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Several concerns were raised. One was the difference between AT Kearney’s individualistic, entrepreneurial style and the more bureaucratic approach of EDS. Another concern was the alignment of incentives when combining the high-rewards culture of a partnership with the bottom-line-focused mentality of a big publicly quoted company.
CASE STUDY 1
The type of merger between Electronic Data System (EDS) and AT Kearney is called Forward vertical merger. Forward vertical merger is when two or more companies combines together in the same industry but different field or when two companies producing goods and services for a product. Electronic data system, the US information technology group, brought AT Kearney, the global strategy consultancy firm in a deal worth $96m. Electronic data system was firm involving producing information technology equipment’s bought AT Kearney an IT consultancy firm.
Despite the challenges AT Kearney faces, they enjoyed highest revenues of $1.3b in 2000. The likely reasons for the high revenue are:
Despite such cultural clashes, the first five years were judged a financial success as AT Kearney was able to take full advantage of the rapidly expanding management-consulting market. AT Kearney’s revenues tripled and in 2000 it recorded its highest revenues ever at $1.3bn.
Despite the challenges AT Kearney faces, they enjoyed highest revenues of $1.3b in 2000. The likely reasons are:
Reducing cost of production:
Tremendous managerial changes came when Richard Brown appointed as Chief Executive at EDS. He believed reducing excess labour cost will have positive impact on the company’s profit, therefore with introducing of this new business model worked positively and could be the result of higher revenue in 2000.
Combination of AT Kearney back office function with EDS’s:
Another vital decision Richard took was to bring many of T Kearney back office functions under one roof of EDS’s as this could result in reducing overhead costs such as rent, insurance, electricity, excess jobs, etc. at great extent .
A free merger:
Merging two companies does not exchange any cash between each other. Merging is usually done in free of cost; this is a likely reason for the high revenue made by the AT Kearney despites challenges faced to them.
By mid-2005 AT kearneys revenue had fallen for 11 straight quarters and it had been unprofitable for the last quarter of 2004 and the first two of 2005, amounting to loss of $36m.
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High fixed cost
Fixed cost can help manage their business more effectively. Business with high fixed cost will have different strategies for managing business than those with high variable cost. Expenses are either fixed or variable cost. Fixed costs are the expenses that are earned, how much is sold or how much is produced.
Dis economies of scale
Dis economies of scale is that a firm may become less efficient if it is become too large. The additional costs of becoming too large are called Dis economies of scale. AT Kearney face this problem because all outcome of the problem of managing larger worker force.
Quality of labor
The quality of labor force depends on education and training. But AT Kearney has lack of labor quality because of that the AT Kearney made a huge loss in the last quarter of 2004.
According to the diagram the total cost of MR Kerney may raise from AR due to inefficiency, changes in the autonomy and remuneration strategies that lead miss management leading to a loss of 36m.
There might be a falling demand for its products or services that lead a huge economic loss to the firm. The demand and marginal revenue curve go down as according to diagram demand (D) and marginal revenue (MR) fall to AR and MR.so it is a loss for the company.
In conclusion AT Kerney suffered a loss of 36m due to growth of it size that became difficult to manage the company leading average cost riser falling the demand and average revenue. When a company grows larger, diseconomies of scale can be experienced.
Larger company may be able to exploit economies of scale more fully.
This occurs when Electronic Data System (EDS) and AT Kearney increased output can reduce average costs.
Mergers can help firms deal with the threat of multinationals and compete on an international scale. Larger company will enjoy a greater degree of market power, and will therefore be better able to exploit its market.
Merging interrelated firms such as EDS and AT Kerney can create innovation in manufacturing, distribution, etc. Before, EDS was only manufacturing IT related products, however, now they merging with AT Kerney provide consultancy services.
Mergers may allow greater investment in R &D:
This is because the firm will have more profit which can be used to finance risky investment. This can lead to a better quality of goods for consumers.
Redundancies can be earned if they can be employed more efficiency
The diversification of products and services of AT Kearney business may be able to offer their goods or services which they can sell through their own distribution channel. This will gain benefit from firms.
Increasing market share
Mergers help in increasing the market share of the merged company. This rise in the market share is achieved by the providing a sufficient supply of goods as needed by consumers. And entering in to an agreement with the clients for continuous supply of goods and services.
