Understanding Business Concepts: Culture Transformation, Demand Function, And Oligopoly - An Essay.

1. Whirlpool Corporation, the world's largest manufacturer and marketer of home appliances had a very strong engineering and manufacturing culture, with constant focus on cost and quality. But by the mid-1990s, its annual sales leveled off. Consumers were unable to differentiate Whirlpool's products. And with falling prices of home appliances, Whirlpool witnessed that its products were being reduced to commodities. Consequently, the company decided to change its corporate culture. With the vision 'Innovation comes from Everyone Everywhere', Whirlpool transformed itself from the traditional manufacturing discipline to a customer-focused enterprise providing innovative products to its consumers.

1. How culture changes affect the business?

2. How does innovation create impact on business? 3. What prerequisites are needed to be a customer focused enterprise?

4. How the roles of leadership help the industry grow successfully?

5. How does product differentiation play a major role?

Short Essay Answer any Four (4) out of Six (6) Questions

2. What are the reasons for a reasonable profit target?

3. What do you mean by demand function? Explain the relationship between price and quantity demanded for a product in the market.

4. Explain production function. Explain the equilibrium of a producer with two factors variable.

5. What are the different types of demand forecasting?

6. What do you mean by current account convertibility? How it affect the exchange rate determination in a country?

7. What are the different types of cost?

Answer any Two (2) out of Four (4) Questions

8. Explain price discrimination under monopoly.

9. Explain price and output determination of a firm under monopoly? Is it possible for a monopolist to generate profit by controlling supply?

10. Discuss the sources of oligopoly.

11. What are the limitations of fiscal policy?

Section A: Case Study

1.

• Culture impacts the focus of the business. This is evident from the Whirlpool where the focus shifted from efficient manufacturing to innovation. This shift helped the company to ensure that products may be differentiated from the competitors on account of quality and features rather than being the lowest cost providers only.
• Innovation allows the business to develop competitive advantage. This is because the products developed are different from the competition owing to which financial success can be achieved by company pursing the product differentiation strategy. Without innovation, the products would have to compete on cost leading to inferior financial performance.
• An enabling culture and support from the top management is pivotal. Also, a through understanding of the customer is pivotal. Besides, the work culture ought to be ethical so that the customers are not duped. Further, superior after sales support along with training to sales staff interacting with the customers is imperative. The performance metrics also need to be tweaked to include customer satisfaction and repeat purchases.
• Growth of industry is dependent on innovation of players based on unfulfilled needs of the consumers. This typically is done by the leaders as these businesses are focused on the future and thereby successful at pre-empting the future changes. As the leaders make suitable changes, the other players in the industry are also forced to follow suit thereby ensuring that relevance of the product/service continues to remain for customers.
• Product differentiation is pivotal as it is source of competitive advantage for a player. This ensures superior financial performance. However, this also improves the overall industry since it fosters innovation amongst competitors also and hence enables the development of the industry based on varying needs and preferences of the consumers.

3.

Demand function highlights the relationship between the price of the underlying good/service and the quantity demanded at that price. This function may correspond to an individual consumer or represent the total demand of all consumers. It may be downward or upward sloping based on whether the underlying good is normal or inferior.

A selected product is a particular luxury model of AUDI. For this product, the demand function would have a negative slope. This is because as the price increases, the quantity demanded would decrease. Further, the percentage decline in quantity demanded would exceed the percentage increase in price. As a result, the demand for this product would be termed as elastic.

5.

There are broadly two types of demand forecasting namely the quantitative and qualitative approaches. Quantitative techniques would include methods such as time series analysis and conjoint analysis. In time series analysis, the future demand forecasting is based on the past demand and using statistical techniques. The conjoint analysis involves identification of relevant factors that influence demand through the use of factor analysis.  The qualitative techniques would include methods such as Delphi method and intention surveys. The Delphi methods bases future demand forecast based on experts who tend to develop consensus about future demand. The intention surveys collects data regarding likely future purchases by sample of potential customers and use the same to estimate future demand.

6.

Current account convertibility implies that there is no restriction with regards to payments related to purchase or sale of goods and services in foreign currencies. This would imply that free and unlimited exchange of the domestic currency into foreign currency and vice versa is possible. It is imperative to distinguish current account convertibility with capital account convertibility which provides freedom of capital movement and investment from domestic currency to foreign currency and vice versa.

The exchange rate of a country is dependent on the demand and supply of domestic currency with regards to a particular foreign currency. Current account convertibility would provide a boost to the foreign trade owing to which the exchange rate will be altered based on whether on the comparison between the magnitude of incremental import and incremental exports. If the incremental imports exceed incremental exports, there would be depreciation of the domestic currency assuming other aspects remain constant.

7.

Based on the relationship with the activity level, costs may be fixed, variable or mixed. Fixed cost does not vary with activity level. Variable costs tend to directly vary with the activity level. Mixed cost have both a fixed as well as a variable component. The costs can also be divided into two categories based on their nature i.e. direct and indirect. Direct costs are typically those which are incurred during the production of the underlying good such as direct material, direct labour. Indirect costs are typically those which are related to selling of the product or providing support after sale. This would include administration costs, selling & advertisement expenses.

10.

There are various sources of oligopoly. One of these is the large amount of upfront capital investment is required. This is especially evident in industries such as organised retail where for a new entrant significant investment in the supply chain and brand building would be required. Another source of oligopoly is the control of limited resources by few players. This is especially true in the telecom industry where a new entrant may not be provided spectrum and hence cannot enter the industry. Yet another contributor to oligopoly is presence of economies of scale. This is especially true for industries where the upfront cost is significant and it makes sense to be present if owing to a huge market significant economies of scale are required to make profits. In such sectors, only a limited number of players are able to survive.

Existence of patents and legal restrictions may also result in oligopoly. This is especially true for pharmaceutical industry where a host of existing players have patents owing to which new entrants find it difficult to enter the market. Also, the upfront investment in research and development is quite significant. Further, the high concentration of market share of existing players also lead to oligopoly. A case in point is the organised retail in Australia where in the supermarket segment there is a duopoly and any new entrant would find it very hard to enter the market since the new players can lower their prices to crush any new competitor.

11.

The various limitations of fiscal policy are highlighted below.

• Delay in introduction – Typically, there is a delay in the fiscal policy owing to the recognition of the need to make changes and actual implementation of the policy. Usually the government introduces fiscal policy measures only when the macroeconomics have deteriorated significantly and thereby it is essentially reactive and rarely proactive.
• Poor debt management – Theoretically it is expected that when the economy is performing well, then the overall debt of the government would reduce. Also, the debt would increase when stimulus package is provided by the government to kickstart the economy. However, even if good times, the government debt does not reduce significantly owing to complacency and populist measures. Owing to this poor debt management, the ability of the government to effectively deploy fiscal policy is hampered.
• Private economy impact – The fiscal policy measures tend to have significant impact on private economy which is often ignored. Consider an increase in government borrowing which would lead to higher interest rate on the government bonds. This would increase the interest rate for the private sector and influence their growth.
• Issues with forecasting- In the globalised economy, it is very difficult for the policy makers to estimate the future challenges and shocks that the economy may be imposed to. As a result, they cannot be proactive in policy measures. This makes the fiscal policy essentially reactive. Further, it often proves to be inadequate and ineffective owing to the poor forecasting.