The Scope of Managerial Economics
Four Characteristics of a Good Business
The remarkable perspective concerning the characteristics of an astonishing and good business is given by the legendary Wall Street investors namely, Rowe and Buffett. Price founded the Baltimore-based Rowe and Associates Company, which is one of the largest no-load mutual fund companies in the United States. Rowe is also called the father of the growth stock theory of investment. According to Rowe, many of the attractive and interesting growth stocks are characterized with low cost of labor, high degree of research as well as development of goods and new markets, superior rates of returns on the stockholder’s equity (ROE), high profit margins, quick earnings per share growth, and lack of aggressive rivalry among organizations.
Buffett, on the other hand, is the billionaire and head of Berkshire Hathaway Company, who looks for organizations that possesses strong and high levels of franchise and ones that enjoy high levels of pricing flexibility, increased return on stockholders’ equity, and elevated levels of cash flows. Moreover, Buffett also looks for companies that are owner oriented in terms of management, and which have high earning prediction, which are not naturally targeted by regulation. Both Rowe and Buffett have reaped tremendously from this kind of investments.
In order to apply both Rowe and Buffett’s investment criteria in a more successful manner, business entities require managers and investors who are highly sensitive to the fundamental demographic as well as economic patterns. Perhaps the most common of these trends is the aging populace. The demand in health-care may also persist to worsen. In the identification of this particular fact, many of the investors have resorted in bidding shares of the firms that provide health care and prescription drugs.
Moreover, perhaps the less common is that the aging populace as well as the progressively rich populace would be able to serve a growing level of their kids’ education as well as their retirement. However, this augurs well with for many of the insurance firms, mutual fund companies, and other companies, which provide highly unique financial services. The entire populace continues to enjoy and earn growing levels of income, and therefore spending more on leisure activities would likely increase; firms that provide distinctive services and products in these particular areas would also likely to do well.
Assisting and serving well-heeled clients is a lot of fun and has often provided the best business venture. Production improvements in order to eliminate issues of economic stagnation would also be combated when such businesses flourish. Moreover, in this particular area, it becomes very easy to forecast the possible beneficiaries of the emerging innovations than it is when charting the future course of the innovation advancements. This section discusses the various characteristics of a good business in detail. These characteristics include high levels of pricing flexibility, increased return on stockholders’ equity (ROE), high profit margins, high comparative advantage, and high degree of research as well as development of goods and new markets.
High Pricing Flexibility
Businesses that have high levels of price flexibility are regarded as good businesses. Thus, many of the good business constantly pursue policies that promote flexibility in markets for their goods and services. In the world today, where there are a number of adjustments to the rapidly changing global as well as domestic economic developments, businesses need to be at the front in the management of such economies in order to ensure maximum earnings. Price flexibility can be understood as the method of selling products and services where their prices are open to negotiations among the buyers and sellers, and which allow for bargaining within a given range.
In a world where there are high levels of innovations, rapid economic change, and social trends, one of the critical things that a business can undertake in order to remain competitive is to create an environment of high level of flexibility. It is true to state that the survival of many of the businesses today depends on their ability to be flexible in terms of prices. Flexibility being the ability to make whatever internal alterations that is necessary to respond in more effective ways to the changing environment, businesses need to adopt to this changes as quickly as possible. The rationale behind price flexibility is very vital to many businesses.
Businesses must also be quick to listen to their employees, sellers, partners, and clients and should never be afraid about any feedback from such groups. A flexible price depends on everyone associated with the company’s ideas, products, innovations, and process improvements. Businesses also need to open up various platforms for price negotiations with their customers as this would likely help many of the businesses triumph over the various turbulences that e exist in the world today. Therefore, high price flexibility enables businesses to perform well in a rapidly changing business environment.
