Managerial Economics Theory - Example

Managerial Economics Name Professor Institution Course Date Managerial Economics Introduction In the current globalization era, many think could that a good business is one that has expanded to several countries (Horowitz, List & McConnell 2007, p.650). However, that may not be true because the business may have adopted globalization but it is not doing well. Based on that information it can be can concluded that a good business must have certain key characteristics away from just globalization. Some of the characteristics of a good business include having an economic moat or competitive advantage or, have unique characteristics that cannot be imitated by other businesses, must have influence because it has a large market share, and must have high rates of return and profit margin (Munger 1997, p.24). Good Business A sustainable competitive advantage is the aspect which sets apart the great firms from the average and blatant lousy companies. Munger (1997, p.25) claims that in this perspective, Coca- Cola can be claimed to be a good company because it has several competitive advantages which comprise of its strong and well known brand all over the world, huge financial base and large customer base. An important competitive advantage enables a firm to generate better than average revenues or perhaps even excellent revenues, and safeguards the firm’s revenues from competitors who want to obtain a piece of their operation (Munger 1997, p.25). Strong brand, having a low-cost production, patents, and monopoly in the market has helped them to attain competitive advantage at outdo its rivals in the beverage market. A good business is one which offers unique and outstanding products which cannot be imitated by its close rivals (Munger 1997, p.28). Some of its unique products are tailored towards various market segments. Some of its unique offers include energy adjustment products to athletes and dietary segment. Another factor that makes a good business is its larger share of the market. In the beverage industry Coco-Cola is regarded a good business because it has the largest market. The market share is contributed by the fact that the company dominates every market it operates in across the globe (Coca Cola 2014). The really good businesses earn good returns, and do not need much increase of capital to increase their profits. However, for the fact these firms can expand with little incremental of capital, they cannot, for an extensive duration of time, continue reinvesting a considerable amount of its profits back into the business at a higher rate of returns they are familiar with (Case & Fair 2007). Four companies that are regarded as having the characteristics of good business Some of the companies that are doing well and can be considered as good business include, Coca-Cola, Samsung, McDonald’s and Emirates Airline. According to company’s website (2014) currently, Coca-Cola is ranked as the largest beverage manufacturer globally. Through its large financial base and large customer base, the company has managed to expand its outlets all over creating competitive advantages for itself (Coca Cola 2014). Competition has enabled Coca-Cola to stay as market leader ahead of PepsiCo. Coca-Cola has great strategies including an outstanding CSR over its competitors. Coca-Cola was the Sponsor of English premier league in 2011/ 2012 season. The company was also ones of the sponsors of 2010 World Cup that took place in South Africa (Coca Cola 2014). Coca-Cola has the largest share of the market in every country it operates. Hence collectively, it has the larger market share in beverage with its closest competitor PepsiCo coming a distant second. Coca Cola (2014) claims that the company also has several Brand portfolios which are unique and can never be imitated by their rivals. Some of these products include Coca Cola, Minute Made, Dasani and Oasis among others. Coca-Cola has been huge returns since its inception. A lot of profits have made Coca-Cola to expand its outlets globally. Samsung is another giant technology gadgets’ maker that can be considered as a good business (Samsung 2014). Samsung has a sustainable competitive advantage as the biggest information technology company surpassing Apple and Nokia. The company competitive advantage is also contributed by its diversification in consumer electronic products such as refrigerators, TV sets and microwaves among others. Samsung Company has the largest share of market by revenue in consumer electronics, mobile phones and Smartphones (Samsung 2014). The company has also continued with positive performance in terms of revenue in the recent past. In 2013, Samsung’s revenue increased from US$8.3 billion in 2012 to US$9.4 billion (Samsung 2014). Currently, McDonald’s is the largest fast food restaurant in the world (McDonald’s 2014). This factor alone gives it a competitive advantage as a strong brand compared to its rivals Subway Systems and KFC. McDonald’s (2014) claim that the company also has massive customer base of 68 million which it serves in a daily basis in 118 countries. As the largest fast food chain means it’s also the company which hold largest share of the market with 19% of the market followed by Subway with 10% (McDonald’s 2014). It is argued that a good business has a characteristic of having high rates of return and profit margin. As a good business McDonald’s increased its profit from 4.7 to $5.5 billion in 2013 (McDonald’s 2014). The company is the market leader in the Hamburger market segment. The company boasts of its unique hamburger which other companies cannot be imitated, and which it uses to create customer value. Emirates can also be considered a good business based on its competitive advantages, market share, unique brands, and high rates of return and profit margin in the Middle East. The company is considered the leading airline in the Middle East in terms of market share and operation. Emirate Airline operates about 3,400 flights every week in 74 nations across the six continents (Emirates 2014). Its strongest brand in the Middle East gives it competitive advantages over its rivals, Qatar, DubaiAir, and Arabian Air in that region and across the world. Like most of the good business today, Emirates airline continues to post good results in terms of returns. In period 2011/12, Emirates posted revenues of about AED 62 billion representing a rise of around 15% over the past revenues which was of AED 54 billion (Emirates 2014). The relevance of marginal concepts to the performance of the chosen four companies In current complex and ever changing business environments, management need daily and appropriate information concerning the costs incurred and business operations for getting into the right decisions to keep away from every likeliness of wastages and losses, and to enhance the business efficiency (List 2003, p.41). One of the best practices for managers is to embrace a marginal concept. This ensures that they provide high quality products that provide value just from the first use. This is because it determines whether the customer will come back purchase in the future (List 2003, p.42). Some of the relevance of marginal concepts to the performance of the Coca-Cola, Samsung, McDonald’s