Establishing a Continuing Business Model Innovation Process - Essay Example

Short term and long term small and big companies strategies must be based on the current economy movements and expected future trends with strategy being easily adoptable to any possible external or internal to economy shocks. As the Federal Reserve chairman stated, the economy in the nearest year will suffer from the largely increased crude oil prices and gas prices, the negative affect of which is aggravated by the hurricanes which made consuming oil from some plants impossible with overall world demand for these energy resources being a way ahead of the supply. Increasing supply of both educated and low qualified labor from emerging markets which further suppress the world production costs and invade US market with import goods further draw trend of decreasing labor supply and inflationary pressure on the US economy. Nevertheless, before the hurricanes hit, the trends were rather positive and some economists argue that the economy will smooth into the recovery phase with growth of demand and overall production. The GDP growth is attributable mainly to the structural productivity growth though the employment rates were revealing job losses over the country. The main target of the national banks in different countries is to precisely monitor the affect of inflationary pressure and low interest rates on the employment and GDP development. Another point of concern in the longer term is the growing rate of federal expenditure on health and retirement programs and in case of larger debt service to GDP the economy will be hit tremendously. To summarize, the outlooks are positive in the short term for production companies not heavily dependant on oil and gas prices, and is more favorable in the long term with certain risks being in place nevertheless. Company managers should strive their best to implement energy saving strategies in order to cut down the value of this cost variable within their overall cost structure and should rush to invest as much as possible into new products which could be delivered to the market very soon. Alan Greesley decided not to give any precise outlook for the economy development in the long term due to increasing baby boomers retiring factor, huge oil and gas prices and no precise way to estimate the path through mechanism of higher interest rates and inflation. The policy makers should invest as much as possible now to implement technology innovations to provide cost reduction methodologies. Keeping the US quality, this will guarantee it competitive position in the markets. The economy must go through reformation which is happening now. The gross domestic product growth depends on the demand and the ability of consumers within the economy to realize their demand for specific products. The demand for the product depends on the utility function of this product and how much utility the product can provide to the customer. The utility of the product is the tradeoff of the qualities of the specific product in return of the quality and ability of this good to satisfy specific consumer needs. The demand of the product is the price sensitive and the good is considered normal if the demand for this product rises if the price falls. On the other hand, demand falls with rising price when the utility function is at its' break point and the utility provided to the customer from purchasing this product is less than the price to be paid for it. Price sensitivity of the product depends on the amount of substitutes available to the customers. In case of few substitutes available and the product being a normal product, the demand will grow with the falling price and visa versa. On the other hand, if the product is normal but there are several substitutes to this product, or the products different in some qualities but providing the same function to the customer, up to certain specific preference point, the customer will be choosing this product and then will switch to another one. For example, with the expectations of growing demand in the short term and falling in the long term, it would be the best idea to start increasing production level of the normal good for which the demand is expected to increase. The outlook for the price firm goods is stable as these are usually the goods for which the demand remains rather stable no matter on the price. For example, bread producers are likely to experience moderate growth in the demand as it is a rather firm good and the demand for this good is rather stable no matter of where the economy is moving, it is one of the necessities which people will always consume. The increasing price of this product will not prone people to consume less of bread as the utility of this healthy food is much more to the people and they would choose utility over the price, but on the other hand this utility is certain, consuming more than 300 grams of bread per day is already over utilizing bread worth which causes negative affects. The contrary to this product would be entertainment services, for example, the demand for which is usually much lower than the optimal level on the national aggregate with rich people over utilizing this product and poor people consuming less than optimal for their wealth. With lower price for these products, people will start consuming more until they reach the maximum level. A household uses a mix of the products which maximize their utility, by mixing products according to their prices and utilities and substituting irrational choices to find the optimal mix. Based on these consumer preferences that maximize their total welfare, producers choose optimal cost to revenue possible to generate from consumer output functions, develop products which will be able to provide more utility to consumers and thus more profits for the company and stop producing goods with no real demand from the customers. The sole purpose of the firm is to generate profits and increase them steadily. Due to ever changing global economy, research1 reveals that only companies that are the most innovative and change one of their business model elements of "who", "what", "where", "when", what price" at least two years, are able to remain profitable in the long term. It is impossible to remain profitable in the long term without innovative as consumer preferences change even for such stiff products as bread, where some years ago white bread was popular and presently dark bread with little carbohydrates is more preferable. The company is not able thus to innovate and introduce new products to the customer in the future if it has no funds to finance innovation process now. The funds come from the company profits and this is the success cycle for the company. It can be a strategy for a company to operate with losses for some time on some products if these losses are offset by the profits from another segment of company operation. This strategy is implemented if the company is targeting to capture big market share and the only way for doing so is to sell products for less than they actually cost for the company. In general, company operating with losses has bad management, bad cost structure and its' products are either not demanded on the market at all or the price of the substitute products available for consumers to satisfy their utility is lower and thus is more competitive to consumers. That is why the company must cut down its' variable costs as fixed costs are hard to bring down, choose the optimal production level of this good, try to enter another market with few substitutes to this product and try to gain market capture there and develop detailed strategy for product mix and operation. Sometimes it is simply impossible due to international competitive advantages where some countries originally are able to produce these goods at much lower costs and with free trade thus will invade the market