CASE STUDY 2
Price elasticity of supply measures the relationship between change in quantity supplied and a change in price. Coffee is a natural factor. It takes many days to harvest. If supply is elastic, producers can increase output without a rise in cost or a time delay. If a supply is inelastic, firms find it hard to change .production in a given period of time.
Price elasticity of supply for coffee is likely to change over time because if the price of coffee is falling producers from Brazil, Colombia and Ethiopia are unable to reduce the supply in order to increase the price coffee. Therefore, in short run the supply will be inelastic for coffee. The short run is a period of time in which the quantity of the other inputs can be varied. In long run the price of coffee is falling so the farmers can shift some other products and robusta. So they can reduce the supply. And it is elastic. Because Producer decides to reduce price to increase sales
According to above diagram (S) shows the inelastic supply for the coffee in short run. In short run the supply for coffee may not be reduced as the crops already harvested and they may not stop or freeze the cultivation.
However, in the long run supplies can reduce the supply by reducing the productivity as the diagram shows quantity Q is reduced to Q1 in the long run.
The strongest demand for coffee, some suppliers are unhappy. In Brazil, which produces a third of the words coffee beans, farmers are striking over falling prices and burning sacks of coffee in protest. Most of the beans produced in Brazil are of the Arabica variety. The reason is that production of coffee and of cheaper robusta beans in particular, is booming. Because of this American, European and Japanese drinkers consume more than half the words coffee is flat and the recession has squeezed the profits of big food companies such as Nestle and Kraft.
As the supply for the coffee is inelastic in the short run, suppliers are unable to control the supply when the price of coffee is falling tremendously. The main reasons for suppliers are unable to control is that coffee is to be harvest from the farm lands, a fall in the price will not have much impact to the supply that’s why it is inelastic in the short run.
According to above diagram, the supply for coffee remains constant (inelastic) and the price for coffee falloff from P to P1.
The effect of falling price of coffee for the suppliers wills loss. They have taken to blending cheaper robusta beans in to their products to maintain their margins, causing the price of robusta to fall more slowly that that arabiana. Arabiana growers falling prices have been accompanied by rising cost. Many Brazilian and Colombian farmers invested to boost production of arabiana in response to the high prices which has added to the oversupply and further depressed prices. That’s why Brazil’s farmers are striking and are demanding more production, in the form fatter subsidies from the state.
Due to oversupply of coffee in the market, the price for the coffee has been falling extremely reducing the profit that the suppliers have been enjoying. Supply for the coffee may not be controlled to increase the price of the coffee in the market as coffee is harvest and therefore, in the short run the supply will be inelastic.
Arabica coffee is inferior good. Because it has negative income elasticity of demand. When demand falls as income rise.
Robusta coffee is normal good because it has positive income elasticity of demand so as consumer’s income rise more is demand in each price. There is an outward shift of the demand curve. Goods for which demand increase when income increase and falls when income decrease, but price remains constant.
Name of the business Total assets as at 31st December 2004
HSBC 662,710 24.61092
Royal bank of Scotland 538,467 21.66809
Barclays banks 522,089 19.38871
HBOS 442,881 16.44718
Lloyds TSB 279,843 10.39247
Standard chartered 73,543 2.73115
Alliance & Leicester 49,967 1.855614
Northern Rock 42,790 1.589083
Bradford & Bingley 35,458 1.316796
Largest UK banks in 2004
The Concentration ratio is the percent of combined production of the leading four or eight firms in the industry.
Sum of the market share of leading firms *100%
Total market size
HSBC: 662710⁄ (26927248*100=24.61092)
Royal bank of Scotland: 583467⁄ (26927248*100=21.66809)
Barclay’s banks: 522089⁄ (26927248*100=19.38871)
HBOS: 442881⁄ (26927248*100=16.44718)
Lloyds TSB 279843⁄ (26927248*100=10.39247)
Standard chartered: 73543⁄ (26927248*100=2.73115)
Alliance & Leicester: 49967⁄ (26927248*100=1.855614)
Northern Rock 42790⁄ (26927248*100=1.589083)
Bradford & Bingley: 35458⁄ (26927248*100=1.316796)
The proportion of the total output in an industry is produced by the four largest firms in an industry. This is one of the two common concentration ratios. The four firm concentration ratios is commonly used to indicate the degree to which an industry is oligopolistic and the extent of market control held by the four largest firm in the industry.
