Good Example Of Long-Term Investment Decisions Essay
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A firm has to constantly take strategic decisions to adjust in a competitive situation. Some decisions are short-term ones which are targeted as a remedy for short-term problems. But a firm also has to take important long-term strategy decisions pertaining to its future course of action. These long-term strategies are contingent upon the future projections about the market situation and the firm’s performance in such situations. The decision taking is influenced by a number of factors some of which are the result of government policies or the market situations which are beyond the control of the managerial team. In such situation the firm has to adjust itself to the changed situation by taking appropriate policy decisions. Some factors are internal in nature and can be handled by the firm by controlling the factors that lead to the internal problem. There are myriad internal and external problems that a firm may face as a challenge to its successful operation. In this article we discuss some these problems and the alternative set of strategies that the firm may follow. In the first section we begin with the issue of the rising costs of the firm which leads to a situation of rising prices. In the second section we discuss how government policies affect a firm’s operation and the commensurate strategy that the firm might follow. In the third section we discuss the regulatory role of the government. It is important for the firm to make space for itself in a regulated atmosphere. In the last two sections we discuss the possibilities of internal conflict that may arise when a firm tends to take important long-term decisions. We also discuss the possible remedy to the internal conflict.
We have based our discussion of the strategic decision making of a firm in the context of the low calories frozen microwaveable food producing company that we have analyzed in the previous assignments. We have already studied the demand and supply conditions for the product in the first assignment. In the second assignment we have discussed the cost revenue and profit situation of the firm. In this paper we discuss the strategic plan pf the firm under different situations that govern the market.
The Rising Cost Conditions
A firm may face a situation of rising costs. The rising cost can be due to a number of factors. The prices of raw materials may rise, the interest rates may rise, the production technology may become inefficient, technical glitches may lead to system failure during production, the factor prices may rise. Here we consider a situation where the firm has to decide on raising the price of its product in the face of a rise in the input prices.
First and foremost, a decision to raise the price of product should consider the elasticity of demand for the product. If the demand is elastic in nature, a rising prices will lead to a severe fall in the demand and result in a revenue loss for the firm. For an elastic demand a reduction in the price leads to rise in the revenue for the firm. But the firm we are considering here faces quite an inelastic demand. If demand is inelastic a rise in price will lead to a rise in the revenue and a fall in the price will mean a fall in the revenue for the firm. We have seen in the previous discussion that the firm faces a rising cost situation. This leads to situation where the firm can earn profit only for a given range of output. It would be advisable for the firm to keep the prices high so that it can remain in a situation of profit. But of course, the price rise also should be within a viable limit. It is very important for the firm to reduce the costs.
The second important thing that the firm has to consider here is the issue of limiting the cost. If the input that is facing the rising price situation is substitutable it should be replaced with a cheaper alternative. If it is a very specific input and does not have an alternative like agricultural raw materials that the product has to use then the production technology must go through an process of innovation to increase its efficiency. An efficient technology will be able to produce more output with less amount of input.
If the labor wages are rising the firm may decide to replace labor with a more capital intensive technique that use more mechanical inputs for the production. In general it is important for this firm to invest in the research and development of cost saving technologies. The firm already faces a situation of high costs which is rising with the output. So cost saving techniques of production are of utmost important for the firm. Another important area that the firm should ponder upon is to improve its revenue situation. It should launch important sales promotion programs that will make the demand more inelastic and raise the demand curve so that the firm can earn profit over a greater range of output.
Government Policy Decisions
Government policies have important implications for the successful running of the firm and its survival in a competitive situation. The minimum wage laws of the government often leads to a rising cost situation for the firm if the wages are too high as a result of the government’s labor protection policies.
The fiscal policies of the government have direct implications for the firm. If the sales taxes are increased then the firm’s cost will rise depending on how of the tax burden the firm is able to shift upon the consumers. The firm we are discussing here is facing an inelastic demand, so it is possible for the firm to shift major part of the tax burden on the consumers. The changes in the direct taxes by the government will also affect the firm’s operation. If the profit tax is increased the firm’s costs will rise. If the government reduces income tax the disposable income of the individuals in the economy will rise, the demand for the product of the firm will increase.
The monetary decisions of the government also have important implications for the firm. If the monetary authority raises the interest rates, investment gets reduced. The firm’s expansion plans through capital investment becomes more costly. If the rate of interest is reduced investment becomes cheaper. The firm can go ahead with its expansion plans.
The government follows a regulatory regime to control various aspects of the market. There are certain markets which require direct government intervention. Some products are of strategic importance for the economy. For such products the government imposes direct control. For example the public utility products like gas, electricity and water supply involves strict government regulation regarding the prices and market concentration. For some agricultural products also the government has to provide some support to the cultivators as the production is subject to some uncertainties. An overproduction may lead to fall in the prices and huge losses to the producers in which case the government has to come to the rescue.
The government also intervenes in cases where one or a few firms dominates the market and tries to churn out more profit by taking control of the market. The US anti-trust laws have been framed to tackle such situations. We have seen a number of cases where a company trying to gain monopoly position has been tried under the antitrust laws and severe legal action has been taken against the erring companies.
Standard microeconomic theory states that the objective of a firm is to maximize profit. This is true for a firm which is operated by the owner. The objective of the owner and the organizer is the same in this case. Both want to maximize profit as that implies higher income for the owner/ organizer. But with time the structure of a firm has undergone a sea of change. Nowadays most of the firms are joint stock companies that have corporate organization. There is a board of directors which takes important decision about the company and its financial matters, But the operation of the company is under the team of managers who take decisions regarding sales, advertisements, prices, employment etc. The aim of the team of managers is to maximize revenue and increasing the popularity of the brand. The first objective has the effect in increasing the managers’ salaries and perks. The increased popularity of the brand increases the managers reputation and improves her track record. The problem that arises from the divergence in the ownership and the management is that, for the owners the profit is more important but for the managers it is the sales. This results in a problem known as the principal-agent problem in economic literature. This problem can be seen in many related areas. The author of a book wants to the sale of the book to rise which will make the author more renowned. But the publisher wants to restrict the sales and increase the price to earn more profit.
The firm that we are discussing here will face similar internal conflict if it wants to take a plan of long-term capital expansion which involves significant amount of investment and raise the cost in the short-term. The board of directors will object to such a move whereas the mangers will strongly want to take such a long-term expansion plan.
The origin of the conflict is the difference in the aim of the owners and the managers. If the aim converges then the conflict will cease to exist. This can happen when the managers are conferred with a part of the ownership. Many firms are nowadays taking such a move. The mangers are made the shareholders of the company. Successful managers are given incentives in the form of company shares. This removes the demarcation line between the mangers and the owners and resolves the conflict we have discussed in the previous section.
We have discussed a few problems that a firm may face in its operation arising from both internal and external sources. There are number of varied challenges that a firm faces in its struggle to remain in control of a significant portion of the market. The firm has to take short-term and long-term strategies in accordance with the problems it faces or expects to face.
Branson, W. H. (1989). Macroeconomic Theory and Policy. McGraw Hill.
Koutsoyiannis, A. (2003). Microeconomics. Pulgrave Macmillan.
Mankiw, G. (2013). Macroeconimcs. Macmillan.
Pindyck, R., & Rubinfield, D. (2009). Microeconomics (7th ed.). Prentice Hall.
Varian, H. R. (2010). Intermediate Microeconomics A Modern Approach (8th ed.). New York: W. W. Norton & Company.
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