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Auto Economic influences play a major role in the success of a company especially when consumers are hesitant on spending or investing their disposable income or have many choices of who they will purchase from. Demand shifts influence profitability, which has a direct effect on the company’s ability to remain successful.
Companies must carefully analyze the industry within they fall and understand how economic influences will affect their functions and infrastructure. Big Drive Auto Company is a major player in the market of automobile dealers in its market area. With many locations, including Canada, Big Drive Auto is an automobile company that sells many types of automobiles and automotive parts. What has made the company so successful is that Big Drive Auto has always attempted to stay on top of what its competitors are doing and how they are doing it. Management is always scanning the macroeconomic environment for signals that may help Big Drive Auto better plan their business” (Big Drive Auto Scenario, 2010). After examining the data the company has maintained on its volume of sales for its various lines of business, the company determined it needed recommendations from experts. These recommendations would include suggestions on pricing strategies, non-price barriers to entry, and product differentiation. Pricing Strategy Whether a company is attempting to find its strengths to maintain or build leverage the company must have a pricing strategy. In a competitive market, the seller must consider the four “P”s of marketing: price, product, place, and promotion. Firms must develop pricing strategies to accomplish marketing objectives based on their assessment of market conditions (e. g. , forecasts of supply and demand) and the economic condition of the business entity” (Review seller’s market, 2010). Big Drive Auto is one of many firms that sell automobiles in a large market. Because Big Drive Auto exists in a “situation in which a particular market is controlled by a small group of firms” the company is an oligopoly type market structure (Oligopoly, 2010).
Unlike a monopoly market, which consists of only one firm in its market, an oligopoly market structure involves more than one firm. Of the two types of oligopolies that exist, homogeneous and differentiated, Big Drive Auto is a differentiated oligopoly because they “typically engage in considerable non-price competition supported by heavy advertising” (McConnell, et al. , 2010). “In profit-maximization pricing, the seller assumes that demand falls as prices increase, and grows as prices decrease.
A firm using this strategy carefully analyzes the market to find the combination of price per unit and quantity of sales that maximizes profit. When employing this strategy, the seller considers the following points: • Is demand sensitive to price changes? • As price increases, does demand decrease? • As price decreases, does demand increase? • What is the point of profit maximization? This is determined through analysis of the relationship between price and demand. However, this pricing strategy is most effective in situations where: • Price is an important marketing factor affecting demand. Competitors react relatively slowly to price changes. • Suppliers and dealers react relatively slowly to price changes. • Actual relationships between price and customer demand can be effectively estimated” (Review seller’s market, 2010). It is recommended that Big Drive Auto follow this pricing strategy because the company is capable of determining their own prices for the products they offer. Big Drive examines their competition’s pricing strategies and creates their product pricing according to what price the market is currently selling same-like products for.
Big Drive Auto further examines customer reactions to price, product, and marketing changes. Because the company operates in an oligopoly market structure the company is very aware, they have to be very strategic when pricing their automobiles and other products. When it comes to pricing Big Drive Auto actually tries to be competitive instead of undermining their competitors because they know that using the profit-maximization strategy is least effective when the market reacts rapidly to changes in the marketing mix.
Big Drive Auto, like other firms, has visions of expanding more however to increase their number of locations the company would have to determine product pricing based on the new location, taxes, mean incomes for consumers, and how many competitors are currently saturated in that particular market area. Big Drive Auto strives to keep their prices reasonable and within the selling market of its competitors to sort of offset any type of a price war between them. One alternative is to band together with other competitors to discuss market strategy options.
One of those options could be to “reach an agreement to fix prices, divide up the market, or otherwise restrict competition among themselves” (McConnell, et. al. , 2009, p. 236). This option could cease any kind of price war from happening and keep prices competitive with all the oligopoly firms. Non-pricing Barriers to Entry and Product Differentiation Non-pricing barriers to entry exist among automobile sales, automobile products as well as automobile deals. The included barriers consist of marketing strategies, product differentiation, advertisement, economies of scale, and non-price competition.
According to Business Dictionary “barriers to entry means economic, procedural, regulatory, or technological factors that obstruct or restrict entry of new firms into an industry or market” (2010, para. 1). Using these barriers helps to improve sales that increase profits and the business of Big Drive Auto. The company must “review acquisition plans and analyze specifications to identify and where possible, remove “barriers” to full and open competition. They must also review justifications for other than full and open competition.
From a pricing standpoint, they can be valuable allies in maximizing price competition” (Review seller’s market, 2010). Marketing strategies Barriers to entry consist of certain obstacles in a particular market that an industry and business will find hard to get into. The marketing strategy that Big Drive Auto recommends involves improving dependability and faithfulness toward the company. Continuing to increase its customer service and baseline helps Big Drive Auto to continue its service of customer reliability toward its products.
When the straightforwardness of entry occurs, the industries, and resources of competitive benefit lessen promptly. If an industry provides a difficulty of entry, then the competitive benefit last longer with more competition is involved. Customer reliability helps provide rewards to new customers as well as reduce the costs for marketing strategies. Thus it is always important for companies like Big Drive Auto to remember that their marketing system affects their pricing structure. Advertisement Advertisement helps a business raise its product line and increase brand recognition as well as customer knowledge.
If the advertising campaign is successful, a business can increase its marketing sales through the help of advertisement tactics. In oligopolies, advertisement creates features of improvement, quality control, and product identification. Through advertisement, a business spends its time advertising its company and products, such as Big Drive Auto’s vehicles and parts. Improving the quality and maintenance of each vehicle after a completed sale may help a company advertise a better loyalty and commitment service for each customer.
