Moving away from internal issues, the opinion above (i.e. the question) does have some merit. Technology, and advancements in technology, enables cheaper and more efficient production, which feeds through to the consumer via lower prices. Keeping prices low by using more efficient machinery and ICT systems will increase sales, which translates to higher revenue, assuming a constant mark-up. In the market for expensive ‘high-tech’ video recorders, new technology has enabled cheaper production which, over time, allows the firm to charge a lower price or widen their profit margin. Such benefits cannot be utilised by not changing operations, even if risky ‘big-ticket’ capital equipment purchases are to be made. One could argue some markets are less volatile, such as the dairy industry. Milk is always going to be a price inelastic product (a product where the % change in price is greater than the % change in demand) with hundreds of suppliers. Households look for milk to provide a tasty source of calcium, and with milk sales rising greatly every year2 farmers are reluctant to increase price in fear of losing out to another producer. Therefore, farmers need not worry about change in the external environment, there is always going to be demand for their products whether the economy is in a recession or a new competitor sets up.
On the contrary, some markets may be extremely volatile. Some products may carry an income elasticity of demand (YED) co-efficient of greater than 1 (income elastic) which means a recession could put them out of business completely. During a recession, unemployment rates soar, and thus reducing the income of society. In such a case, paying close attention to the external environment is vital for the businesses short-term success, never mind the long-term. To overcome this situation arising, a firm must develop a brand to help increase its market share. Market share is the percentage of total revenue (or sales) in a market, so gaining a higher share could develop a monopoly in the industry. Monopolies are generally regarded as being against the public interest, because they have the power to charge whatever price they wish. Regardless, developing a monopoly will secure success for a firm in the long-term. However, a number of external issues must be taken into consideration.
- Competition could set up, attracted to the profitability of the industry and take some market share away,
- The competition commission could carry out an investigation to see if the business is operating undesirably,
- Building up a recognised brand takes many years.
Consequently, even if the business had a large market share (it is 25% currently to be deemed a monopoly, and 40% to be a ‘dominant’ monopoly) and power over a market, external factors can still break-down the profitability of a business. Adapting to change to overcome these issues becomes crucial, hence justifying the view above. To put into context; Microsoft in 2001 had a 93.2% market share3, meaning they held a rightly earned place at the top of the computer operating systems table. Recently Apple has seen their foothold on the market accelerate, with a market share increasing from 7.31% in Dec 2007 to 9.63% in Dec 20084. That’s a 32% increase in market share during 2008, which could pose a threat to Microsoft in the future if their share continues to grow at this rate.
To conclude, I support the argument that a business must adapt to change in order to survive – especially in competitive markets. With consumer tastes changing constantly, firms like HMV will get left behind – as Charles Darwin’s theory of evolution suggests, the least fit species get left behind. Business is about the survival of the fittest, and to maintain a healthy business, profit levels and sales must be high, with regular cash inflows every month. In addition to this, with product life cycles ending all the time (such as the iPod classic) extension strategies must be implemented. How does one figure out which product to extend and which to scrap? By looking at what the external environment (predominantly customers) wants and responding to it. Especially with globalisation taking over the way which businesses trade, the external environment is more important than ever. The integration of economies on a national basis frees up trade regulations and allows capital, goods and services and labour to be transported with relative ease. The opening up of these new national markets is an opportunity to be relished and seized by as many firms as possible, thus backing my opinion that adapting to change is the way forward.
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References:
- http://www.guardian.co.uk/business/2006/may/09/retail.money
http://www.thisismoney.co.uk/news/article.html?in_article_id=410516&in_page_id=2
- http://future.aae.wisc.edu/data/annual_values/by_area/2356?tab=sales
- http://windowsitpro.com/article/articleid/40481/os-market-share-microsoft-stomps-the-competition.html
- http://successfulsoftware.net/2009/01/09/macosx-market-share/
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Word count:
Excluding references: 1,097
Note to Sarah: it was a challenge to stick to below 1,000 words. I apologise for going over the limit.