BUSINESS BEHAVIOUR AND THE MARKET ENVIRONMENT
Part I
This exercise deals with the analysis of the potential economic impact on the activities of the selected “plant as a present” retailer on the UK market that the case will refer to as the company. Current economic crisis put pressure on the company profitability and the management considers expanding its operation in terms of variety to leverage the challenges of the domestic economy. The aim of this analysis is to outline core scenarios of the company development through basic supply and demand modeling and look at the best options in regards to financing their expansion strategy.
The UK Market Environment and Price Sensitivity
Current economic environment along with the challenges on a domestic market creates a number of opportunities that are related to the cost-driven strategies. Based on the situation, presented in the Heatwave 2003, gives an insight into the UK leisure industry environment with the following characteristic:
- Increased saving due to economic instability and risk-adverse behavior.
- Preference for local tourism, determined by financial benefits and favorable weather conditions in the country.
- Shift in some basic goods consumption, opening opportunities for product range expansion for current industry players.
Given the above attributes of current market environment, the company should be looking at several product types, including perishable, seasonal and first need goods. Based on the case study it was decided to analyze the products per category, organized on the basis of demand-supply response:
- Perishable agricultural goods: lettuce, barley, wheat, maize
- Seasonal goods: hotel rooms, ice-cream, barbeque charcoal, garden swings
- Other goods: beer, beef burgers, pimms
Perishable agricultural goods
General characteristics of this category are the price sensitivity along with switching costs, which makes market response to the price change relatively flat (low price elasticity – A-1). The goods in this category are the first need products, which means that reasonable price jump most probably will not result in radical drop in quantity demand. Demand for this product will likely remain stable with the small price increase, will reduce significantly with radical price jump, but will never reaches 0 level as agricultural products are critical for the local market.
Demand-supply relationships determine the shape of the supply sensitivity to price. In real situation with the demand being stable and market having the potential to grow, supply of the product will continue to grow until it reaches the optimum level. After this level is achieved, demand will drop, as the price will be perceived too high and the market will start looking for a substitute product or reduce it consumption in general. Consequently, supply of the product will reduce to reach equilibrium with the demand.
Seasonal Goods
Even though, such products as hotel rooms and ice-cream are completely different goods, their demand-supply curve ad price to demand-supply relationships will take very similar shapes. This is explained by the seasonality of the goods. Elasticity of demand will be reasonably flat during the season and perfect over off-season period (A-2). For example, hotel rooms on the coast of the UK have much higher demand during summer and, therefore, more people are ready to accept higher prices. At the same time, demand for coast vacation during winter is minimal, which will make demand fall irrespectively of the price (Keohane and Olmstead, 2007). To make the supply more attractive, companies will be forced to offer significantly lower prices, to maintain at least some demand. Ice-cream supply-demand curve behaves in a similar way, with higher price sensitivity and smaller demand over off-season period, and lower price sensitivity and higher demand during season. With that the shape of the price-demand curve will have different slope, based on the season we are looking at.
Other Goods
Such goods as burgers, beer and pimms find their demand relatively stable with price elasticity curve steep, meaning that even with the price being high, people will continue consume these products, but the consumption will reduce, based on amount of disposable income (A-3). This type of goods is not seasonal and at the same time does not fall under the category of first-need goods. The major impact on the demand and supply of the product is, therefore, the price. Price-demand curve for this group of product will be extremely steep as they are considered very price elastic.
Potential Economic Impact of Expansion Strategy on the Company
Environment
There are several economic systems that range from centralized command to free market economy, taking to edges of possible command approach represented by the U.S.S.R and the United States respectively. In the case of the UK, it is possible to conclude that the country represent mixed economic system, as the resource allocation is done majorly by the influence of market forces. Given the free choice of the companies in regards to their product proposition and mix with very little governmental intervention and control (Carson, 1997).