In addition, advertising for a better quality of product, introducing a new product, or adding loyalty points may increase company sales and help the company to remain competitive with its competitors. Advertisement adds characteristics to the products being offered. Economies of Scale The cost advantages that a company obtains because of expansion are referred to as increasing returns to scale or economies of scale. The only time economies of scale take place primarily is the time a manufacture’s quantity increases and there is a decrease of the products unit cost.
For example when the economy of scale occurred within Big Drive Auto, this forced other competitors to compete at a higher level or come to an agreement of a cost drawback on a smaller scale. So economies of scale will cause a type of situation to occur where the cost of producing an additional unit of output of a product will decrease as the volume of other outputs increases. Larger companies, such as Big Drive Auto, may lower its production costs to avoid a destructive loss in production and sales. Non- price competition Non-price competition relies on the type of product and sale offered.
When prices remain inflexible, the company creates less incentive to changing the prices of the products. Although advertising sometimes creates maximum profit benefits, the objective that Big Drive Auto should try to reach consist of increasing its service line as well as expanding its sales revenue. A non-price competition occurs when the company concentrates its time to expand the company’s profits and sales without the use of price approaches. Product Differentiate Through product differentiation, a company may use product classification to restrict competition.
Big Drive Auto uses product differentiation to appeal to its customers during and after the sale of the vehicles. Product differentiation creates a high-level of demand, which closely associates with elevated levels of competition. Through product differentiation, a company may use product classification to restrict market competition. In addition, Big Drive Auto should use product differentiation to provide customers with effective and resourceful products and exceptional service during and after the sale of its vehicles.
While this strategy can be applied in very competitive situations, it has most effective application in markets where there is some degree of product differentiation. For example General Motors has a history of pricing automobiles to achieve 15 to 20 % return-on-investment whereas public utility company’s prices are typically set based on prescribed rates of return. In order for Big Drive to continue its successful sales trend there are several points for the company to consider. First, Big Drive Auto should make sure that their vehicles are still accommodating the needs of their target market.
For example, the younger demographic will likely buy a vehicle that is visually appealing but still energy efficient and can provide a high mile-per-gallon ratio. They may also want a vehicle that is technologically advanced and includes features such as a GPS, IPod/mp3 connection, or a factory installed audio/theater system. A larger family will need extra seating with the efficiency of smaller vehicle and high safety features. Remembering their target customers is essential in product differentiation. Second, the customers will likely stay with the company if they can go back to their riginal seller for maintaining their vehicle needs. They currently are able service their vehicles when it comes to concerning tires, motor oil, and coolant, service, and parts. However, these are not the only extras that come with purchasing a new or used vehicle. They may want to consider implementing an accessories department in their servicing business. Here they can purchase name-branded alarm systems, tinting, etc. When there is a low-level of differentiation, then there follows a high rivalry; developing a brand can differentiate between these companies. Third, the company should differentiate their sales team.
Having a variety of personalities may seem difficult to manage but each individual has something to offer and while one personality might not mesh well with a buyer, there is always another to help pull off that sale or customer service. Sometimes it is the most intangible aspects that make a difference. Anyone can buy a car from a dealership, but buying from a dealership that hires individuals who share the same values and views as the buyer makes the company profitable. They are more likely to refer the dealership and word-of-mouth is one of the best and least expensive methods of advertisement. Evidence to Support These Recommendations
Not only can competition put a wrench on company’s strategic plans but also economic conditions can help deter if the company will stay competitive and in business. Economic conditions forces companies like Bid Drive Auto to review their economic future. Because Big Drive Auto offers not only automobiles but also other automobile services, they must always be aware of how economic conditions can affect their market share and bottom line. For the past 10 years Big Drive Auto has kept data on its volume of sales for many products and the services they offer. The company maintained data over the last 10 years for the following activities:
Even after noticing some commonality in the data’s activity over the years the data shows the company still needed to determine different avenues the company could take to increase productivity while also increasing its market share and decreasing their cost. These trends graphed out explicitly gives evidence on why Big Drive Auto should support the pricing strategy, non-price barriers and product differentiation recommendations. Conclusion Market competition can be fierce. In an oligopoly market structure, it is important to be always aware of what competitors are doing and what they have to do in the future to stay or remain successful.
Sometimes changing your company’s vision is needed and this is no different to what Big Drive Auto had to do. In examining the data Big Drive Auto has stored over the past 10 years Big Drive Auto knew it had to make changes to keep its customers interested in purchasing from them. These changes included adapting a new pricing strategy, finding ways to include non-price barriers of entry and finally suggestive ways of product differentiation techniques. References Barriers to entry. BusinessDictionary. com. Retrieved October 03, 2010, from BusinessDictionary. com website: http://www. businessdictionary. om/definition/barriers-to-entry. html. Big Drive Auto Scenario, (2010). Retrieved on October 1, 2010, from University of Phoenix online classroom McConnell, C. R. , Brue, S. L. , & Flynn, S. M. (2009). Economics. Principles, Problems, and Policies (18th ed. ). Retrieved from the University of Phoenix eBook Collection database. Oligopoly. (2010). Retrieved on October 2, 2010, from the Investopia Web site: http://www. investopedia. com/terms/o/oligopoly. asp. Review seller’s market, 2010. Retrieved on October 4, 2010, from http://www. acq. osd. mil/dpap/cpf/docs/contract_pricing_finance_guide/vol1_intro. pdf.