High Levels of Profit Margins
A company’s most significant as well as critical objective is to make profits and keep them, which also depends on the company’s liquidity level and efficiency. Because these factors determine a firm’s ability to pay its investors ‘dividends, a company’s profitability is usually reflected through its share price. Due to this, many investors know the ways in which to analyze and evaluate the various facets of a company’s profitability, including how a firm efficiently uses its resources as well as how much the company generates from its operations. Evaluating a company’s profit margin becomes a great way to obtain insights on many aspects on how well as company can generate and retain its money.
There are many reasons as to why high levels of profit margins signify a good business venture. The bottom line is that many of the investors first look at the measure of an organization’s level of profitability. It is very disappointing to rely on the net earnings of a company because it does not often offer the clear picture of the organization, and applying it as the only gauge for a company’s profitability may pose serious repercussions. The profit margin ratios may also offer the people who are investing in the company a deeper insight into the company’s management policies and efficiency. However, rather that gauging on how much managers can earn from assets, invested capital, or equity, these ratios have the ability of measuring how much money an organization squeezes through its revenues or total sales.
Profit margins are often expressed in terms of ratios or percentages of company sales. A percentage permits investors to check the profits of various companies. Net earnings, on the other hand, are presented as absolute numbers. There are three major profit margins that are usually used in order to evaluate the success of a company. These ratios include the operating profit margins, the net profit margins, and the gross profit margins.
The gross profit margin informs investors on the level of profitability that a company earns on its cost of sales. In other words, the gross profit margin reflects how a company efficiently manages as well as uses its labor and supplies in the process of producing goods and services. Companies that have high levels of gross margins have a lot of income at their disposal to spend on other business ventures, including undertaking research and development for product enhancement and search of new markets. Costs that are associated with labor and materials sometimes increase quickly and they decrease the level of gross margins if a company cannot pass these costs to the clients in form of high prices.
It is also important to note that gross margins may vary from one business to the other or from one industry to another. However, high gross margins have been associated with wonderful businesses. This in effect implies that businesses that are able to manage their gross profit margins qualify to be classified as good businesses.
The operating margins, on the other hand, compares a company’s earnings before interest and taxes to the company’s sales. Operating margins demonstrate just how a successful company is in terms of management. Moreover, operating margin is a ratio that measures a company’s level of operating leverage that a company may obtain in the conduct of an operational part of its business. This ratio reflects how many the earnings before interest as well as taxes are generated in terms of dollar per sales. High operating margins suggests that a company has efficient control over its costs. In addition, high operating margins implies that a company’s sales are increasing more rapidly as compared to its operating costs.
Operating margins also offer investors the opportunity to carry out profit-margin comparisons among various companies that do not offer separate business disclosure of their cost of goods and services. The operating margin measures the level of money that a company invests. Some individuals regard the operating margin as the most reliable measure of a company’s profitability because this ratio is very hard to manipulate. Therefore, high operating margins signify good businesses.
The net profit margins are also a good measure of an effective company. Net margins are those profits that are generated from all the aspects of a business, which also includes taxes. This particular ratio compares the net income of a company with its sales. Just like other ratios such as the gross margin, the net margin varies from one industry to the other. Moreover, through comparing a company’s net and gross margins, one is able to obtain a good sense of the company’s non-production as well as non-direct costs such as administration and marketing costs.
When a company has a high level of net profit margins, it often means that the company is sound financially and that it has more advantage over its competitors. Many of the companies that have high levels of net margins enjoy greater cushion to shield themselves during difficult times, when compared with those companies that have low levels of net margins. Moreover, companies with high net margins also reflect high competitive advantage and these companies are usually able to enhance their market shares throughout both hard and good times. This leaves many of these companies in a better position in order to deal well with many other challenges that might come their way. Thus, high net margins signify wonderful businesses.
High Return on Stockholders’ Equity (ROE)
High levels of returns to stockholders indicate that a business is faring well in its industry. It also signifies a good business. It is commonly agreed that good companies have traits such as high competitive advantage, above-average management, as well as market leadership. All these characteristics point out to a good business. Moreover, earnings in terms of return to equity as well as its relative value comprise the indicators that characterize good companies. In addition to growing rates of return to stockholders, high levels of return on equity marks one of the most significant traits of a good business. Consequently, a high return on the level of equity is often a sign of good business management as well as superior economics towards a wonderful business. A return on the level of equity is usually understood as a company’s assets subtracted by its level of liabilities.
