Decisions and Adjustments of Competitive Firms - Essay Example

Year: Summer ECO 202-001 Topic: Short-Run Decisions and Long Run Adjustments of Firms Facing Competition Competition is a factor that organizations operating in the perfect market cannot avoid. The main objective of every firm is profit maximization. This is possible by exploiting a number of opportunities available to the organization. The ability of the management to strategically plan on how to win against its competition best defines the competitive advantage in the industry. Proper strategies implemented according to plan helps improve the market share of the company and subsequently improve in its revenues. However, not all situations can the management plan on how to counter the competitors. In most cases, these situations arise due to unavoidable circumstances facing an organization. Whenever such situations arise, an organization’s management has to take drastic measures of solving the problem. How firms solve the problem of competition in the two scenarios forms the main discussion of this paper. Short-Run Decisions and Long Run Adjustments of Firms Facing Competition Introduction Competition occurs in perfect market structures where firms operate in a perfectly competitive market structure. In perfect competition, many small firms involved in the production of identical products with perfect access to resources and knowledge characterize the market structure. Firms operating in a perfectly competitive market structure face a horizontal and perfectly elastic and demand curve, a situation where marginal revenues are equal to average revenue. Characteristics of perfectly competitive markets include perfect knowledge, freedom of entry and exit of firms, production of homogenous and identical units of output and many firms in operation. The structuring of a perfect market does not give an opportunity to a single firm to either influence the market price or market conditions, there are no governmental regulations and the assumption there is no existence of externalities. Body Faced with the problem of competition, organizations have to device ways and means of preserving their relevance in the market. Various factors affect the relevance of organizations in the industry they operate. Jain and Khanna (198) assert that quality and the popularity of an organization’s products among the customers determine the market share of that company in the market it operates. Competition indirectly acts as a quality controller. As companies increase their fight for a bigger cake in the entire market, they apply a number of measures. Firstly, companies increase their focus on the quality of products provided to the market while at the same time strives to offer the best prices in the market. Pricing is not an influential factor as high-end markets have indicated. Quality is the biggest factor influencing the market dynamics and purchasing behaviours of customers. Compromising quality of products adversely effects on the customers base of a company. Companies known to high quality products and services are associated with large market shares and subsequently report high revenues and profits. While laying down strategies for winning their competition, organizations apply a number of means and ways. Although every organization uses unique strategies in the market geared towards increasing its revenue sales, there are similar steps that organizations use to achieve these results. Either, an organization can opt for long term or short-term competition mitigation factors. While long-term plans needs a solid strategic plan and implementation schedule, short term decisions could be spontaneous and reactive. Reaction is a situation where a company facing high competition from other firms operating in the same industry takes drastic measures of countering that competition. Mainly, the management as measures of last result takes such measures. However, the management of an organization should be adequately prepared to counter any in eventualities whenever they occur in their operations. Whenever organizations face increased levels of competition, the results are severe. Either, the management’s strategic plan incorporated measures to militate against the occurrence of such a situation, or the worst happens. Worst situations that are likely to affect an organization faced with planning problems are liquidation, or pulling out of business for a while. The advantage of planning for bad economic times is organizational safety of operations and confidence of the management in facing the future. Technology offer unlimited opportunities to a company that seeks to perform well in future. With technology, there are high levels of output and quality of products. In this era of mechanization and computerization, few companies could complain of forecasting problems. Forecasting software developed for different industries help organizations in making the most informed decisions about the future. Moreover, perfect competition allows free access to information by all interested parties. This way, any publicly available information for any industry is accessible to an organization at no cost. Changing trends in consumption patterns of people, the demographics of the people in a certain region, population growth, changing weather conditions, new technological inventions and innovations as well as inflation are examples of information freely available to companies. These factors are crucial to organizations whenever drafting their strategic plans and developing measures of how to implement them. In their strategic planning blue prints, organizations include measures to adopt in order to stay at the top in the industry. Controlling the largest market share and being a leader in the industry of an organization’s operations are clauses contained in their mission statements. Further, they come up with steps to achieve these goals and objectives. In their mission statements, organizations define their vision, which is their plan in a number of years. None plans to fall in the second place, and none seeks to control a small percentage of the market. However, not always are a company’s plans solid and error proof. In some instances, unanticipated situations occur, which were not included in their strategic plans. Other factors are beyond the control of the organizations’ management. An organization cannot control or hedge