Alternative Measures of Industry Concentration - Example

RЕРОRT USING STRUСTURЕ-СОNDUСT-РЕRFОRMАNСЕ FRАMЕWОRK DЕSСRIBING АN INDUSTRY by Student’s name Code+ course name Professor’s name University name City, State Date Alternative measures of industry concentration Introduction Industry concentration refers to the extent to which the production capacity of an industry rests on a few players in the market. This is can be estimated in a number of techniques including the use of graphs, tables and figures. Arguably, industry concentration is a common concept in the contemporary business world considering that the major players and price makers are engaging in serious mergers and acquisitions. Apparently a merger between two organizations that control a significant share of the market comes with a number of advantages (Albarran et al 2006). Perhaps the most notable merit of such mergers is that a company becomes a better producer and bigger shareholder in the industry. Mergers reduce the number of autonomous players in the industry and increase chances of monopolies. Depending on the nature of an industry, production can be vested in very few organizations. This is what brings about the aspect of market concentration. This paper endeavors to explain various alternative industry concentration measures in light of the automobile industry in Europe. Before focusing on the various alternative measures, it is important to have a perfect understanding of some of the key considerations that need to be held during the evaluation of the industry in light of market concentration. Worth noting is the fact that in a monopoly market, the market concentration is 1 or 100 percent depending on the scale used (Waterman & Weiss 2007). For purposes of making comparisons, the economists suggest that the scale to be used should range between 0 and 1. This scale is suitable in the sense that a person can easily and flexibly work with either ratios or fractions. It is as well important to note that when a market concentration calculation is conducted, it may not be practicable to estimate the impact of one firm leaving the market or independently making expansions or acquisitions. However, the use of such methods as the Herfindahl-Hirschman (HH) index can reveal a number of details concerning changes in a single component of the market concentration. The industry concentration curve The industry concentration curve is arguably the most common method applied in measuring industry concentration. The curve plotted on a two plane graph like framework, considers the industry players on the horizontal (X axis) and the market share on the vertical (Y axis) the curve then shows the degree to which an individual firm controls the market. The curve shows those firms with the highest or rather biggest share of the market at the highest tangent of the curve (Tremblay & Tremblay 2007). This way, the industry concentration can be established by finding the difference between the largest shareholders and the whole market. In simpler terms, the area or share covered by the biggest market players is evaluated in relation to the market. The industry concentration curve indicates the differences in the market brought about by the entry of new firm. Worth noting is the fact that the entrance of a new organization into an industry where the market concentration is considerably high, can be a very costly affair depending on the relative size of the market, the capital outlay required and the marketing strategies to be employed. An increase in the number of principal players in the market decreases market concentration. The opposite is true. A decease in the number of firms in the market increases industry concentration since industry concentration is evaluated in relation to the entire market. Similarly, a merger condition brings about changes in the market concentration. When the top firms merge within the industry, the market concentration goes up. There are two reasons as to why this happens. The significant reason is that when firms merge, the number of autonomous firms automatically decreases (Dixon, R. 2008). The second reason is that when such firms merge, the production capacity of the resultant organization increases following the merits of such a merger. Notably, mergers boost the synergy of the merging firms in such a way that they stop being price takers and start operating as price makers. The concentration ratio (CR) Debatably, this is among the simplest methods of measuring industry concentration. The method evaluates the production capacities of the various organizations as a fraction of the entire market production (Albarran et al 2006). The ratios can be expressed as percentages or fractions with reference to the entire market. The market concentration is denoted as CRm. CRm is the weighted ratio representing market concentration. The m in the formula represents the number of firms constituting the market or industrial concentration. Therefore CRm can be calculated as follows: CRm = S1 + S2 +S3 + S4 . . . . . + Sm. Where, S is the share of the individual organizations and m is the total number of players in the combination. The evaluation is done in such a manner that the CRm is related to zero. This may be a remarkably efficient way of establishing the level of competitiveness of the market. Where the CRm is close to zero, the inference is that the market is extremely competitive. This is because, a weighted average of close to zero means that there are other firms actively sharing the market and participating in the production process. Usually, when the CRm is distant from zero, the level of competition is comparatively