A company’s ability to create a high return on equity can directly impact on the growth of a business’s earnings. Moreover, an increasing rate of earnings implies that more profits and dividends are generated by a company.
High Comparative Advantage
The level of comparative advantage for a company may be broken down into aspects such as differentiation advantage as well as cost advantage. Differentiation advantage comes to being as a result of a company having or offering superior products and services for the same prices that are charged in the market. On the other hand, cost advantage comes as a result of a company providing the same services as well as products in the market at lower levels of prices. These two forms of advantages are often referred to as positional advantages since they define a company’s position as possessing a leading product or service in its particular industry.
Good companies are able to maintain high status of comparative advantage when there are significantly high restrictions to new entrants into the market. Comparative advantages brings with it price leadership for a company. There is nothing powerful more than offering distinctive services as well as products to the market for relatively low prices. Moreover, through comparative advantage, a company is able to earn above-average management of its affairs. Thus, high levels of comparative advantage to a company, implies to the fact that the business is a good one.
Four Companies Regarded Having the Characteristics of Good Business
Having above the normal returns from the process of investing for wonderful and well performing businesses is only possible to the degree that such benefits are fully recognized and appreciated by other investors in the industry. In the case of Rowe, the earlier investments in IBM as well as Avon goods produced good returns because he saw their wonderful potential in advance of any other investor. On the other hand, Buffett has significantly gained through taking major positions in excellent companies, which suffer from some significant, though curable, problems. For instance, in the year 1991, Buffett made a very huge investment in the American Express company when the company suffered from an unexpected credit card as well as real estate loan losses.
When the company finally absorbed these losses without the presence of any lasting harm to its inherent profit making ability, the prices of the company’s stocks soared and Buffett cleaned them up. Many of the companies that are predictably financed benefits similar abilities to profit whenever an unexpected business crisis leads to financially distressed competitors, sell their valuable business assets at a bargain-level prices. Thus, while above average as well as stock market returns offer the obvious evidence having selected good businesses for venturing, short-term outcomes may be disappointingly average or sometimes far below average when the virtues of such good businesses are explicitly identified in the marketplace.
More annoying still is the issue of obtaining as well as investing in good businesses at striking prices and then having to wait while conventional understanding comes around to identifying them as such. The entire stock market is tremendously resourceful and efficient at searching out bargains as well as adjusting the prices in order for the subsequent investor to obtain only the risk adjusted normal level of returns. For many of the individual investors, seeking for the above average returns as well as finding good businesses, marks a necessary first step, though such investors must also be wrongly priced. Buffett triumphs because he is strangely skillful in searching high-quality bargain businesses.
Therefore, the American Express Company, Gillette, Well Fargo & Company, as well as Coca-Cola are the widely known examples of major stock holdings of Buffett’s company. All of Buffett’s major companies are large and capital intensive organizations with very long operating histories of above-average levels of returns. Similarly, any really good business, must demonstrate wise use of its assets as shown by the rate of stockholders’ earnings, which are well above the normal norms. Improving the attractiveness of these organizations would signify to the fact that they would also demonstrate above-average yearly rates of growth in the stockholders’’ level of equity. Therefore, all these companies may be described as the beneficiaries of high-profit margin growth. Just as usual, financial attractiveness as well as operational statistics essentially depicts attractive economic features of every organization or company.
The American Express Company
The American Express is a premier travel as well as financial services company, which is strategically positioned to benefit as well as reap gains from the aging baby boomers. This company is the only business with a strong as well as global presence across the entire payment industry. It is the world’s biggest card issuer as well as premium network of high spending. The company processes millions of transactions on a daily basis and offers business building services to a number of people worldwide.