The company is operating in the market that currently is driven by consumer demand and, thus very responsive to the economic environment. Expansion of the plant business to other economic sectors will potentially have dual impact on the company. On one side it will widen product portfolio and therefore can leverage the influence of economic environment on total earning. In this case, if consumers´ confidence rises along with economic recovery, the company will definitely benefit from increasing its portfolio. On the other hand, elasticity of demand for the majority of retail goods and service tend to increase at times to critical levels and, thus, there is a significant risk that the company will not see the return on investment that the management expects, especially if the pace of economic recovery continues to put negative pressure on demand. It is critical to place more emphasis on demand forecasting models and cost-efficient structure to be able to compete under tough economic conditions.
Financing the growth
There are numerous ways to finance organizational growth. All of them could be divided into internal and external financing sources. It is assumed that the company is not a multinational corporation, but reasonably large retail organization with proven track record and reputation in its segment. With that in mind the company can be looking at both, financing its growth with internal capital as well as apply to the market for capital inflow.
First alternative is the internal financing. To be able to count on this financial structure of new strategy, the company current account should reflect high liquidity ratio that frees up working capital for future capital inflow to enter into new market segment. Alternatively, if the company operates with shareholder capital, one of the options would be to reduce dividend payments to invest into organic growth. The challenge of this approach that undermines the feasibility of financing is the fact that the company is already influenced by the economic downturn, meaning that its capital structure most probably lacks liquid capital. The same economic environment would potentially create uncertainty among the shareholders as at the time of crisis, people tend to be more risk-averse and growth strategy through shareholder fund is a high risk to the organization.
Second alternative is the external financing, such as bank loan or merger with smaller companies, operating in the target segment. While merger could be a viable alternative at this time due to the challenge that small players face on the market, this choice is risky as it does not leave a room for testing and market way-out strategy is very complex in case of failure. Bank financing alternative would leave the company more opportunity for way-out strategy, flexibility and speed in decision-making process and sufficient guaranteed funds to lead the strategy goals to the end.
Part II
The case study looks at the latest trend in the UK education system that reflect growing concerns about the closure of mainly two types of courses: natural science and language related. While the number of universities, including Kent University and Queen Mary College consider the possibility to close the courses, Exeter University case in the center of attention since the institution announced the decision to close chemistry and music department. Opinions in academic and economic world are polarized between strong supporters of the marketing approach, looking at the situation as the market driven and those, who consider the reality as a consequence of the market failure and inefficient resource allocation.
Market and Economic Environment in the UK Education system
The UK education is operating in the mixed economic system with high influence of the governmental funding and intervention. While demand and supply is mainly determined by the market forces, such as the current trend in professions and student preferences, governmental funding still determines the possibilities for development and growth of the UK institutions.
The statistics, presented in the case, shows that overall demand for the education is growing, reflecting 5% increase in demand for professional courses, some of the educational categories experience sharp fall of interest, such as chemistry and language.
The situation can be seen from the market forces perspective, where supply in the educational system is represented by the total amount of courses in the UK institutions, demand is clearly based on the students enrolled for the course and the resource allocation is a combination of governmental funding and university facilities used and allocated for each of the course under consideration. Production possibility frontier in this case is determined by the equilibrium between internal demand for the course and optimal supply of the education system (Keohane and Olmstead, 2007).
Education as a Subject to Market Forces
The UK education is the public service that is critical for sustainable development of the nation. Current allocation of resources has proved to be highly dependent on the governmental funding and research assessment exercise (RAE). Tuition fees are just a part of the resource allocation that makes education system a subject to market forces. The complexity and volatility of the sector makes it necessary to created mixed funding scheme and reduce the dependency of the institutions on the market forces. The reality of the education shows that short-term changes and external environmental influences do not have the same impact on education as they have on retail business, as an example. In other terms, shut down of professional courses today may result not only in supply shortage in a decade from now, but in tremendous downfall of education quality. Additionally, it is the experience and education that professional receive today that will determine the success of chemistry, physics or media tomorrow (Hartmand and Boyd, 1998).
