Long-Term Investment Decisions - Assignment Example

? Long-Term Investment Decisions Long-term Investment Decisions Introduction Entertainment industry represents an oligopolistic market structure where only a few players, including Universal Music Group, Sony Music Entertainment, Warner Music Group and the EMI Group, dominate the market. While operating in such a market environment, the pricing strategy of a company will be greatly affected by the prices of other marketers. Therefore, it is not possible for a firm to set higher prices unless all the market players mutually agree with such a practice. The level of government intervention is high in an oligopolistic market environment and this situation would prevent potential mergers in the entertainment industry from absorbing smaller corporations. This paper will discuss whether government regulation is needed in this industry and analyze certain potential threats to the expansion of industry through capital projects. Significance of Government Regulation Based on a comprehensive analysis, it can be said that government regulation is essential in a market economy, particularly an oligopolistic market structure like entertainment industry. Achievement of social efficiency and equity are the major reasons for government involvement in a market economy. Social efficiency can be attained at a point where the marginal benefits of either production or consumption to society are equal to marginal costs of production or consumption. In addition, social equality is less likely to be promoted in a market environment where government intervention is insignificant. As Hyman (2007, p. 67) points out, government involvement in a market economy is particularly vital to prevent the creation of monopoly power, which in turn will result in an output level below the socially efficient level. This practice is also necessary to provide the public with proper information and to enhance market certainty. Probably, lack of certainty would persuade people to produce or consume at a level less than they would choose otherwise. Free market environments seem to respond sluggishly to demand and supply fluctuations and this time lag in response can result in permanent disequilibrium state and cause instability problems. Timely government regulation in a market economy is also crucial to promote adequate provision of dependents and adequate output of merit goods. Evidently, tools like taxes and subsidies are specifically important to address market distortions effectively. To illustrate, imposing tax rates equal to marginal external costs and granting subsidy rates equal to marginal external benefits are some potential strategies to resolve externalities. In short, effective government regulation is inevitable to prevent the imposition of external costs and to enhance customer protection. Rationale for Government Intervention in US Currently, the entertainment industry’s long-term expansion plans through mergers are challenged by Federal government regulations. There are various reasons for the intervention of government in the market process in the US. As discussed already, today entertainment industry is an oligopolistic market, which is dominated by four main players. Evidently, the planned mergers would turn the entertainment industry into monopoly and this situation in turn would negatively affect the interests of the society. Under a monopolistic market structure, there is no market competition and therefore the ‘market ruler’ is free to charge any price regardless of consumer interests. In other words, customers do not have any option other than buying the products at the rates fixed by the company. In this situation, the organization may find it profitable to produce inferior or substandard goods because customers are compelled to purchase those items without a second thought. Hence, it can be claimed that creation of a monopolistic market structure would lead to consumer exploitation and this practice may cause customer dissatisfaction. Price discrimination is another negative impact of market monopoly. In a monopolistic market environment, the firm may charge different prices for different consumers on the same product. Since a monopolistic market structure eliminates strong market competition, there would be no inventions and innovations and this situation in turn may result in a stunted industry growth. In short, the major rationale for the government intervention in the US market process is to encourage the production of quality products, to ensure reasonable prices, and to prevent customer exploitation. Challenges of Expansion via Capital Projects Although the company (Sony Music Entertainment) considers self-expansion via capital projects as an alternative strategy to merger, it would face additional complexities under this new scenario too. Sherman (2011) describes six types of capital investment projects including replacement, expansion, rationalization, development, mandatory and others (pp. 141-142). Evidently, all these projects require additional new investments. It is precise that the US economy is yet to recover from the shock of recent global recession and therefore it would be difficult for the entertainment industry to raise enough funds required to finance the capital investment projects effectively. More clearly, US banks are reluctant to grant loans to corporate giants followed by a series of bank failures in the country over the last decade. Another challenge of business expansion through capital investment projects is growing concerns on environmental sustainability. To illustrate, when the organization enters a new market territory by making fresh investment, it is particularly required to take environmental safety into account. Majority of the capital projects would take longer time to get into full swing as compared to strategic projects like mergers and acquisitions. This long time delay will probably affect the operational efficiency of the organization. Sherman states that development projects enhance the growth of the firm “through new products, new markets, or new technologies” (p. 142). For this, the company needs to invest huge amounts in R&D and to develop a potentially skilled workforce. Furthermore, the company has to conduct an extensive market research to obtain a clear the view of the capital investment projects proposed. Undoubtedly, changes in market conditions and government regulations during the course of project execution may impact the success of the company expansion. In short, the firm will face a sequence of challenges while promoting business expansion through capital investment projects. Influence of Different Forces In order to ensure the convergence between the interests of stockholders and managers, it is necessary to achieve increased productivity and better profitability. Evidently, a rise in profits would meet the interests of managers and a resulted increase in dividends would enhance stockholder satisfaction. Currently, it is clear that merger is not a practical option for Sony because it is challenged by strict government regulations. At this juncture, the organization can promote its long term expansion plans by engaging in joint ventures (JV). Unlike in a merger, two companies remain separate and intact in a joint venture and jointly operate for the achievement of a specific goal, such as marketing synergistic services. Undoubtedly, a joint venture with other leading firms would assist Sony to acquire or expand its resources and capabilities. In addition, the joint operation is helpful for the company to reduce operational costs (like transportation) and hence to increase profitability. According to Gutterman (2002, pp. 3-4), in a recovering global economy, JV will be the right option to boost sales and to improve the overall market share. The synergies of combined operation would aid the firm to defend new market entrants effectively and to expand the market area, for this will offer a convergence of different forces to promote the interests of both stockholders and managers. Conclusion From the above discussion, it is obvious that government involvement in a market economy is necessary to prevent the creation of monopoly and to ensure social efficiency and equity. Currently, the US government intervenes in the market process to promote market competition and to prevent customer exploitation. There are many challenges to long-term business expansion through capital projects, such as huge investments and long time delay. In this situation, the company can cut down its costs and survive in a recovering economy through potential joint ventures. References Hyman, D. N. (2007). Public finance: A contemporary application of theory to policy. Cengage Learning. Gutterman, A. (2002). A short course in international joint ventures: negotiating, forming, and operating the international joint venture. World Trade Press. Sherman, E. H. (2011). Finance and accounting for non-financial managers. AMACOM Div American Mgmt Association. Read More