Having such an international scale in terms of payments, the company offers a diverse number of opportunities in order to grow its business as well as drive technological innovations in its market. The company also acts as a gateway to a wide assortment of services that further differentiates its distinctive position. The company’s direct relationship with its millions of clients and businesses is combined with its leading age, information management, and various other capacities that help the company to offer valuable services.
The American Express company is a highly distinctive and uniquely powerful service business. Moreover, the company has many other plans of boosting its overall earnings. The company has recently entered into a joint partnership with another company in order to approximately fifty percent of its low profitable section. In addition, the company enjoys the world’s strongest franchise, growing rates of returns, and owner-based management. Moreover, the company is not subjected to price or profit regulations of any form. This makes the company offer a wide range of services, including travel solutions and facilitating event capabilities. American Express serves a total of 138 nations globally.
The Coca-Cola Company is one of the most successful as well as biggest holdings, which typifies an example of a good business. Coca-cola Company enjoys the globe’s strongest franchise, growing rates of returns, and owner-based management. Moreover, the company is not subjected to price or profit regulations of any form. From the perspective of being a good business, Coca-Cola is explicitly the best performing companies in the world.
Coca-Cola possesses a business policy that provides an objective business scenario as well as principles that make it a good business. The company focuses on the best lines of businesses. Coca-Cola concentrates on its most effective as well as profitable line of business. Much of the company’s revenues come from soft drinks, a business line that the company has pursued for a long time. Moreover, the sale of the company’s soft drinks operates in areas that have high business returns.
The company also pursues reinvestment policies, which are very important to the ongoing business progress. The company has concentrated its profits on reinvestments which have seen the company increasingly raise its dividends. The company also focuses on its consumers. This is because a successful business is one that is able to remain focused to its clients. In addition, the company sufficiently meets the needs of its customers through offering quality goods and services. An important gauge of a good business is the value as well as the volume of a company’s sales. Therefore, the global success of Coca-Cola indicates a good business. The company sets out on its ways to become one of the globe’s leading company in terms of consumer marketing and satisfaction.
Wells Fargo & Company
A number of newspapers, television companies, and other forms of media post the Wells Fargo & Company, which has immense economies of scale in terms of production. This places the company into the dominating competitive edge among other companies in the industry. The various forms of media also fit the company into Buffett’s criteria of good companies.
The company participates in a number of online banking activities and seeks to satisfy its customers through offering the most valuable of services. The company is the leading in terms of electronic commerce and it enjoys relatively low costs. With the profound possibilities of the internet in the world today, the company has realized a number of opportunities, including the web as being the most efficient channel for designing as well as distributing new products and new levels of security measures.
The company was the first one to identify some of these possibilities when it went online almost eight decades ago. It was also the first bank to offer internet services. Over the time, the company has experience a high level of competition, which has made the industry fiercer than before. The company has thus, been the leader in the innovation and creativity industry, which has earned it a fast market. Moreover, the company has been frequently named by various magazines and newspapers as the best online bank in the globe since 1996.
The company also enjoys the globe’s strongest franchise, growing rates of returns, and owner-based management. Moreover, the company is not subjected to price or profit regulations of any form. In addition, the company enjoys many other advantages over the course of time, including lower operational costs, large distribution channels, as well as marketing advantages.
Moreover, while the prospects of the future held profound risks as well as uncertainty for the banking industry, the company still had a number of advantages going into the electronic market wars of the twenty first century. Of all the online financial operators, banks experienced an unmatched information base and the company, for one, intended to make use of this in order to obtain the right offers swiftly to the right clients. Furthermore, banks encountered an intangible asset, which would be hard its competitors to break through.
This company also has a long history of banking over the years. It was opened in the year 1852 as an express and banking company, offering a wide variety of services to pioneers. The company was the largest express company at the time and stage coaching was its earliest backbone. Over time, the company has increasingly continued to offer new as well as innovative products to its clients, and offering a full range of financial services to many of the small businesses, commercial, and real estate clients, in addition to the company’s convectional banking services.