and Emirates Airline comprise of the marginal use, marginal utility, marginal rate of substitution, marginal benefit and marginal cost. Coca-Cola has several product portfolios which it offers to different markets across the world (Coca Cola 2014). Before the production team decides to manufacture a certain products, comprehensive research must have been carried out to arrive at the decision. Majority of the products has resulted to increase in marginal use because they provide customer value. One of such brands that are well known today is the Coca Cola that is consumed all over the world (Coca Cola 2014). However, it must also be noted that some of the products have flopped in the market and can be argued to decrease marginal use. Managers must always be aware of existence of marginal utility in the mind of every consumer. Arthur & Sheffrin (2003) contend that they always look for that unique aspect of the product which will make him or her return to purchase. First consumption of a product is likely to yield more utility compared to second and following units (Arthur & Sheffrin 2003). Today, Coca-Cola remains one of the most used products just because it’s first marginal utility proves that it proved customers value. In some circumstance where the products could achieve such result, the managers have been able to learn the marginal rate of substitution. This is the rate at which a customer is willing to change from one good to another. As such, the company has developed several products in which the company can change to within its products portfolio. Samsung consumer is also attracted by a Smartphone just from the use of experience from their shops. Once one person is contented with the product (marginal utility), he would use it even more or recommend to others hence increasing its demand (marginal use) (Allen et al. 2009). These four companies (Coca-Cola, Samsung, McDonald’s and Emirates Airline) understand that when one product is used for a long time its marginal use reduces. Based on the idea, marginal concept is relevance to the manager in that it enables them to develop new products which give extra utility (Allen et al. 2009). Arthur & Sheffrin (2003) argue that without this, marginal rate of substitution would increase as consumer would turn to competitor who provides alternative products. That is why Emirates continue to improve its airlines classes. Similarly, McDonald’s is one of the companies which have suffered of negative view as a company which promotes unhealthy fast foods. It has been forced to diverse and developed new products which increase utility. Arthur & Sheffrin (2003) posit that in a situation where one product is blocking the main products from doing well, the managers have been able to adopt to marginal rate of transformation concept to increase the performance of the main product which the company is well known for. In a nutshell, marginal rate of transformation is the level in which one output has to be sacrificed so as to improve another output. The whole concept makes the managers understand that consumers will use their money or income on various products in a way that marginal utility of every product is directly proportional to their price (Allen et al. 2009). How understanding of marginal concepts help to establish strategies to conserve as opposed to bankruptcy The marginal concepts influence a several business decisions, especially those associated with marginal analysis when employed in the managerial economics practices (Arthur & Sheffrin 2003). They hold an influence on decisions which revolves on production, inventory management, hiring and cost-cutting procedures. According to Arthur & Sheffrin (2003), Marginal concepts help strategize on production; what is the marginal value, the marginal use, marginal utility and how they affect profits maximization of a particular good. It enables managers to know when a certain product has decreased its utility and can never increase its profits (Case & Fair 2007). As such, they would require increasing a unit of utility to continue attracting its existing customers. The marginal concept through the use of curves has helped companies to know how competitive the market is; that is the rate of supply and the rate of demand (Case & Fair 2007). Based on the demand and supply in the market, the restaurant like McDonald’s will be able to know the quantity of Hamburger they should make and whether to increase price or to lower it. The understanding of marginal concept has enabled these four companies to develop several products hence creating higher rate of substitution. In other words, when the marginal use of one product reduces they can simply change to a product within the brand making use the profits go to them (Vatiero 2009, p.224). This is a strategy of making sure the company does not get bankrupt since it still makes profits. Today managers understand that they must only charge according prices which is equal to marginal utility, and that the money which the consumers will have to part with. As such it can be concluded that marginal concept creates pricing strategies for companies. Management can also put the marginal concept to create market strategies (Vatiero 2009, p.221). One of such strategy is to control the market in terms of place, product, promotion and pricing. This is what Coca-Cola has thrived in to outdo PepsiCo. All these have ensured they minimize liability while maximizing their profits. Conclusion All the businesses analyzed here have unique characteristics that have made them remain top of the industry they operate. Even though they are good businesses, competition is currently increasing; hence they must rethink their strategies to sustain competition from their rivals. However, they must shake off the competition to continue remaining market leaders in various sectors. As business that operates within different economies, their managers ought to analyze and use different marginal concepts to give them as insight into market demand and consumer needs so as to make informed decisions. Reference Allen et al 2009, Managerial Economics Theory, Applications, and Cases (7th Ed.), Norton. Arthur, S & Sheffrin, S.M 2003, Economics: Principles in action, Upper Saddle River, New Jersey, Pearson Prentice Hall. Case, K.E & Fair, R.C 2007, Principles of Economics (8th Ed.), Prentice Hall Business Publishing. Coca Cola 2014, Company’s official website, Retrieved May 06, 2014 from http://us.coca-cola.com/home/ Emirates 2014, Company’s official website, Retrieved May 06, 2014 from http://www.emirates.com/ke/English/flying/index.aspx Horowitz, J List, J & McConnell, K.E 2007, A Test of Diminishing Marginal Value, Economica, vol. 74, pp.650–663. List, J. 2003, Does market experience eliminates market anomalies? Quarterly Journal of Economics, vol.118, pp.41–71. McDonald’s 2014, Company’s official website, Retrieved May 06, 2014 from http://www.aboutmcdonalds.com/mcd.html Munger, T 1997, How Do You Get Worldly Wisdom? Outstanding Investor Digest, 24-31. Vatiero, M 2009, An Institutionalist Explanation of Market Dominances, World Competition. Law and Economics Review, vol. 32, pp.221-226. Samsung 2014, Company’s official website, Retrieved May 06, 2014 from http://www.samsung.com/africa_en/ Read More