The four firm concentration ratios are calculated based on the market share of the largest firm in the industry. A four firm concentration ratios over 82 is 82% of industry output produced by the four largest firms is a good indication of oligopoly and that these four firms have significant market control. Based on the above data it is clearly understood that the Banks of UK in 2004 had an oligopoly market completion.
High, medium and low
Concentration ratios are designed to measure industry concentration, and by inference the degree of market control. Concentration ratios range from a low of 0 percent to a high of 100 percent. At the low end, a 0 percent concentration ratio indicates an extremely competitive market. At the high end, a 100 percent concentration ratio means an extremely concentrated oligopoly or even monopoly if the one firm concentration ratio is 100 percent. Between these two extreme, concentration ratio can fall into low, medium and high concentration. (Riley, Market structure summary, 2012)
A concentration ratio of 0 to 50 percent is commonly interpreted as an industry with low concentration. Monopolistic competition falls into the bottom of this with oligopoly emerging near the upper end. (Riley, Market structure summary, 2012)
A concentration ratio of 50to 80 percent is considered an industry with medium concentration.
An industry with concentration ratio of 80 to 100 percent is viewed as highly concentrated. Government regulators are usually most concerned with industries falling in to this category. (Riley, Market structure summary, 2012)
Market structure refers to the physical characteristic of the market within which firms interact. It the number of firms in the market and the barriers to industry. (Riley, Market structure summary, 2012)
Monopolistic competition is a market structure in which there are many firms selling differentiated products. While the goods produced by the firms in the industry are similar, slight differences often exist. As such, firms operating in monopolistic competition are extremely competitive but each has a small degree of market control.
An Oligopoly is a market dominated by a few large suppliers. The degree of market concentration is very high. Therefore a large percentage of the market is taken up by the leading firms. Another important characteristic of an Oligopoly is interdependence between firms. This means that each firm must take into account the likely reaction of other firms in the market when making ricing and investment decisions. This creates uncertainly in such markets.
Characteristics of Oligopoly
One of the key characteristics of Oligopoly is Interdependence. Any change in the price and other economic factors by a firm will also bring about a change in the pricing policy of the rivals, as competition is limited. Apart from taking into account the demand for its products or cost of the products, Oligopoly firm also consider the reactions of other rival firms to change in their price and output policies.
Entry barriers help existing firms to exercise market control. Government restrictions, copyrights and patent issues, huge setup cost and undivided resource ownership are common barriers to entry. This particular feature also helps in differentiating an Oligopolistic market from a monopolistic market, as new firms can enter a monopolistic market and reduce dominance of the large firms.
Advertising and marketing cost
Under an Oligopolistic market, firms undertake aggressive marketing and advertising initiatives in order to gain greater market share. This is not only generates publicity for the firms products and service but also helps to increase its sales.
Rigidity of price
Oligopoly market has a rigid price structure. Changes in the price of the products or service hardly take place in an Oligopolistic market. Any production in the price by one firm is counter attacked by other competitive firms who also tend to undercut their prices. To avoid such
Situation, usually, firms avoid price cut or make a price related decision in consultation with other firms.
Non price competition
Oligopoly market follows a tough non-price competition. The competition exists in the form of loyalty schemes, advertisements, product differentiation, research and development, marketing, packaging, manufacturing products which are enhanced version of rival products.
Oligopolistic firms maximize their profits as the quantity where the rising marginal cost equal or near to the marginal revenue. This is achieved when the price of the product is greater than the average variable cost.
Mergers or collaboration are a common feature of Oligopolistic competition. Merging of two or more competitors helps them to act as one dominant entity in the market. This is also increasing their market share. It has a more benefit where they can collectively achieve greater economies of scale as well as reduce the competition. The firm which forms as a result of a merger will dominate and control market supply and prices of other smaller firms.
Oligopoly firms may assure to enjoy perfect knowledge of various economic factors and the actions of the competitors as only a few, large players exist. There are chances that they are full aware of their own cost and other business related details, however they may not be sure about the inter-firm information.