with them leaving local countries with little market capture and stressing the need for them to strengthen their brand preferences and work hard at their strategy. That is why big companies are very often created as mergers usually undertaken to implement costs reduction in some segments when two producers when connecting gain competitive advantages in two or more spheres of production while being separate, they have one competitive advantage each. They are also able to cut down some costs on company management which strengthens their competitive position in many areas on the markets and attracts customers that were not before clients of either of the firm. It is important for companies to provide maximum utility to the customer with lower possible cost and thus generate corporate profits as the majority countries have oligopoly as market structure. Oligopoly is the presence of few companies in the market each enjoy a rather big market share and trading differentiated products. These products are substitutes one to another to some degree, they usually serve rather same function but have different quality and are not necessarily price differentiated. This differentiation is achieved through non price competition which is the characteristic of monopolistic competition. Though price competition is closed and producers cannot neglect prices of the competitors for the like products, non price competition in design, quality, style and services creates space for monopolistic competition and thus companies are able to some degree generate for them monopolistic profits in their products. For the oligopoly structure of the market, the entry barriers for the company are rather strong with the marginal cost of production for the companies being lower than the price of the product. Though the demand for the products is decreasing with increasing price, in oligopoly market structure companies can achieve long term economic profits. American economy is one of the strongest in terms of oligopoly market structure. Oligopoly exists in almost each sphere of the products served to the clients, for example: in groceries the market is captures mainly by Wal-Mart, Tesco and the like; in Chemicals/Oil industry it is occupied by Sheell, Exxa and the rest; for fast food outlets these are McDonalds', KFC, Burger King and so on; for detergents - Unilever, Procter and Gamble and so on. In fact competition can exist between oligopoly firms until they form a cartel or some kind of cooperation and thus can dictate the prices to the market with no competition for them and thus no effective utility for the consumers. Cooperation of the firms can decide on the division of the markets, price setting, hold back technology and in this way promote inefficient resource allocation within economy. Big taxation burden creates a big incentive for the price wars between oligopoly companies as they will be tempted to lower or increase prices simultaneously. This is known to happen among producers of cigarettes, automobiles and petroleum which are traditional oligopoly industries. In 1991 all the companies of Fortune 500 were players within oligopoly industries. Aggressive competition of oligopolies in the USA and their exploiting foreign cheap resources and opportunities of foreign markets were the drivers for the USA trade of industrial goods expansion. Monopoly is the most extreme market structure but the monopolistic company cannot always set the highest possible price for its' product. With monopolistic structure, the company is facing the downward sloping demand curve which is also the average revenue curve. This implies that the revenues of the company increase as the price falls due to higher volumes of good sold, and the demand for the product rises with falling price. The marginal revenue curve is also downward sloping and lies below the average revenue curve while in case of perfect competition the marginal revenue cost equals average revenue cost curve. Thus, as the price for the product decreases, the extra revenue generated from selling this product increases. Marginal cost curve is upward sloping and with increasing volume of the goods produced the marginal cost of producing the extra good increases. Any firm maximizes its' profits by producing the quantity of goods for which the marginal cost equals marginal revenue. The average total cost curve lies above the intercept of the marginal cost and marginal revenue. As the overall revenue is greater than the production costs, the firm is receiving monopolistic profits. But the firm cannot set the highest possible price as the output at the level of marginal cost equal to marginal revenue is optimal while if the price is increased, the volume of the goods sold will decrease with the average revenue being less, the sales will fall. The profits are likely to fall as the average total cost will increase with the marginal cost being less than in the optimal output position. That is why the monopolist is not likely to set the highest possible price, but will set the price where his marginal cost equal marginal revenue, but his marginal revenue curve is below average revenue curve which gives him room to generate long term economic profits. It is worth mentioning that in practice it is rather hard to maintain monopoly for a long time as big profits are likely to attract more players into the industry which will distract the earnings from one company. Sometimes to avoid monopoly, the government sets limits to certain prices targeting to aid the consumers. The balance price for a product reflects the relationship of the supply of this product or service to the demand for it and thus the most optimal price is estimated to balance the market. In case of goods which are considered very important for national security and so on, government aims to assist the residents and sets price limits to housing, for example, taxis and so on. Very often this measure is used as anti damping measure. There are also cases when the government sets limits higher than the balanced price. As the supply for the product is upward sloping curve and is increasing with increasing price, but the demand curve is downward sloping and thus is falling with increasing price, the interception of the price higher than balanced with the supply and demand curves will mean undersupply of the services or products that the customer would wish to purchase for this price. The demand for the good or service will be greater than the supply producers would be willing to provide at this price as it will be lower than their costs and so on, and that is why there will be shortage of the good for the customers. It is negative impact on the country as these resources could be provided to the clients ready to pay for them, but they would have to search for another initiative, while customers will remain with unsatisfied demand. This is inefficient resource allocation within economy. The implication to be made is that limitation theory is not always the good idea in economic terms while it is a very popular policy for the government and has positive drivers. Usually, the poor people are those benefiting from limiting strategy as now they access to this good and will enjoy it, while more rich people will not have their demand satisfied and can switch to another substitute product. To summarize, the economic outlook for the near future is positive with showing activities in employment, investments, development and so on which can give strong purchasing power for the future production firms. Nevertheless, certain steps must be done by majority of the countries to meet the possible economic and global challenges. References: 1) Mankiw, Principles of Microeconomics, 3rd Edition, South-West, 2004. 2) Mitchell, D. and Coles, C. (2004) Establishing a continuing business model innovation process. Journal of Business Strategy, 25 (3), pp. 39-49. Read More