low since the market is dominated by very few firms (Waterman & Weiss 2007). In normal circumstances, the competition of the market is said to be extremely high when the CRm is 40 percent. Any figure above forty percent indicates a market with low competition since all the other firms are left with a small share of the market while the dominating firms take the bigger share. The industry concentration index has been described as a method of calculation that has quite a number of shortcomings. The method does not reveal the distribution of the particular firms making up the industry. Additionally, the method does not include the relative size of the market that is dominated by the firms concerned with the concentration of production. The Herfindahl-Hirschman Index (HHI) This measure of market concentration concerns itself with the market shares of all the concerned firms. In the European automobile market, four manufactures have conquered the industry in the production of sports utility vehicles (SUVs). Arguably Germany tops the automobile production business. It is because of this reason that the Mercedes, BMW, Audi and Volkswagen have concentrated the market. Such kind of market concentration can be evaluated by all the above methods but can best be illustrated by the HHI for all details and information relating to autonomous business performance (Evilly et al 2011). The HHI can be arrived at as follows: HHI = S1 + S2 + S3 . . . + Sn The S1, S2 and so on up to Sn are independently squared so as to yield a weighted average. Therefore, calculating the market concentration of the European automobile market can be done as follows: HHIe = Sm + Sb + Sv + Sa All the figures are then squared independently and added together to yield a value for the HHI. Following the independent squaring of the figures, a shift or change in the entire industry will result in a shift or a change in the figure. Where there are many firms operating in the market, the HHI will tend to zero and this may be inference as a clear indication of a perfect competition market. The structure-conduct-performance framework The structure-conduct-performance framework is arguably among the most effective ways of determining the ease or difficulty with which a new firm can penetrate an existing market. The structure-conduct-performance framework, which, endeavors to explain the relationship between the structure of the market, the activities of an organization, and the performance of such an organization is a complicated idea (Moschandreas 2000). It may not be easy to understand the link between the structure of the market and the performance of a company but there sure is a serious connection between the two variables. Arguably, the relationship between the conduct and the performance of the organization is among the simplest and most straightforward concepts to understand. However, the whole Structure-Conduct-performance thing appeared as complicated as can be. Including the aspect of research and development in the concept makes it even more complex. This part of the paper endeavors to elaborate the role of research and development in the structure-conduct-performance framework. Fundamentally, the structure refers to the market. In other words, the structure refers to the type of market in which the organization operates. For instance it is different when a company operates in a monopoly market and when the same company operates in a perfect competition market. Apparently, the type of opportunities and threats, to which a company operating in a monopoly is exposed to, cannot be compared to those that the perfect competition organization is subjected to (Albarran et al 2006). Additionally, it is important to note that the threats and opportunities are directly connected to the internal strengths and weaknesses. Research and development is an exceptionally important aspect of business in the contemporary world, considering that, with technology, things are quickly changing and organizations are taking advantage of all resources available to them to gain competitive advantage. Research and development has become a primary department in all leading organization as a way of helping the organization keep abreast with the times. Debatably, research and development are of primary importance when it comes to establishing the relationship between structure and conduct. Research is carried out on the structure, to enable development to be implemented within the organization. In straightforward terms, the findings of the research are used to modify the conduct of the organization, thereby enabling the company to enhance its strengths as a way of trying to maximize the seizure of all the available opportunities. The findings of a research into the field enable the company establish the industry best practices. This way, all the organizations tend to act in a similar manner and this enables them to survive in the competitive markets. Perhaps the most significant industry, when it comes to research and development as a way of dealing with the structure-conduct-performance framework, is the telecommunications industry. This industry deals with such things as computers and mobile phones together with such devices as the iPad and iPod. The major reason why this industry is the most appropriate when it comes to research and development is the fact that the industry is based on modern technology, which is highly volatile as it changes by day (Tremblay & Tremblay 2007). The industry is punctuated by continuous changes relating to software and other programs. It is only through research and development that the organizations can learn about