature of goods. These products are price sensitive and therefore elastic in terms of economics. The company should be very cautious when increasing prices or introducing new games in the market. Because a price hike may lead to loss of customers to rivals such as Take-Two Interactive. This in-turn would strike down sales and thus profitability. It can be argued that in such an industry demand would stay constant for the games depending on the taste of gamers irrespective of the price. But this cannot be guaranteed; as the demand for a video game may depend on the taste or craze of the gamer it still does not become a necessity and can be avoided no matter how much a gamer is addicted. A strong advocacy against the theory has been observed in context to certain products whose demand and supply doesn’t change with respect to prices. These products are referred to as “In-elastic” products in economic jargon. Good example of an in-elastic product would be medicines which have no substitutes. Similarly an elastic product can be explained in terms of things that are not basic necessity. Therefore any change in its prices would produce major impacts on its demand. Business analysts have a tendency to counter such issues during planning a launch of a product or shifting strategies to compete with rivals. A wrong move can lead to disastrous consequences such as being drifted out from the market by rivals in a price war situation. (Sloman, 2010) Factors pertaining to market structures need be considered in devising strategies to achieve competitive advantage. The nature of the market itself, in which the company competes, should also be considered as it is in itself a whole strategy. Looking at the dynamics of the market, the company should maintain its strength in oligopoly and try to move towards Monopoly. Under such circumstances the company would maintain its place as a partial monopolist until complete monopoly is established. Monopolistic market can be achieved through acquisitions of world giants or creating games which are more valued by customers. Thus driving out competitors from the market and swallowing their market shares. A move towards a perfect market could result in rivals dominating the market and thus losing market share. Towards Monopsony would be a severely wrong move as under such conditions prices would be set by the only or very few customers, retreating profitability (Electronic Arts, 2011; Sloman, 2010). As defined earlier in the report, elasticity of a product should be considered for decision making purposes. In the company’s perspective all three elasticity’s have major implications. Price elasticity of demand measures the quantity demanded with respect to changes in its prices. The elasticity portrays that if prices of video game changes it will have impacts on its sales or the demand. There is a possibility that increasing prices would hold sales and vise versa. The company should carefully price its gaming products considering its sensitivity in changing demand. Income elasticity on the other hand measures the effect on demand related to the change in consumer income. The fact has weight, as demand would definitely fall for gaming products if the income of the consumer falls. The company should consider giving discounts if the economy is in recession. People would focus on basic necessities at such times rather than wasting money at a video game. Therefore the company should use price penetration strategy to penetrate its products first in the market and then increase prices while considering the sensitivity of the variable. Cross elasticity is a much complex hypothesis to be considered by the company. It measures the change in the quantity demanded in relation to change in the price of another product. In general terms the company should be worried about the fact, that how would demand for games respond if there is a change in the prices of consoles on which the games run. (Electronic Arts, 2011, Lipsey et al, 2011) As discussed above the company should consider different pricing strategies to maintain its competitive edge and increase its market share. Pricing strategies such as price penetrations, complementary product pricing or price discrimination should be used effectively. As the Gaming industry is fiercely competitive any wrong move could result in major setbacks for the company. The company when taken as a whole across its geographical reach is a magnificent producer of modern day video games. In relation to the product line it can be advocated that the company is using all available resources at its disposal efficiently. With large distribution networks, brilliant brand image, huge development capabilities and a massive pool of finance at its disposal, it is not unwise to suggest that Electronic Arts, Inc is utilizing every resource effectively and has competitive edge over its rivals. (Electronic Arts, 2011) MACROECONOMIC ANALYSIS The analysis of Macro-economic environment surrounding the company is as important as the internal factors. These would include economic growth, unemployment, inflation, balance of payment and business cycle. These factors are important and have a significant role in developing strategies. One should consider all