At the same time, market demand is the result of the combination of factors, most of which is the transparent correlation between the developments of the industries in the country. That said, the growth of demand for media professionals on the market is a result of the sector development and inability to meet this demand, will negatively affect the industry.
Given the above, it is possible to argue that market forces play significant role in maintaining the quality level of education and serve as the sensor and external forecasting for the demand in this area. This market driven power, however, should build on the strong governmental capabilities to create robust funding mechanism.
Governmental Funding Efficiency
It is evident that the UK government managed to improve its funding mechanism by implementing RAE system that by funding allocation manages to control quality and compliance of the educational institution with the regulations and governmental expectations. At the same time the reality shows that the government failed to provide sufficient funding and consistent shortfalls on the financial side result in growing tuition fees and negatively affect the supply of particular professional courses. In spite of the shortfalls of the funding mechanism, statistics shows that the government is on the right track with their resource allocation policy. The UK managed to push its age participation from 16% to 35% and achieve student retention rate of 89% between 1989 and 2012.
Exeter University Case Argument
First of all, it is important to understand that even under high influence of the government as a part of the UK education system on funding and quality, it is still up to the market to determine the supply of particular courses, such as chemistry and music. It is possible to see the case from two perspectives: A) the decision of the Exeter University as a vital element of the public sector, critical for the national development and B) marketing decision made by the player in the current environment under market forces pressure.
Until the moment the government is not able or does not wish to provide 100% efficient funding to the educational system and unless this approach creates optimal possibility frontier in the economy, Exeter will remain an integral part of the UK educational market. With that in mind, there is no argument that would be sufficient to keep an institution from taking effective business decision to close professional courses that do not generate economic value and create pressure on efficiency of the organization as a whole (Shattok, 2013).
General Overview
The UK monetary and fiscal policy is in the hands of the Bank of England. It is aimed at control over the interest rate, keeping on a low level of 2%. At the same time it focused on long-term growth strategy by governmental spending regulations and reduction of unemployment. This is achieved through fiscal mechanisms, such as low taxation that boosts disposable income and drives economic recovery along with employment. This all comes along with strong control over the current account deficit.
Recent changes in the regulatory base and funding mechanism in the UK education system are seen through the implementation and development of research assessment exercise (RAE) that set an objective to drive competition among educational institution based on the research activities. This, on one side, serves as the natural driver for some of the “stagnating” departments in the university and at the same time causes a number of debates on the efficiency of resource allocation that takes out the opportunity for development from those institutions that have lower funding. In other terms, this system support already effective institutions, which is, perhaps, not the most effective policy (Perry, 2012).
Market forces have strong influence of the direction that further education system will take in the near future. First of all, the demand for the “modern” professions, such as communication, design, Information technology and media is growing in a fast pace, replacing and overgrowing the need for classical and traditional disciplines, such as chemistry, literature and language studies. Cultural element, such as internalization of the education, demand for multinational experience and diversity will continue to transform the UK educational system as well as global educational arena not only from the perspective of changing demand structure, but also from quality and student composition perspective.
References
Shattok M (2013). Efficiency and Effectiveness of British Higher Education. Ministry of Education, Science and Culture. Available at: http://www.menntamalaraduneyti.is/media/MRN-pdf_Annad/RadstfjarmMichaelShattock.pdf
Perry G (2013).Understanding Higher Education in Further in Further Education Colleges. Department for Business Innovation & Skill, BIS Ressearch Paper Number 9., June 2012.
Hartman W and Lowe Boyd W (1998). Resource Allocation and Productivity in Education. Theory and Practice.Westport: Greenwood Press.
Carson R (1997). Comparative Economic Systems. 2nd Edition. New York: M.E. Sharpe Inc.
Keohane N and Olmstead S (2007). Market and the Environment. Washington: Iceland Press.
Appendix
A-1: Elasticity of Demand for Perishable Goods
A-2: Elasticity of Demand for Seasonal Goods
A-3: Elasticity of Demand for Other Goods