In terms of globalization, the high growth in automated machines, including telephone banking as well as online banking helped many customers to use banking services at anytime and anywhere. The technology was first exploited by the company, which began to aggressively market the “7/24” banking system. The availability of the banking services as well as products around the world proved that the company had a greater access to a greater customer base than ever before.
Gillette Company is also fitted into Buffett’s criteria of excellent and good companies by the various media, including social media, televisions, and newspapers. For the case of Gillette Company, the above-normal gains come as a result of its unique products, which are designed as well as executed through the company’s extraordinary competent management.
In order to effectively guide itself as well as ensure that the whole company is perfectly aligned to its fundamental objectives, the organization has regularly developed performance measures and visions. Following the performance indicators and the company’s vision becomes important for the company’s internal audiences.
Gillette Company has sought to pursue a number of strategies in effort to remain the leader in its market. The company recognizes that increasing the level of incomes would contribute to increased level of spending among the consumers. The market, however, is not uniform, but one that contains various segments, the needs of which must be carefully targeted and met. The company has recognized these segments in the market. Over the years, the company has endeavored to design as well as develop various commodities, which range from the popular razors to more sophisticated shaving systems. For instance, the company has found an increasing market among the United Kingdom men.
The company’s major emphasis on the provision of premium performance through the best value money offers has been vibrant, and one that ensures high quality as well as convenience among the customers. Many business entities look to expand into markets that offer related opportunities for growth and protection through market diversity. Gillette Company has four major business areas, including personal glooming, electrical appliances, oral care, as well as portable power.
Gillette Company remains the market leader in the majority of these areas throughout the world. The company also continues to undertake a number of investments in each of these areas. Clearly, the company has grown not only through developing its major business areas, but also through acquiring thriving businesses with development potential in many of the markets that are related to its core activities. Moreover, the company enjoys high profit margins, returns on equity, low operational costs, as well as comparative advantage over its competitors.
Relevance of Marginal Concepts to the Performance of the Chosen Companies
The term marginal concepts explains the discrepancy in the marginal utility when compared to the value given to the goods and services delivered. An explanation as to why the price of Gillette’s razor is higher in comparison with the competitors is due to the higher level of satisfaction derived from it over that of its rivals.
The marginal concepts arose in the mid and late 19th century in regard to the feedbacks that had faced the normative way of practicing economics. The marginal concepts were as a result of the efforts to increase the scope in the subject of economics to the level of universalism as well as objectivity in order to avoid the normative criticisms. It is also a concept of marginal utility which draws from the theme of explaining costs using the marginal physical productivity. There are a number of important marginal concepts, including marginality, marginal use, the law of diminishing marginal utility, marginal utility, marginal cost, marginal rate of substitution, and quantified marginal utility.
The concept of marginality holds that constraints are often conceptualized as a margin. The positioning of the margin for a business or individual corresponds to the level of endowment, which is broadly conceived to comprise opportunities. This type of endowment is often determined through a number of things, including the physical laws, incidents of nature, as well as the outcomes of the past choices that were made by other people or businesses. If a particular constraint is a marginal value, then any value may hold.
The neoclassical economics often assumes that marginal changes limits. Usually, an assumption is held that the term marginal is synonymous with small, though it may not be necessarily true. More often, economic scrutiny concerns the marginal units that are related to the change of a single unit of a resource, as choices are usually made based on units. The concept of marginality seeks to explicate the unit prices of resources using marginal units.
The marginal utilization of a product is the specific function to which an individual or a business can put an increase to the functioning of the product, which in case of a given decrease, would result in abandonment. The marginal concept assumes that for any particular individual or business, economic rationality as well as an ordering of likely outcomes, such that, for any set of constraints, there exists an achievable state that is best to the individual or business. The decision among the specific means through which various expected outcomes may be affected is only governed through the differences between the individual specific outcomes. Therefore, the various choices have to be governed.
