Hyundai Auto Company - Essay Example

? Hyundai Auto Company Introduction The success or failure of an organization partly depends upon its several managerial decisions. In this context that the business enterprises, in the current era, tend to enthusiastically implement the notion of managerial economics that majorly concentrates on various analytical tools that support the managers in making effective decisions gaining an in-sight to the market scenario. Theories such as price elasticity (e) along with market structure, profit maximization and the impact of macro-economic factors on the decision making and its implications have widely been regarded to assist managers in developing better efficient strategies. From a similar point of view, various analytical tools including the Marginal Cost (MC) curve, Average Total Cost (ATC) curve, shifts in the Demand-Supply curve along with opportunity cost and market share coverage (Managerial Economics, n.d.). By taking into consideration all the aforementioned theories and concepts, the discussion in this paper will intend to demonstrate and analyze the managerial decisions taken by Hyundai Sonata (i.e. a particular brand by Hyundai Motor Company) being into competition with Toyota Camry (i.e. a particular brand by Toyota Motor Corporation) in the international automobile industry. Hyundai was established in the year 1967, by Ju-Young Chung as an ancillary of Hyundai Corporation which was a Korean entity. The company is considered to be among the leading automobile companies in the world. Since its inception, the company can be identified as highly impacted by the micro as well as macroeconomic environment factors by a large extent. For instance, the remarkable technological enhancements as well as the resourceful marketing strategies of the company ultimately led to a striking increase in its sales in the US market being supported by the market structure along with the macro-economic policies. As a result, the total sales of the company rose by 284,902 cars during the years 1998-2002. The total revenue earned by the company in the current fiscal year 2011-2012 amounted to approximately US $ 77 billion (Stanford Graduate School of Business). Market Structure of US Automotive Industry It is quite important to understand the chief facets of a Monopolistically Competition Market (MCM) before understanding the nature of the demand curve. With focus on the automobile industry of the US, it can be apparently observed that the market structure prevailing in the economy is a monopolistically competitive market (Nguyen & Kira, 1998). The major features of a monopolistically competitive market include: The inclusion of a large number of market players, availability of substitute (but not identical) products, Higher price-elasticity with minimum influence of producers on commodity price increasing the bargaining power of customers, Fierce competition in terms of promotion, quality as well as other non-price factors, In a MCM structure, a firm also enjoys the liberty of ‘free entry and exit’ which again raises the threat of new entrants (Nguyen & Kira, 1998) Hence, operating in the MCM structure, Hyundai needs to face steep competition along with the barriers of high price and demand elasticity along with greater bargaining power of both suppliers as well as customers owing to the availability of close substitute products. This can be better illustrated with the assistance of its demand-supply curve. For instance, if the price for Hyundai Sonata increases with a single unit (e.g. from US$ 37.79 as on 2009 to US$ 38.79) it is quite likely that the demand for the brand will reduce proportionately with the availability of close substitute product of Toyota Camry. Therefore, its demand-supply curve can be formulated as below. Figure 1: Demand-Supply Curves of Hyundai As can be witnessed from the above diagram with a shift in the demand curve, the brand also needs to shift its supply curve in order to satisfy the equilibrium condition. Due to the fact that firms have limited influence over price structures, it can be stated that supply in this case tends to be dependent on the demand curve fluctuation. In other words, an upward shift of the demand curve indicates the brand to consider a lower investment to reduce its supply, thereby allowing the customers with greater bargaining power on the pricing strategies decided. As can be apparently witnessed, owing to the availability of close substitutes and lower control over its commodity prices, the price-elasticity of this industry tends to be high, thus creating competitive pressures on brands like Hyundai Sonata and Toyota Camry. This can be better understood with the assistance of the calculation of price elasticity (e) for Hyundai Sonata. Price-elasticity (e) is calculated as the percentage change of quantity demanded divided by the percentage change in price, the e for Hyundai Sonata can be formulated with regards to the variables below: Aggregate price for Hyundai Sonata models for 2011 = US$ 23,662 per unit (approx) Aggregate quantity demanded (aggregate retail sales) for Hyundai Sonata models for 2011 = US$ 156,580 (approx) Aggregate price for Hyundai Sonata models for 2012 = US$ 24,245 per unit (approx) Aggregate quantity demanded/aggregate retail sales for Hyundai Sonata models for 2011 = US$ 96,481 (approx) (MotorTrend Magazine, 