that which is taking place in the market. Such research enables the organizations to structure their production department in such a way that it responds to the market forces without any disturbances. By affecting the organization through forcing it to restructure the internal design and arrangement, the research and design is said to have altered the conduct in response to the structure. Worth noting is the fact that such restructuring is done in such a way that it answers to the needs of the market. This may mean that the company has to restructure its marketing strategies as well as employment practices (Hildebrand 2009). Focusing on the same industry, research and development departments have played a paramount role on ensuring the companies keep up with their competitors. Apple Inc is, debatably, the most innovative of all firms when it comes to such things as software and operating systems. This outstanding capacity has not made Apple Inc a market dominating firm, thanks to research and development efforts by most organizations. The most significant example is Samsung Mobile and the Nokia Corporation. Samsung Mobile and the Nokia Corporation have, through their research and development departments benchmarked on Apple Inc, which is the undisputed maker of innovative software and programs. The research and development teams from the two competitors have studied the market trends, which have indicated that the mobile phone and computer markets are tending towards innovative Apple Inc products. The findings indicated that the tastes and preferences of the consumers were shifting from the old product designs to the innovative ones such as the innovative software invented by apple, commonly referred to as iOS. As such, the key competitors have made a change in conduct, from the traditional ways of marketing and manufacturing to the new ways of manufacturing and marketing. The unique management style at Apple Inc has been embraced by many firms as a way of trying to change from the old conduct that was associated with poor relative performance to the new competitive practices. The change in conduct has enabled the rivals to match up the apple corporation. For instance, currently, Samsung is among the best performers in the market, having come up with such mobile phones as the Samsung Galaxy Note II, which is not so much different from the popular iPhone 5. Similarly, other competitors such as Nokia have come up with similar brand, thanks to efficient research and development strategies. From the study of the telecommunications industry, it is clear that research and development play a central role in linking up the three components of an industry (Albarran et al 2006). It is through research that an organization acquires knowledge on that which is taking place in the market, including the most recent trends. Through such knowledge, the management of an organization can facilitate the incorporation of change in the ways of doing things. Through such changes in ways of going about activities, the organizations performance becomes better. It is therefore worth concluding that, much like the telecommunications industry, all industries, in one way or another rely on the structure-conduct-performance framework in moving from a current state to another. Research and development as well helps an organization establish its relative position in the market. The realization that the organization is poorly placed in the industry may trigger the need for more research. Such continuous research may make an organization overcome its weaknesses as a way of mitigating the risk of failure. Vertical integration Vertical integration is a situation where an organization that handles products at a certain stage of production merges with another organization, within the same industry but operating at a different level of production. There are three forms of vertical integration. The first type is forward vertical integration. This entails a situation where an organization partners with another organization, usually one that is closer to the final consumer (Waterman & Weiss 2007). For instance, a manufacturer of motor vehicles may opt to partner with a prominent distributor. This way, the manufacturer will be in a position to handle the retailing of the vehicles. The second type of vertical integration is backward integration. Such integration entails an organization merging with another organization which supplies it with raw materials and other semi finished products. This is done to ensure continuous and reliable supply of materials to an organization so that such organization can sustain stable supply of products to the market. This part of the paper endeavors to explain the concept of vertical integration and the possible consequences of such integration in light of a contemporary telecommunication industry. Arguably, an organization is considered successful if such an organization can sustain the forces of demand and supply existing within the market. In order to achieve this goal, contemporary organizations have resorted to such concepts as the idea of vertical integration. The first and most significant rationale behind vertical integration is the need to reduce transaction costs (Harrigan & Harrigan 2003). Apparently, transaction costs are those costs associated with contracts and agreements that need legal backing. The fact that an organization has to sign supply partnership agreements each and every time makes materials considerably costly. Additionally, the same organization signs contracts with the suppliers and distributors of semi-finished goods. These lead to an increase in the cost of production. A