Good Example Of Report On Long-Term Investment Decisions
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The operation of a firm is affected by a number of exogenous and endogenous factors. The pricing strategy of the firm is an important decision which depends on a number of issues like the elasticity of demand, the degree of market competition, the cost and supply conditions, the existing tax rates, demand potential and such others. The marketing strategies followed by the firm in the form of advertisement campaigns, new innovations, direct sales promotion measures are also important in determining the profitability of the firm and its ability to maintain its market power in the long-run. The production technology, internal administration, personnel management are also areas which have to be focused on for the profitable operation of the firm. The production technology and internal atmosphere are the endogenous factors that affect the cost of production of the firm which in turn affects its competitiveness in the market. Exogenous factors like the input prices and the government decisions on taxes also affect a firm’s costs which it has to combat using the factors which is under its control. In this article we discuss some of the internal and external factors that affect the firm’s operation, profitability and competitiveness and the corresponding strategies that the firm may follow under various challenging situations. We discuss all the issues from the perspective of the low-calorie microwaveable frozen food company that we have analyzed in the previous two occasions. In the first occasion we have analyzed the demand and supply conditions. In the second case we have analyzed the market situation and the corresponding pricing and output decisions of the firm. Here we consider some internal and external factors and the long-term strategy that the firm should follow under various challenging situation that it faces. We begin with a situation of rising input prices then we discuss the effects of government policies. These two issues are followed by the discussion on the effect of government regulation on the market. The last two issues that we deal with are the origin of internal conflicts and the ways and means by which the firm can tackle such internal strife.
The Situation of Rising Prices
A situation of rising prices can be triggered from several issues. The prices of inputs like agricultural raw materials may rise. The prices of intermediate goods that the firms purchases as raw materials from other firms, like packaging materials, preservatives etc., may also rise. Labor wages may also rise as result of government regulations or due to labor union demand for higher wages. Scarcity of skilled labor may also raise the salaries offered to the skilled personnel.
The input which is undergoing a rising price situation may be a very specific input. For example if the price of poultry products is increasing the firm cannot think of any alternative inputs for its frozen chicken dishes. In that case the form has to minimize the cost on other inputs and find out some innovative way to reduce its production cost through technological improvements. If the price of such an input is increasing which is not very specific in the firm’s production such as the price of packaging material, the firm may use some alternative materials which is cheaper but serves a similar purpose. If the cause of the rising cost is the rising wages the firm has to use its existing labor force judiciously and find out proper technique to handle production with less amount of labor usage.
The government takes up a number of policy measures to control the economy of the country. The two major instruments of the government’s economic policies include the Fiscal Policy and the Monetary Policy. The fiscal policy instruments include the taxes, subsidies, income policies, government expenditures, etc. If the government raises the sales tax the firm has to increase the price of the product to some extent to shift a part of the burden of the tax on the consumers. In case of the firm we are discussing here, the elasticity is low so the firm can pass almost the entire burden of the tax on the consumers. The elasticity being low the demand for the product will not be reduced much. If the government imposes a profit tax the firm’s profit will be reduced as it has to pay the tax prom its profit. But in our case we have seen that the firm faces a situation of loss. If the firm receives some subsidy as a health food producer it stands to gain and can increase its scale of operation from the subsidy it receives.
The government also uses monetary instruments that affect the operation of the firm. The monetary instruments include the change in the rate of interest, the open market operations etc. that regulates the cash and credit flow in the economy. During inflation the central bank tends to increase the rate of interest. With higher rate of interest, investments fall. The firms are faced with capital crunch. Production is reduced. If the rate of interest is low investments increase which in turn raises production.
On the other hand if the government expenditure increases the aggregate demand increases, the income of the individuals increase. With increase in income, the demand for the goods in the economy increases. We have seen for out form that the income elasticity is quite high. If the income increases the demand for the good will increase. The demand curve will shift upwards and the firm will earn more revenues.
Often the wage laws of the government affect the firms adversely. The firms cost on labor rises and so the firm faces a situation of loss. Ultimately the firm has to lay-off its workers to cut on cost.
Government Regulation on the Market
The government has to intervene even in a market economy when market imperfections penetrate and affects the parties involved in the market or is left out of the market system. For strategic products like fuel, telecommunication, food crops, medical services, the government has to often interfere into the working of the market to ensure the efficient use of the market and also to ensure that the good is efficiently distributed. If the price of the good is prohibitively high then the low income group is left out of the market. If it is an essential commodity then the government has to intervene so that the good comes within the reach of every individual in the economy. In such cases the government may impose a price ceiling so that the price of the good does not exceed a certain limit. Often for agricultural products it so happens that during a bumper crop the price of the product falls. The cultivators are affected as they may run into losses. In such a situation the government has to come into the rescue by imposing a price floor so that the price does not fall below a given limit and protects the interest of the producers.
The government also intervenes in a situation when the a firm or group of firms assumes considerable amount of monopoly power and restricts the entry and operation of other firms in the industry. Such a practice by the monopoly firms also affects the consumers as they have to pay a higher price than a competitive market would have offered. In such a situation the government can take punitive action against the erring firms through the legal system. The anti-trust cases bear instances to such interventions by the government.
The single ownership firm aims at maximization of profit. But the transition of the firms to joint stock companies has made the firm associated with a number of stakeholders. The stockholders are the owners of the company and are interested in higher profits as that increases the returns on stocks. The managers on the other hand are interested in sales promotion as that gives proves their success as mangers and popularizes the brand. The managers are more interested in increasing the perks and incentives of the managerial team. This is a sort of principal-agent problem. As we know that the author of a book is more interested in the number of copies sold but the publisher wants to limit the number of copies and increase the price for higher profits. The firm’s plan to expand its operations through investments will be faced with similar problem.
Solution of the Principal-Agent Conflict
We know that the principal-agent conflict did not exist in a single owner firm where the owner and the manger was the same person. In case of today’s corporate houses also the conflict can be solved by making the managers stockholders of the same firm. The work incentive can come in the form of shares given to the managers. In such a situation the managers will be interested in increasing the profit along with the expansion plans.
In this article we have discussed some of the internal and external conflicts and problems that a firm has to face and the ways of tackling such problems. We have pondered upon only a handful of possible challenges that a firm may face. In the real life a firm faces a multitude of conflicts and challenges that requires a complex set of strategies. A single strategy at any pont of time cannot provide the right solution. It is the interaction of a number of moves that gives the firm a stable position in the long-term market setting.
Bebchuk, L. (December 2004). The Case for Increasing Shareholder Power. Harvard Law Review.
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.
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