2012) Therefore, percentage change in price can be calculated as 2.46% leading to a percentage change in quantity demanded by -38.22%. Hence, the e for Hyundai Sonata can be obtained as -? indicating the brand as a perfectly elastic commodity in the US market which can be attributed as a major feature of the MCM structure. It was mentioned above that another feature of the MCM structure which tends to affect the price-elasticity and likewise the demand for goods offered is the availability of the close substitutes. This comparative relationship between Hyundai Sonata and Toyota Camry can be well identified with reference to the cross-price elasticity. The cross-price elasticity is calculated as the percentage change in quantity demanded for product A (i.e. Hyundai Sonata) divided by the percentage change in price of product B (i.e. Toyota Camry). Hereby, percentage change in quantity demanded for Hyundai Sonata can be measured as -38.22% in relation to the percentage change in price for Toyota Camry by 18.83% (MotorTrend Magazine, 2012). Therefore, the obtained cross-price elasticity, i.e. -?, again indicates a high elasticity which in turn depicts that the company needs to face fierce competition in the US market. Profit Maximization of Hyundai Sonata With reference to the demand-supply curves, the MC and ATC curves can be determined which again assists the company to depict its profit maximization situation. For instance, it can be viewed that the total cost of Hyundai Sonata at the end of the year 2009, 2008 and 2007 stood at US$60.85, US$52.95 and US$44.11 million respectively. Moreover, the quantity of units sold by the organization in the year 2009, 2008 and 2007 are 1.61, 1.66 and 1.07 million respectively. Thus, the MC incurred by the brand for these years can be calculated as 158.03 for the year 2009 and 15.06 for the year 2008. Again, the ATC of Hyundai for the year 2009 and 2008 is 37.80 and 31.90 million respectively. In the similar context, the revenue of Hyundai for the year 2009 and 2008 was amounted to US$ 7.83 million and US$6.82 million respectively. Thus, the Marginal Revenue (MR) of Hyundai can be calculated as US $ 200.86 for the year 2009 (i.e. change in revenue divided by change in quantity) with Average Revenue (AR) of US$ 306 million for three consecutive years (i.e. 2007, 2008 and 2009). Including these figures in the graph below, we can obtain the profit maximization situation for the brand. Figure 2: Profit-Output Equilibrium of Hyundai It is in this context that both Hyundai Sonata need to focus on their competitive strategies to preserve their leading positions in the monopolistically competitive market of the US. The company is further observed to focus on its profit maximization strategies, placing emphasis on the aspects of marginal costs as well as average total cost (Rasik, 2012; California State University, n.d.). This in turn depicts the impact of a MCM structure on the company strategies. Operating within the MCM structure, a company needs to maintain its MC as equal to MR. As can be witnessed in the case of Hyundai Sonata, the company needs to decrease its MR to meet the shift in the MC. Notably, the company perceives lesser control over its MR in relation to price, as customers enjoy greater bargaining power to influence the prices charged in comparison to the company itself. The competitive position of Hyundai Sonata, in relation to its profit maximization strategies, can be better observed in comparison to the position of Toyota Camry, which is a close substitute of the brand in the MCM structure of US automotive industry. In this context, the total cost of Toyota at the end of the year 2009, 2008 and 2007 stood at ?20.99, ?24.02 and ?21.71 million respectively. Moreover, the quantity of units sold by the organization in the year 2009, 2008 and 2007 was recorded as 7.23, 9.23 and 9.49 million units respectively. Therefore, the MC for the year 2009 is 1.52 and 8.47 for the year 2008 in case of Toyota. On the basis of the aforementioned figures, the ATC of Toyota for the year 2009 and 2008 is 2.90 and 2.60 million respectively. Similarly, the revenue of Toyota for the year 2009 was ?6.22 million and for 2008 was ?9.42 million .Thus, the calculated MR for the year 2009, in case of Toyota, is ? 4.29 (i.e. change in revenue divided by change in quantity), whereas, the AR for three consecutive years (i.e. 2007, 2008 and 2009) is ? 8 million. Figure 3: Profit-Output Equilibrium of Toyota As can be witnessed from the comparison of the Price-Output Equilibrium of the two brands, it can be stated that Hyundai Sonata presents itself in a better competitive position than Toyota Camry. It is in this context that the profit maximization strategy of Toyota Camry needs to emphasize on not only on the minimization of its MC by a substantial extent, comparatively more than Hyundai Sonata in order to attain its equilibrium phase. However, in terms of profitability, Toyota Camry can be considered as better than Hyundai Sonata, even though it possesses considerable weakness in relation to its profit maximization equilibrium position (Tucker, I. B., 2010). Impact of Macroeconomic Environment on the Managerial Decision-Making at Micro Level The aspect of macro-economic environment examines the general business climate of the organizations such as Hyundai and Toyota that impose significant impact upon the business