The notion of marginal utility stipulates that the utilization of the product at its marginal use is the marginal utility of that product. Given the assumption of economic rationality, it is the best usefulness that can be gotten from a product using the best possible combination of constraints and decisions through which its use is incorporated. Marginal utility refers to the border use or usefulness of a commodity.
The Law of Diminishing Utility
The law of diminishing marginal utility holds that as additional units of a product is added to the available resources, its marginal utility or usefulness decreases. This law is often perceived as something that is proven through introspection or a mere instrumental assumption that is only adopted for its perceived anticipated efficiency. Sometimes, application of the law is not possible other circumstances. Individuals or business are only be able to command a portion the possible uses of a product. When there is scarcity of goods and services, then the rational agent, who can be either an individual or a business, would seek to satisfy those needs of the highest feasible priority in order to make sure that there is no single need that is avoidably sacrificed to achieve a need of lower precedence. In the cases of absence in terms of complementarity among the uses, it would mean that the precedence of usage of any extra unit would be lower than that precedence of the established uses.
On the other hand, should a complementarity exist among the uses, then the additional units might bring things past the desired level or cause them to fall apart. In this case, the marginal utility or usefulness of a product may in reality be growing. Moreover, the concept of marginal utility is often supplemented by indifference curves that expound on the various utility functions.
Net Profit Margins
Many companies can use their net margins in order to yardstick their performance each against those of their competitors their given industries. Net margins for companies are obtained through the use of income and sales. The managers may examine whether a company’s net margin is increasing, decreasing, or remaining constant. For example, if a given organization or company identifies a tendency that its net margin is decreasing, meanwhile its sales are increasing; the company management can use this particular information in order to decide the company’s performance. Moreover, the company might decide on using other strategies in order to improve its efficiency.
Marginal Rate of Substitution
The marginal rate of substitution is understood as the best rate at which an individual or business is willing to exchange the units of one product for the units of another product. When the products are disconnected, the least favorable price that an individual or a business can trade a commodity for another will often vary from that in which another individual or a business would trade the commodity. However, when such goods are divisible, the case becomes very different and the marginal rate of substitution becomes the gradient of the indifference curve. This implies that when an individual or a company has a stock of goods and services whose usefulness is inferior to that of another goods and services for which the individual or company could trade, then it becomes the interest of the individual or company to initiate such a trade.
At the peak of generalization, a marginal cost is understood as a marginal opportunity cost. In many of the contexts, marginal cost may also refer to the marginal financial cost, meaning that it is measured by the value of the forgone money. The concept of marginal cost is seen to increase under diminishing marginal utility since using resources to one use decreases their availability to another use.
Application of Marginal Concepts to Price
The marginal concepts may be of relevance to the four chosen companies, including the American Express Company, Gillette, Well Fargo & Company, as well as Coca-Cola. These companies can apply the above described concepts in setting their product prices in the market. Therefore, the areas in which these companies may apply the marginal concepts include supply, demand, and markets.
Demand. In the area of demand, it has been described under both the concept of marginalism as well as in the marginal rates of substitution. On a particular price level, a prospective customer or buyer of a company product enjoys some level of marginal rate of substitution on finance for the product in question. Thus, provided the law of diminishing utility, or given the convex indifferences, the rates are such that the desire to forgo money for the product decreases as the customer would ever have more of the product and less of the money. Therefore, any particular customer bears a demand schedule, which generally decreases in regard to price. The total quantity that is demanded by all the customers is, at any particular price, just the aggregate of the quantities that are demanded by the individual customers, which also goes down as the price is hiked.
For instance, Coca-Cola having an explicit understanding in terms of its market as well as its diversity of customers, the company needs to make appropriate prices for its products given the understanding of the marginal rate of substitution. This concept can help the company in setting up its product prices and ensure that it gains as much demand in the market as possible. Also, other companies such as Gillete, Wells Fargo, and America Express may apply the same principles in setting their prices. All these companies have been identified as the best companies in their industries, thus, ensuring that they have the greatest number of buyers attributed to them, it the way forward to prosperity.