aspects of the environment before drafting any strategy. In the context of Electronic Arts in the Gaming World most of the Macro-environmental factors are at play. The company is heavily diversified in terms of its products and geographical reach. This exposes it to threats at different levels. For example, the company develops games which are available all across the world at similar prices. There is a huge possibility that pirated copies will be created and thus the company will lose a lot of its revenue. Similarly in countries where rotten economic conditions prevail, video games might be considered a waste of time and people will focus entirely on providing for their basic necessities. Price skimming strategies would be totally irrelevant in such countries (Electronic Arts, 2011; Sloman, 2010). Varying Macro-economical situation would present very different challenges for the company’s success. But it should be considered that not all the factors would come into play at once. Changes in the economic conditions could be favorable and adverse. If the economic conditions in a country are improving, indicating that the lifestyle of its citizens is also improving. If this be the case, then the company should cash on all its cash cow products and try to produce as much of its star products as it can. In same time the company should be able to get rid of all the dog products in its portfolio. If the economic growth is witnessed the company could also move towards product development strategies. Once the product is developed and introduced into the market, the company can follow a price skimming strategy to charge high prices at the start and then slowly reduce prices to maintain market share. Conditions such as increase in un-employments suggest a shrinking economy and reducing buying power of customers. Similar is the case with inflation. If such conditions are at work then the company should be vigilant in drafting any growth strategies. The company should consider reducing its product range to reduce cost. Reduction in quality of the product is amongst the option to reduce cost, but is likely to be risky. Price penetration would fit such environment. Further it will help achieve economies of scale (Lipsey et al, 2011). Business cycles and product life cycles are also an important factor which should be considered in strategic planning especially for the Gaming Industry. The life cycle techniques tend to accumulate cost at the beginning of the product life cycle. The advantage to the company is that, costs can be planned and controlled at the very beginning of the product life cycle. The company should try to maintain a longer life cycle. The growth and maturity stages should be longest to achieve highest profit margins. Balance between payments is also an important variable requiring consideration. This is most effective in terms of imports and exports. Careful monitoring of exchange rates and hedging risk from foreign exchange rate fluctuations is required. This in-turn would result in exchange gains and reduce the currency exposure risk in different countries. (ACCA, 2011; Lipsey et al) Considering the facts laid down in the report, obvious and straightforward conclusions can be presented. Any company whether Electronic Arts Inc, or other industrial giants such as Unilever, GSK, BP, SHELL etc. need to consider the implications of the Micro and Macro economical environment in which it operates. These factors are crucial for a company’s success and could undermine possible going concern issues, if considered appropriately. Demand and supply is the basis upon which a company creates its dominance in the market. Similarly if the attributes of the market itself are timely determined than suitable strategies could be put in place to achieve or maintain competitive edge. The elasticity’s are of considerable importance. The elasticity’s can be used to project prices, assists in allowing discounts to stipulate sales and can shield the company in a price war situation. Factor external to the company should be given equal significance. Un-employment, economic growth and inflation are major external issues that need be considered. These factors are curial as they are not in control of the company but are closely linked and if not accounted for can cause going concern issues. Balance of payment and the business cycles are to a certain extent in control of the company. These factors should be efficiently handled so to increase profitability of the concerned product or service. Bibliography ASSOCIATION OF CHARTERED CERTIFIED ACCOUNTANTS (ACCA) (GREAT BRITAIN). (2011). Governance, risk and ethics. London, BPP.BPP Study Text Paper P1: Ethics, Corporate governance and Internal Control ELECTRONIC ARTS. (2011). Official Website. [online] Available at: [Accessed 13 March 2011] LIPSEY, R. G., & CHRYSTAL, K. A. (2011). Economics. Oxford, Oxford University Press SLOMAN, J. (2010). Essentials of economics. Harlow, Financial Times Prentice Hall. STEUART DENHAM, J., & SKINNER, A. S. (1966). An inquiry into the principles of political economy by Sir James Steuart. Edited and with an introduction, by Andrew S. Skinner. Edinburgh, Published for the Scottish Economic Society by Oliver & Boyd. Read More