Causes of Market Failure and role of State - Essay Example

Causes of Market Failure and role of The growing researches on the strategy formulation suggest that the products and resources can be considered as two sides of the same coin therefore the competition should not be judged by the similarities of the products but of the resources too. The new strategy formulation research thus suggests two perspectives on the strategy formulation. First perspective is called as Outside In perspective which relies on markets over the resources and is more of opportunity driven besides responding to changes quickly to take advantage of the opportunities by using positioning as a strategy. The other strategy is called inside out perspective which emphasis on the resources over markets and focus on responsibilities and resources within the firm. It is usually driven by internal strengths of the firm by using internal potential of the firm and emphasis on developing unique capabilities of the firm. The following discussion will undertake to explore both of these perspectives in details to present an argument of which approach is better suited for strategy formulation. Market Driven Outside In Perspective As discussed above that the market drive outside in perspective takes into account the market dynamics while formulating any strategy therefore the behaviors of these firms are largely driven by external factors which sometimes get out of the hands of the firms to comprehend and respond on time. However still it provide firms an opportunity to know about the market sentiments and tailor made their strategy according to the current needs of their customers. It also allow firms to spot the opportunities and make them flexible to respond to them in quickest possible way to take advantage of the emerging opportunity thus it also entails the degree of certain ability to foresee and anticipate the market moves and demand from firms to respond to the changes in timely manner otherwise competition can overtake them if they have better ability to respond to these changes and opportunities. The Outside in perspective also allow these firms to detect new resources and activities that need to be developed however in each market in which firm performs with different positions can yield sustainable profitability for the firms practicing outside in perspective of strategy formulation. However if a firm constantly pursuing this strategy through constantly repositioning itself can significantly become incapable of focusing on the distinctive competencies. One such failure of the firms focusing on market driven outside in perspective is the Customer Relationship Management i.e. CRM. Many companies that have invested heavily in order to align themselves with the customers have failed to achieve the results as one survey suggest that very companies have been able to unlock the value through this strategy whereas most of the firms have failed to regain the value on their investments made on CRM as a bid to align their strategies with the market. Secondly, the inability of the firms to focus on distinctive capabilities does not allow them to achieve a competitive advantage over the longer term as a result of this. However, despite this, markets fail. The subsequent sections will discuss the reasons behind the failure of the markets and the role played by the government in correcting market failures. Why Markets Fail One of the most fundamental principles for the working of the markets is the relationship between demand and supply. Most of the markets in the world work purely on these principles and all the prices in the international as well local markets take place through this mechanism. In a perfect market, both demand and supply tend to work in tandem and an equilibrium is always achieved however if any of the element of the demand and supply equation is distorted, the whole equilibrium is distorted thus creating either shortages or glut in the market. The shortages in the market emerge when demand for any particular quantity of good or a service exceeds the available supply in the market. When this happen, markets tend to experience shortage of that good and the prices tend to increase as more and more people would be willing to buy at the price which significantly greater than the previous price. Similarly when supply in the market exceeds the available demand in the market, the market tend to experience a glut of that particular good or service thus the available supply increases the available demand. This put pressures on the prices to go downward thus a deflation is achieved. The possible outcomes of this result would be the fact that the suppliers, an other essential and necessary component of the market, would find it hard to have a profitable business therefore if conditions persists, he or she surely will go out of the market. In a perfect market, every transaction is considered as an exchange and this exchange is done on the premise that both the parties to the transaction should mutually benefit from it however when distortions in the equilibrium is created, either buyer or seller is going to benefit. Thus distortions in perfect market are going to drift the markets towards other market structures such as monopoly etc. Thus the first reason for the market failure is the result of imbalance between demand and supply forces of the market. If any of the force fails, markets tend to fail. However, there are also other micro reasons behind the failure of the markets also. As discussed above those organizations tend to work either on outside in perspective or inside out perspective where resources and markets take preference over each other in each approach. Failing to realize the internal capabilities of the firms is another reason why markets fail. When in a market where firms fail to perform due to their own internal weaknesses and inefficiencies, markets are going to fail because the suppliers i.e. firms do not build up the capacity to effectively and efficiently run the business, thus either creating market situations where costs increase the prices or prices greatly increase the costs thus virtually forcing the buyers to inflation. The role of government Government can play a very important role in avoiding distortions in the markets and can help them avoid the failure. The shortages created through the demand supply distortions can be fulfilled by the government through import of the required goods and services thus balancing the equilibrium of the market through price adjustments. Similarly excess goods are exported in order to keep their demand intact thus avoiding steep short falls into them. Secondly, governments have the power to check in the monopoly in the markets. Through its anti-trust laws, monopoly commissions etc, government can effectively reduce the influence of big players in the market and by doing so it can avoid the monopoly of the organizations over their respective sectors. Further, the de-regulation policies adapted by most of the governments allow the flourishing of competition in the market thus creating an environment mostly closely resembling to perfect markets. This is also important in the sense that perfect markets provide necessary stability to the markets and their chances of being failed markets are minimized thus effectively checking in monopoly and price controls, governments can greatly reduce the chances of market failures which otherwise could happen due to sometimes irresponsible behavior by the firms. It must also be noted that most governments when faced with monopoly markets tend to levy high taxes on those monopoly profits thus effectively bringing down their profits to the normal level. Conclusion Firms tend to rely on markets as well as internal capabilities to effectively lever the economy however, despite this, markets tend to fail. The distortions in demand and supply are considered as the main reasons behind the failure of the markets however governments have the capability to avoid market failures in the economy. Read More