Supply. In terms of product supply, the marginal concepts can well describe as well as explain the forces of supply and supply curves using marginal cost. The concept of marginalism tends to represent the idea of supply curve for any given producer in the form of a curve of marginal financial cost, which is objectively determined through the physical processes, with an curve sloping upwards (y) the law of diminishing returns. This concept also has a huge significance to the four selected companies because it offers insights into the levels of supply through the use of supply curves. These curves would help in explaining or informing these companies on the levels of goods that should be supplied into the market in order to maintain their costs. Given this form of information, the companies would also be able to avoid overproducing goods and services into the market and therefore, end up making loses. The issue of supply is very important and bears a lot of significance to the companies.
Markets. Through confining to the limiting cases of which both the sellers as well as the buyers are the price takers, the demand functions often ignore the supply function or sometimes vice versa. The marginal concepts have led to the development of the perfect as well a pure competition and the different types of imperfect market, which are often captured in simple graphs. The concept of marginalism presents a more realistic explanation. The other concepts have been put to use in determining the forces of demand as well as supply, which have consequently led to the creation of markets. The four companies that are discussed above can use the marginal concepts in the determination of market for their products. The application of indifference graph gives the optimal quantities and supplies that are needed in the market.
The marginal concepts can help the four companies to increase as well as enhance their performance in a number of ways. Through the use of these concepts, these companies would be able to understand the needs of their consumers. These companies would also be able to determine the quantities that are required in the market, therefore, reducing extra costs that might lead to losses. Moreover, these companies would be able to have better insights into the types of markets that are available to them. This in return, will increase the companies’ prospects and enhance their performance. The use the marginal concepts in order to track its operating profit margins can help in establishing what causes performance within a company. In addition, organizations can also use marginal concepts in order to determine and manage their sales. Also, marginal concepts offer the best approach for many companies in the world today to use in order to derive appropriate decisions on improving their performance. Thus, through this way, a company is able to manage as well as monitor its performance in both the long-run and the short-run.
Marginal Concepts Help to Establish Strategies to Conserve
The marginal concepts that are available for any given company or organization can be very useful in highlighting many of the managerial issues that a number of companies face in the world today. A company or an organization may apply the marginal concepts in order to evaluate as well as advance on its business models. A company’s management may also use the marginal concepts in order to track its operating profit margins as well as to establish what causes performance within the company. Moreover companies may also use these concepts in order to determine their break-even sales. The issue of marginal concepts presents an excellent tool for many of the organizations today to apply in order to make decisions on improving the company performance and conservation as opposed to bankruptcy.
The operating profit margins concept is one of the fundamental concepts as well as decision making tools that companies have. A company or business may use the concept of profit margin in order to evaluate its business model, which would further, help in conserving the business. The operating margin concept is derived through subtracting the cost of goods sold from that of sales and then dividing the result by the value of sales. An organization or a company may resort to decide whether the business model is essentially sound through trends in the operating margin. When the operating margins decreases over time, the company then has to decide to focus on increasing its sales, prices, or decreasing its cost of goods sold.
Contribution Margin and Break-Even Sales
The marginal concepts are very useful in the determination of a company’s break-even sales. At the level of the break-even point, profits are usually zero. A company’s management may decide to figure out on the number of the units that are sold to the break-even point as well as what the profits would be at the various unit sales. An organization’s break-even point can be determined through dividing its total fixed sales with the unit contribution margin. This concept is particularly of significance since it allows a company to monitor its sales and profits, hence helping the company to conserve its operations.
The Net Margins
Various companies can evaluate their net margins in order to benchmark their performance year after year against those of their competitors their industries. Net margins for companies are obtained through the use of income and sales. The managers may examine whether a company’s net margin is increasing, decreasing, or remaining constant. For instance, when a company identifies a trend that its net margin is decreasing, meanwhile its sales are increasing; the company management can use this particular information in order to decide on a change of strategy. Moreover, the company might decide on increasing its prices or improving its efficiency.
