Research Methodology on local and international market forces facing businesses

Research Methodology on local and international market forces facing businesses
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Background
Market forces in the economy in which a business operates always affect its profitability. It is paramount for a business to understand the industry aspects in the market it operates. This helps the business develop strategies that give it an upper hand than other operators in the market. Rivalry in any market is beneficial as it makes enterprises compete to give good services and products. However, stiff competition can also impact negatively on a business. A number of businesses end up winding their operations because of competitiveness in the market. This research paper seeks to establish how market forces can affect a business. Market forces include demand from buyers, pricing, competition, government policies, and business regulations. A business must be aware of the market forces that exist in any economy (Ryan and Jones, 2012).
This research paper seeks to analyze the market forces a business can be faced with in local and international markets. In the case of multinational business, it is important to understand the government and market policies. Seeking new markets is a way of expanding profitability and production. It is necessary for a business to understand regulations in a market before making an investment. Business rivals will always seek to outdo each other in order to maintain or gain significant market share. Through SWOT analysis, a business can establish its strengths and weaknesses. The analysis is also a step to knowing the threats and opportunities that exist in a market (Cox, 2010).
A business can only come up with informed decisions after doing a thorough research on market factors affecting it. Some factors can be internal while others can be external. An analysis on the overall market is also necessary. Carrying out a market analysis helps the business gain knowledge of important aspects that drive the market. Using Porter’s five analyses, a business can come up with vital information about the market and how to tackle setbacks in the market. A business can recruit a team of experts to analyze the market situation. Sometimes it may be necessary to involve a group of external consultants to carry out an unbiased market research. Without a deep understanding of the market, a business can find itself being phased out by rivals. It is also paramount to establish the strategies employed by rival companies. This helps a business to come up with measures to counter the rival’s competitiveness. The initial step is to understand the problem and then work towards suppressing or eliminating it (Epstein, 2010).
Literature Review
There are different kinds of markets each having its own unique characteristics. There are various factors affecting characteristics of a market. These factors include price, demand, supply, government policies among others. It is imperative for businessmen to understand the kind of market structure in which their premises operate. Understanding the market enables traders to make strategic decisions regarding the business. Consumers should also understand the market structure to enable them make informed decisions when seeking for goods and services.
In this market, demand, supply and price play a huge role in trading. Unlike monopoly, market, no trader controls the market operations. The products sold by the traders in this market are similar. The major variance is how the products are packaged, methods of marketing, and sale offers. The fact that the products can be substituted for another makes the traders equal. When one trader increases the price of products or services, the consumers seek other products that are relatively cheap. It is a risk for a trader to increase the price if other players in the market have kept their product prices low (Bohm, 2009).
When product supply is high, prices tend to reduce. A surplus in supply means that the availability of the product is higher than demand. Consequently, the traders reduce the price of products to attract more consumers. Where there is a low supply of a good in the market, consumers scramble for the available products. Traders take advantage of the situation by increasing the prices of their products. If the good is a necessity, the consumers have no choice but to buy. Unscrupulous businessmen sometimes hoard goods to create scarcity in the market. When goods are scarce, their prices are bound to go high (Henry, 2011)
A perfect competition market is characterized by free exit and entry. There are no restrictions in this market once a trader has obtained a permit to trade after registering the business. Traders are free to join the market and leave the market at their will. The market does not experience government intervention except that market forces control the business. If it is a new market, traders make abnormal profits, but this is short-lived when new entrants join the market. There are several advantages in of a free market. One of them is that there is a flow of information. All participants share information making it easy to gain access to important facts and current updates. Since the market has no barriers, then monopoly power does not exist. Every market player has the freedom to make a choice. The producers in the market cover opportunity cost since only average profit are made. In a perfect competition market, advertising is unnecessary. This is so because information is accessible to everyone. Some goods in the market are also unbranded. Since market players are so many, price of goods and services is relatively cheap. An example of perfect competition industry is the beauty and personal care. Companies like Procter and Gamble, Palmolive and Johnson and Johnson (Ryan and Jones, 2012).
An oligopoly is a market with few industries. The few industries control the market but act independently. The products in an oligopolistic market are differential. That means that the products or services may be similar but unique. Barriers of entry exist in this market majorly due to large scale economies. An example could be an airline company controlling accessibility of an airport. The initial set up the cost in this market are usually high thus deterring new entrants in the market.