itself against natural calamities such as floods, droughts and famines, earthquakes or tsunami. These potentially affect the survival of a business especially in its development and expansion plans. Hedging against natural events that affect the business future is not possible. The organization can only adopt short-term measures to deal with such problems whenever they occur. According to McEachern (182), in the short run, a firm has fixed resources, but at the same focuses at maximizing profits while at the same time minimizing its expenses. In the short run, time constraints face a company operating in the perfect competition market structure. The management has no time to draft policies and plans to counter the situation in their disposal. Faced with a competition problem in the short run, a company has few opportunities. In profit maximization, the company should avoid high costs incurred from different areas and departments. Faced with the problem of time factor, an organization seeks to improve its revenues by minimizing all its costs. Shutting down its operations is the only way of doing this. Before the management drafts measures to solve the competition problem, the best option is shutting down the operations of the company. During this time, there are no operations costs involved, no production costs as well as administrative costs. The sales and marketing teams are in operation and thus, their salaries and expenses are the only form of expenses the organization faces. However, since complete shutting of the firm is inevitable, payment of salaries can either continue or too halt for that particular time. The best way of effecting payments but retain low costs is offering part of their salaries and retaining the rest. Mainly, short run competition periods do not last long. They take a few weeks to a number of months depending on the ability of the management to draft measures of countering the increased levels of competition. Management and leaders who easily adapt to changes come up with measures that get the organization out of the situation easily and with speed. Market boom of a particular new product by a company is the major cause of short-term competition that affects the output of an organization. Others include the launch of an extremely exciting and equally efficient product to the market, or price cuts and slashes by the company. Where an exotic and highly specialized product causes such competition, the company faces high risks of failure. The best way the company could hedge against such a problem is developing or improving the qualities of its products to meet those of the competition. This may however take a long time, as the research team has to carry out a market research and make recommendations to the product development team on how to develop a product meeting the needs of the customers. Where price cuts leads to competition, the company can only survive by offering customer friendly promotions as well as announcing a reduction in its pricing strategy. However, this comes with disadvantages too. A price cut means that revenues are affected. Before there is an improvement of the situation, the company needs to develop means of cutting down its expenses in the long term. This is possible either by reducing the number of staff in operation or by reducing administrative costs. Where the costs incurred by a company exceed their revenues, the firms needs to close indefinitely. Additionally, no payment of dividends to any shareholders of the company should take place in a time, as a measure of reducing all the costs by the company. Until the company’s products gain popularity among the people, and it successfully acquires its original market stare, no payment of dividends should take place. The difference between long term and short-term levels of competition is that in long term, a company can plan, while in the short term, no planning takes place. Faced by a long-term competition problem, a firm could exploit its resources in preparation for the oncoming challenges (Arnold 483). In long term planning, the management of the organization can exploit different ways to counter its competition in the industry. The advantage of planning is that the management considers the pros and cons of all methods of planning considered by the management of the company. There is enough time for the management to weigh all its options and forecast. Strategic planning takes care of the unforeseeable future that is likely to affect the organization. The firm could either engage its employees fully or ensure that it fully produces to capacity. Producing to capacity ensures that goods produced by the organization are of high quality and meet the demands of the customers. It also takes care of shortages that are likely to arise in the market due to low levels of production. Application of modern technology in production, computerization of operations and upgrade of the company’s Information and Communication Technology helps in maximization of the company’s operations and products. The use of technology in the production process improves the quality and quantity of production. Goods produced with the aid of machines are of higher quality than goods produced manually. Training of employees to equip them with the best skills as well as motivating them handsomely helps them improve the quality of products and show dedication in their work. Conclusion Firms cannot avoid competition, especially those that operate in the perfect markets. There are few competition challenges facing monopolistic ventures while compared to the perfect market competition. Too much competition can push an organization out of the industry completely if not well managed. In two scenarios facing an organization, where a firm faces competition, two options are available for exploitation. In short-term decisions, a firm could either opt to close operations to reduce its costs or opt for other means that reduce the amount of costs incurred by the organization. However, in the long term, the firm has the opportunity of planning on the methods available to counter its competitors. Bibliography Arnold, Roger A. Economics. Australia: South-Western Cengage Learning, 2010. Print. pp 483 Jain, T R, and O P. Khanna. Business Economics. New Delhi: V K Publications, 2008. Print. pp 198 McEachern, William A. Macroeconomics: A Contemporary Introduction. 2014. Print. pp 182 Read More