Economics and Managerial Decision Making
Many companies have applied the established principles of Managerial Economics to improve their profitability. The best way to become acquainted with Managerial Economics is to come face to face with real world decision problems. In the past decade, a number of known companies have experienced successful changes in the economics by-using economic tools or techniques. Some cases have-been discussed here.
Example 1: Reliance Industries has maintained top-position in polymers by building a world-scale plan-t & upgrading technology. This has resulted in low operating costs due to economies of scale. Reliance Petroleum Ltd registered a net profit of Rs 726 crores on sales of Rs 14,308 crores for the six months ended September 30, 2000. Of these, exports amounted to Rs 2,138 crores that make RPL India's largest manufacturer, exporter.
RPL is -planning to expand its capacity from 27 to 30 million tons in April 2001, or further to 40.5 million tons by April 2002. The overall economies of scale are in favour of expansion. This expansion will further consolidate the position of RPL in the sector or help -in warding off rivals.
Example 2: For P&G, the 1990s was a decade of 'value-oriented' consumer. The company formulated policies in view of emergence of India as 'value for money' product market. Customers are "becoming more price-sensitive or quality conscious more focused on self satisfaction. This means that consumers are willing to pay premium price only for quality goods. Therefore, it can be said that consumer preferences or tastes have come to play a vital role in the survival of companies.
Example 3: Leading multinational players like LG, Samsung, Panasonic and Sony cornered a large part of Indian consumer durables market in the late 1990s. This was possible because of global manufacturing facilities or investment in technologies. To maintain their market share, they resorted to product differentiation. These companies introduced technologically advanced models with specific product features or product styling.
Example 4: In late 1990s, HLL earned supernormal profits by selling low-priced branded products in the rural areas. The company considers the rural market as a separate market. This was a result of market segmentation policy adopted by the company. HLL is now developing packages for the rural market with products, packaging and pricing tailor made for the rural consumers.
To ward off rivals and to make it a better competitor the company resorted to mergers and acquisitions. Merger of BBIL with HLL in 1996 made it the largest conglomerate in the consumer goods market in India. Over the years HLL has acquired Kissan and Dipys from UB group; Dollops from Cadburys in 1993; and International Best foods in 2000, to achieve economies of scope.
Example 5: Apple, the company that began the PC revolution, had always managed to maintain its market share and profitability by differentiating its products from the IBM PC compatibles. However, the introduction of Microsoft's Windows operating system gave the IBM and IBM compatible PCs the look feet and ease of use of the Apple Macintosh. This change in the competitive environment forced Apple to lower its prices to levels much closer to IBM compatibles. The result has been an erosion of profit margins. For example, between 1991 and 1993, Apple's net profit margins fell from 5- to 1 per cent.
In all the above examples, decision making has primarily been economic in nature as it involves an act of choice. The decision of Reliance Industries to build a plant of international scale and to further expand capacity was made on the basis of the law of returns to scale and economies of scale. Similarly, the MNCs in the consumer durables market in India emphasised on global manufacturing facilities coupled with product differentiation to capture and maintain a major portion of market share. It should be noted that scale economies are sufficient for RPL as it operates under homogenous oligopoly . But consumer durables market falls under differentiated oligopoly market structure, so it requires emphasis on differentiation as well. Likewise, Apple had always managed to maintain market share due to product differentiation.
Fast moving consumer goods (FMCG) companies, P&G and HLL took concepts of consumer demand analysis, namely, consumer preferences and market segmentation respectively, to maintain their dominant position in various product categories. Selection of product portfolio of P & G is an expression of consumer choice for quality products. HLL strategy to earn supernormal profits by catering to rural areas is an economic decision based on selection of an expanding market segment. The objective of HLL of being the largest firm in the industry was achieved by economies of scope mergers and acquisitions.
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