As much as the firms are interdependent, the action of one company affects the others. For instance when one company lowers the price of its products, the other companies may have to consider a counteractive step. Reducing price always attracts consumers. The other companies might be forced to reduce their prices too or keep them constant. Keeping price constant can be influenced by the customer base that a firm has established. Strategies used by oligopolistic firms include colluding or competing. Firms can choose to collude to increase their profits or compete against each other. The decisions to collude or compete depend on the customer base, the influence of each firm among other things.
The most sensitive aspect of competition is pricing. Firms have to make decisions on whether to increase, lower or maintain a constant price. All the three can bear a negative or positive effect to the firm. An increase in price can make one firm lose customers to the rival firms. An increase in price can also result to profitability. Lowering prices can attract more customers than rivals or lead to losses. Oligopoly is also characterized by price stickiness. Once industry players determine a price, they have no choice but stick to that. This is because pursuing independent strategies can have negative effects on a firm. However, lowering the price by one firm may force the other firms to respond in the same manner. Lowering prices may lead to loss of market share and sales revenue. Advertising is always intensified by companies to attract customers
Sometimes oligopolies collude to increase profitability. One kind of collusion is overt collusion. In this kind of collusion, firms make agreement publicly. This can be in the form of trade associations. Another form of collusion is covert. In covert collusion, firms hide the details of their collusion agreement. This is a measure to avoid industry regulators. Firms can make covert collusions fix price in the market. Tacit collusion is where firms in the industry make an informal agreement which reduces a competition among them. The firms can choose their leader while others follow the chosen leader. There is usually no record to prove the agreement. This is done to conceal information from industry regulators.
Oligopolistic firms make abnormal profits since they are few in the market. The profits are used to create innovations which are beneficial to customers. Price stability in an oligopoly market aids consumers to plan their expenditure. Examples of Oligopolistic industries include American Airlines and Shell Petroleum Company.
In a monopoly structure, one firm controls the market. This is usually enabled by the fact that the firm owns an important resource or has patent rights to the production of a commodity. Government may also give a firm the right to be a monopoly. This may be in a case where services involved are risky or for security reasons. A monopoly may also be created when a number of firms merge together.
Monopolies are characterized by making abnormal profits since their products and services are exclusive. When there are no close substitutes for the product, the firm makes supernormal profits. If the products of a monopoly are exported, it can earn the host country high foreign exchange. Monopolies can also be inefficient in production. Since monopolies make huge profits, they may produce less than demanded. Monopolies reduce the sovereignty of consumers. The consumers are bound to buy the product. The consumer choices are restricted. Example of monopolies includes Microsoft Company and Apple Company.
In a monopolistic market, firms sell different products. Decisions made by the firms are independent of each other. A monopolistic market is free and has no entry barriers. Monopolistic market experiences four types of differentiation. One is product differentiation where products have different shapes, design, color and performance. There also exists a difference in marketing strategies. The products are advertised and packaged in a different manner. Human capital differentiation is another area of difference. The level of skills varies for employees of different firms in the market. Distribution channels used by firms in the market differ.
Since the products are different, a firm can charge high or low prices without affecting the industry. Advertising of products is mandatory since industry players are many and each has a unique product. A monopolistic competition is more efficient than a monopoly market. Differentiation policy creates diversity in the market.
Market Entry Barriers
The existence and non-existence of entry barriers can affect profitability of a market. In Perfect competition and monopolistic markets, there is no barrier to enter and leave the market. New entrants in the market increase competition for existing firms. A new entrant can bring on unique but substitutable products. Consumers' tastes and preferences can be influenced by the uniqueness of a product. With many firms in the market, profitability is reduced. The existing firms share the profits with the new entrants. Companies may be forced to increase advertisement expenditure. This does not guarantee that the firm's sales will consequently increase.
In monopoly market and oligopoly markets, a number of entry barriers exist. Some of the markets require high initial capital for operation. This limits the chances of new entrants into the market. Existing companies make abnormal profits as a result. In some cases, cost of advertising is high and limits firms from entering the market. The ownership of patent rights can also limit entrance of new firms in the market.
In markets where new entrants make their way, existing firms face stiff competition. The profits are shared among the firms in the market. In perfect and monopolistic competition, some firms may be forced out of the market. When a new entrant has a huge impact in the market, some firms may find themselves making little or no profit to sustain the business. If a firm has more expenditure than revenue due to a new entrant, the company may be forced to wind up.