A situation in which two companies owns all or nearly all the market for a given product or service. A duopoly can have the same impact on the market as a monopoly if the two players understand on price or output.
Monopoly is the market structure in which there is only one product/seller for a product. Entry into such a market is restricted due to high cost or other obstacles.
Price discrimination is the practice of charging different price for the same good or service. There are three main degree of price discrimination. It includes:
Time: charge different prices at different time’s example: IPhone.
Place: price differ according to the location of the buyer example: selling IPhone for local and international.
Income: income divided into different groups. Example: doctors and lawyers.
Types of price discrimination.
First degree price discrimination
Second degree price discrimination
Third degree price discrimination
First degree price discrimination
The monopolist charges a different price equal to the maximum amount for each unit of the commodity from each consumer separately. The price of each unit is equal to its demand price so that the consumer is unable to enjoy any consumer surplus. Such prices are charged by doctors, lawyers etc. Perfect price discrimination occurs when the producer is able to charge every consumer the price that is willing to pay; when this is applied customer surplus will be equal to zero. (Riley, Price discrimination, 2012)
Second degree price discrimination
The monopolist divides his market into different groups of customers and charges each group highest price which the marginal consumer belonging to that group is willing to pay. This type of price discrimination happens selling the remaining stock at lower price than normal price.
Example: selling air tickets at a low price (Riley, Price discrimination, 2012)
The firm will change their profit maximizing price p1 and producing quantity Q1. The firm will have a large amount of extra capacity; this is equal to the differences between Q1 and full capacity. they will be willing to sell this volume for any price so long as it covers the marginal cost of producing, as it will be the contributing to its fixed costs or profits.
Third degree price discrimination
The monopolist divides the entire market into few sub-markets and charges different prices for the same commodity in different sub-markets. The division here is among classes of consumers and not among individual consumers. The segment with a less elastic demand pays a higher price than the segment with more elastic demand. For example, movie theaters, railways typically charge lower price to senior citizens, students. (Riley, Price discrimination, 2012)
A business organization, such as corporation, limited liability or partnership. Firms are usually associated with business organizations that practice law, but can be used for a wide variety or business operation units.
Objectives of a firm
Profit maximization is the process of obtaining the highest level of profit through the production and sales of goods and services. This is the guiding principle underlying the analysis of short run production by a firm. In a particular economic analysis is assumed that firms undertake actions and make the decision that increase profit. Profit is the differences between the total revenue a firm receives from selling output and the total cost of producing that output. Profit maximization means that a firm seeks the production level that generates the greatest difference between total revenue and total cost (Riley, Objectives of Firms, 2012)
Revenue maximization is the extra amount of money produce in a firm. Firm may wish to maximize their sales revenue, to do this they will continue to produce until the marginal revenue is equal to zero. This is because while the marginal revenue is positive, total revenue will increase when output rises. (Riley, Objectives of Firms, 2012)
Sales maximization is a firm may wish to maximize its sales in order to gain as large a share of the market as possible. This goal would have to be pursued subject to the constraint of at least normal economic profit. The firm will lower its price until the point where AC=AR. (Riley, Objectives of Firms, 2012)
Riley, G. (2012, September 23). Market structure summary. Retrieved october 15, 2013, from http://www.tutor2u.net/economics/revision-notes/a2-micro-market-structures-summary.html: http://www.tutor2u.net/economics/revision-notes/a2-micro-market-structures-summary.html
Riley, G. (2012, September 23). Objectives of Firms. Retrieved october 19, 2013, from http://www.tutor2u.net/economics/revision-notes/a2-micro-business-objectives.html: http://www.tutor2u.net/economics/revision-notes/a2-micro-business-objectives.html
Riley, G. (2012, September 23). Price discrimination. Retrieved october 18, 2013, from http://tutor2u.net/economics/revision-notes/a2-micro-price-discrimination.html: http://tutor2u.net/economics/revision-notes/a2-micro-price-discrimination.html
Riley, G. (2012, september 12). tutor2u. Retrieved september 12, 2013, from http://www.tutor2u.net/economics/revision-notes/as-markets-income-elasticity-of-demand.html: http://www.tutor2u.net/economics/revision-notes/as-markets-income-elasticity-of-demand.html