hike in the cost of production leads to high prices which trigger low demand. In the long run, the organization ends up losing customer loyalty in the market. Loss of customer loyalty is a significant step towards failure since the consumer is the most important stakeholder. The most contemporary mergers or integrations, of such nature, have been observed in the telecommunication industry. Notably, Apple Inc is the single most vertically integrated organization in the industry. Much like organizations in other industries, Apple Inc has realized the essence of having its hardware and software supplied from within. It is for this reason that Apple Inc has come up with a strategy of acquiring the most efficient suppliers of hardware in the industry. The acquisition, which usually takes the form of a business purchase, makes the acquired company part and parcel of the new organizations. This way, they are turned into departments of the Apple Company. For instance, one of the production departments handles the manufacture of hardware. This means that the hardware are produced within the premises where the assembling and formatting of the mobile phones and computers. The implication here is a positive consequence since transport costs are eliminated (Moschandreas 2000). Additionally, the handling of stock becomes more effective since the production department works with the stock that is available while putting enough effort to avoid the shortages that may put off clients. With vertical integration, processing urgent orders is a very simple task as everything is conducted from within. As compared to a situation where the company has to process an urgent order from external suppliers, the integrated approach is much more efficient. Apple Inc, for instance, does not experience a difficult time in marketing since the retailers are part and parcel of the organization. Being located in the same locality and working under the same management makes coordination becomes easily executable (Hildebrand 2009). The departments can communicate with one another freely. This enhances efficiency as it is through such communication that goals are communicated to the work force. Stock handling is among the most crucial parts of managing costs. Through integrating an organization vertically, the manner in which stock is managed can be made more efficient. The patterns of production can be established enabling the merged organization to manage the movement of stocks more efficiently. Apparently managing the stocks properly can save the organization a lot of resources and time in terms of handling costs and such unforeseen disturbances as the breakage of such goods (Hill & Jones 2010). Additionally, the established pattern can enable an organization plan for the emergency needs of the organization. This way, they can manage to stock contingent stocks without having such materials go redundant. Overstocking within the organization enhances the risk of having the materials and semi finished products go redundant. A vertically integrated merger can mitigate chances of uncertainty. Typically, uncertainty in an organization is brought about by the fact that there is no clear foresight of the alterations in the market dynamics of demand and supply. The forces are rather dynamic in such a way that the organization that only deals in production cannot establish the future needs of raw materials. This as well implies that the organization cannot estimate the market’s demand for raw materials with accuracy (Harrigan & Harrigan 2003). It is for this reason that inconsistencies occur in the process of endeavor to strike a balance between demand and supply. With forward integration, an organization can estimate the rate at which the demand in the market changes from time to time. Similarly, with backward integration, the organization can easily acquire the materials needed to process the required orders. This minimizes systematic risk in the organization hence eliminating the weaknesses. It is from such integration that the telecommunication industry, Apple Inc being the most notable example, has managed to balance the demand and supply of their products. The organization has software designing departments, which the main reason as to why the organization exists. Apparently the software ought to work with the Apple Inc software which has been outsourced for quite a long time. Currently, the organization has been integrated in such a way that it manufactures the hardware, handles repairs and sells the products directly to the client. This has greatly eliminated transaction costs. References list Albarran, A. B., Olmsted, S. M., & Wirth, M. O. 2006. Handbook Of Media Management And Economics. Mahwah, N.J.: L. Erlbaum Associates. Dixon, R. 2008. Concentration in Australian Industry. London. Oxford University Press Evilly, Richard, & Little, I. M. D. 2011. Concentration in British Industry an Empirical Study Of The Structure Of Industrial Production 1935-51. Cambridge University Press Harrigan, K. R., & Harrigan, K. R. 2003. Vertical Integration, Outsourcing, and Corporate Strategy. Washington, D.C., Beard Books. Hildebrand, D. 2009. The Role of Economic Analysis in the EC Competition Rules. Austin [Tex.], Wolters Kluwer Law & Business. Hill, C. W. L., & Jones, G. R. 2010. Strategic Management Theory: An Integrated Approach. Boston, Ma, Houghton Mifflin. Moschandreas, M. 2000. Business Economics. London [U.A.], Business Press. Tremblay, V. J., & Tremblay, C. H. 2007. Industry and Firm Studies. Armonk, N.Y., M.E. Sharpe Waterman, D. H., & Weiss, A. 2007. Vertical Integration in Cable Television. Washington, D.C., AEI Press Read More