Competitive pressure from new market may result to diversification of products. Firms are sometimes made to invest in new products because of a new market entrant. Diversification of product is common in monopolistic competition. In a monopoly market, entrant of a new market may have little effect since products may vary. In an oligopoly market, firms may merge to counter the competition of a new entrant.
Price Elasticity in the Markets
In a monopoly market, a decrease in price of products results increase in demand. Demand is elastic with price decrease. An increase in price does not affect demand in a monopoly market since substitutes are not available. In an oligopoly, demand is elastic for with the price increase. Products in this market can be substituted if one firm increases its price, consumers buy products from another firm. A reduce in price is however demand inelastic since every firm reduces price.
In a perfect competition, demand is elastic with price changes. An increase in price reduces demand as consumers buy from other firms. A decrease in price leads to high demand for products. In a monopolistic market, demand is inelastic with price change since goods are differentiated (Henry, 2011).
Role of Government in Markets
In perfect competition, the government plays no role in the market. It is a free market with no regulations. However, in monopoly markets, the government usually controls firms from exploiting consumers. The government also regulates the issuance of certificates of trade where business is risky. This is to control the number of firms in the business. In oligopoly markets, the government regulates the market to curb mergers. Mergers create reduce competition and make firms control the market. The government can also intervene in pricing. The government can give incentives to encourage growth in all markets. Incentives include loan facilities and buying shares.
Government taxes also influence the course a new venture can take. If the government taxes products or service that the new price is ready to offer, then the venture might seek an alternative location. Taxes will increase the price of the commodity hence consumers might avoid buying the same commodity. Taxes also decrease profitability of a business. It is not wise to venture in a market where profits will be relatively low, or production will be hindered. Interest rates can also impact the economy negatively or positively. When the interest rates are high, this affects the value of the currency thus limiting sales, exports and imports. This is a negative economic environment for a new business venture.
Effect of International Trade
The per capita income also affects consumer spending habits. In countries where the per capita income is high, consumers spend more, and that is encouraging for new business enterprises. Conversely, in countries with low domestic income customers tend to spend a little money because their budgets are limited. Such economies are not suitable for new business ventures. Growth and size of the economy also influences market opportunities. Gross domestic product is commodities and services produced by a country within a specific period of time. Variance in the GDP of a country is the pointer of economic growth and activity. The United States is considered to be the world's largest economy; however, it has recorded a relatively low growth in GDP recently. Countries like China and others in Western Europe have surpassed the United States by registering high GDP consistently. New business venture can thrive and excel in countries that record GDP growth.
The political environment in a country can influence the market performance for businesses in that environment. Political factors can favor or can at times cause the closure of a business. When the government gives subsidies to producers, it increases the productivity of these firms and consequently increases profitability. Countries like China have backed off regulated market system to a free market system. This has made investors to start businesses in China and other countries that have a free market system. Regulated markets tend to lower productivity and profitability of business ventures.
Political sanctions and embargoes can eliminate various market opportunities and limit investment. When the World Trade Organization declared embargoes against Libya, Vietnam, South Africa and Iraq, many investors pulled out of these countries. This impacted negatively on the economy of these countries. After the embargo lift in Vietnam, companies like Coca-Cola, American Express and Kodak ventured their businesses in Vietnam.
There are international laws, local legislation and state laws that govern business environment across the world. The laws are usually ones that promote competition or ones that protect consumers. A business venture should beware of specific laws in a market that it intends to venture. In 1992, a United States Federal Court found American Airlines not guilty of unfair competition. The Airline had slashed the fare to attract customers. Other Airlines suffered by losing customers to American Airlines. An Arkansas City state Court gave a guilty verdict on Wal-Mart. The business was selling pharmaceutical products at a low price in a bid to eliminate its competitors. Consumer protection laws are usually passed to protect consumers. False information or products perceived to be harmful are some of the things consumers are offered protection. Some of these laws are a setback to marketing, especially ones that prohibit advertisements to appear on television programs being watched by children.
In Europe, a business must get approval of the International Organization for Standardization (ISO) to thrive in business. This is a regulatory measure connoted by the European Union (EU) to ensure that businesses operate within world standards. This is a limiting factor for businesses who have not become ISO certified to venture into the European...