performance of such organizations. It can be stated in this regard that the environmental analysis of the industry lies at the core of the macro-economic environment. The several factors of the macro-economic environment that include demographics, socio-cultural trends, technology, and economic conditions tend to collectively affect the market structure of any particular organization. Similarly, the different macro-environmental factors also affect the business performance, economic conditions, and socio-cultural trends of Hyundai as well as Toyota at large. As both of the organizations are operating in a monopolistically competitive market, there are immense chances for the organizations to be significantly affected by the characteristics of such market structures as can be identified in the case of Hyundai Sonata and Toyota Camry in the US market. As the consumers are increasingly becoming price conscious, the factors of demographics along with the socio-cultural trends might become a critical concern for both Hyundai and Toyota (Managerial Economics, n.d.). With reference to the above discussion, it becomes quite apparent that the prevailing macroeconomic environment of US market possesses a significant impact over the decision-making of Hyundai Sonata. These particular aspects become quite apparent with reference to the strategies adopted by the organization concerning its pricing strategies and profitability or rather profit maximization. For instance, the above discussed values indicate that because Hyundai Sonata is operating within the MCM structure of the US market, it enjoys limited control over the product prices and therefore needs to allow the customers with greater liberty on determining its MR. From a similar perspective, the brand also requires facing a considerable degree of competition in the market due to the existence of close substitute products such as the Toyota Camry with almost similar features. It is worth mentioning that with the introduction of Toyota Camry, the market share of Toyota has been observed to rise by 15 percent and is also estimated to increase at a similar rate in the near future. Similarly, in case of Hyundai, with the introduction of Sonata, the market share of the organization in the MCM structure of US automotive market, has been observed and further is anticipated to augment by 11 percent by the year 2014 (Bloomberg L.P., 2012). This particular finding can be substantiated with reference to the obtained results from profit-output equilibrium curves. Apparently, Toyota can be witnessed to be currently in a better position of profitability than Hyundai. However, in the short-run, it is quite likely that Hyundai shall be able to attain its profit-output equilibrium point earlier than Toyota owing to the differences persisting between the MC and the MR values (refer to Figures 3 & 4). Conclusion With reference to the above discussion, it becomes apparent that the various aspects, instruments, and tools of economics must be taken into consideration when any organization makes any sort of effective managerial decisions. The different factors that include the demand and supply functions, theory of profit maximization, concepts of marginal costs, and average total costs ultimately impose considerable impact on the overall performance of the organizations. In this regard, on the basis of the various macro-economic environmental factors, both Hyundai and Toyota perform their business functions according to the characteristics of the market structure, placing sufficient emphasis on competition and customer preferences. In order to increase their sales under a monopolistic market and to attain maximum financial returns and a competitive position in comparison to the rival organizations, both the companies have to lower the prices of their products. References Bloomberg, L.P. (2012). Market share. Retrieved from http://www.bloomberg.com/news/2011-07-13/toyota-earnings-at-stake-as-camry-loses-drivers-to-sonata-cars.html California State University (n.d.). Profit maximization. Retrieved from http://www.csun.edu/~dgw61315/ECON600lect3.pdf Hyundai Motor Company. (2011). Annual report. Retrieved from http://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0CFwQFjAB&url=http%3A%2F%2Fwww.globaldenso.com%2Fen%2Finvestors%2Fannual_report%2Fdocuments%2F2011_annual_report.pdf&ei=teLZT8z2CMbtrQftm_D6Bw&usg=AFQjCNEK7NRx6_BZnRKzP5attKEBI_WPkQ&sig2=8p566eg7df9tOxS4Un6nIw Managerial Economics. (n.d.). Concepts of managerial economics. Retrieved from http://www.sgbau.ac.in/managerial-economics.pdf MotorTrend Magazine, 2012. New Hyundai Sonata Reviews, Specs, & Pricing. Retrieved from http://www.motortrend.com/new_cars/04/hyundai/sonata/ MotorTrend Magazine, 2012. New Toyota Camry Reviews, Specs, & Pricing. Retrieved from http://www.motortrend.com/new_cars/04/toyota/camry/ Nguyen, Dat-Dao & Kira, Dennis S. (1998). Market Structure, Competition, and Equilibrium in Electronic Commerce Setting. Retrieved from http://www.csun.edu/~dn58412/econ_ecom.pdf Rasik, Nurul Fatin Izzati (2012). Product mix pricing strategies. Retrieved from http://www.scribd.com/doc/56578989/Assignment-Mkt Stanford Graduate School of Business. (2003). Hyundai motor company. Retrieved from http://gsbapps.stanford.edu/cases/documents/SM122.pdf Tucker, Irvin B. (2010). Survey of Economics. United States: Cengage Learning. Read More