Marginal Rate of Substitution
The definition of marginal rate of substitution is the best rate at which an individual or business is willing to exchange the units of one product for the units of another product. When the products are disconnected, the least favorable price that an individual or a business can trade a commodity for another will often vary from that in which another individual or a business would trade the commodity. However, when such goods are divisible, the case becomes very different and the marginal rate of substitution becomes the gradient of the indifference curve. This means that when a company has a stock of goods or services whose value is less as compared with that of another goods and services for which the company could trade, then it becomes the interest of the company to commence with the trade. Given the knowledge of the marginal rate of substitution, companies may decide on the best strategies to adopt in order to improve their trade. Moreover, when strategies have been reached, it will enable the business to endure even to the most difficult times.
Marginal utility states that the marginal utility of a particular product is given by its usefulness. Given the statement about the economic rationality of individuals and companies, it is the best possible utilization using the best practical combinations of decisions through which its use is integrated. The concept of marginal utility as described may help companies in coming up with appropriate choices about their production activities. Many of the companies face limited levels of resources. Making sure that the most pressing needs are made, points out the company’s efficiency. Therefore, through the knowledge of marginal utility, companies would be able to make appropriate decision on the best use of their resources in order to enhance their level of performance. This also could lead to the adoption of various strategies to ensure that many of the competing needs are met.
The concept of marginal costing can also be used in the change of a company’s strategies as well as in ensuring that the company continues to thrive. Marginal costing may be very critical in assisting companies with decision making processes. This can be possible in a number of situations including decisions such as dropping a certain product line, accepting a special order, and choosing a given product mix to produce. This particular technique mainly concentrates on the company’s financial resources, for instance, on a company’s goal of maximizing the level of profits or creating wealth.
When other long-term commercial implications of a company are involved, this technique plays a very critical role in ensuring that these implications are not ignored. Thus, when a company is approached on whether to drop a certain product line or not, it becomes very necessary to consider these commercial factors. For instance, when a company decides to stop manufacturing products due to profitability issues, the customers become very upset because they have been using the product over the years. A company need not decide immediately to drop certain products when the level of demand for such products is low, but rather should consider adopting various strategies in order to increase the level of demand for its products.
The concept of marginal costing enhances many aspects of commercial factors for consideration. The contribution of products should be used as decision making tools alongside the commercial factors in order to ensure the continuity of the company. Moreover, a company need to pay a major attention to its clients and is rivals as well. A long-term strategy, which includes both the financial as well as the non-financial factors need to be particularly established in order to ensure a sustainable as well as a profitable performance of the company.
The Marginal Rate of Transformation
The slope of the production curve at any particular point signifies the marginal rate of transformation. The slope describes the rate at which the product of a product may be reallocated in terms of resources into the production of a different commodity. This is also known as the marginal opportunity cost. Therefore, the marginal opportunity cost can be said to be the opportunity cost of one product in terms of another at the margin. This technique measures how much of a product can be given for the product of one more unit of another product. The idea of the marginal rate of transformation is of practical application. It helps companies in coming up with efficient combination of commodities for production. This technique helps companies in initiating strategies that ensure appropriate combinations of the available resource, therefore, ensuring the sustainability and profitability of a company.
Tips as Well as Tricks
The marginal concepts presents the most appropriate step in driving a business’ decisions concerning strategies. The presence of poor margins may act as hotspots for areas to put major emphasis by the management of a company. Managers of a company or business need to comprehensively examine areas with poor margins, then concentrate on these areas in order to determine the most suitable strategy and performance drivers of these margins. Given that some companies may have limited manpower as well as resources, they need to prioritize their performance drivers in order to facilitate a change of strategy. Through determining the type of drivers that may improve the company margins in the most appropriate way, a company’s management may then decide on what area to focus. Therefore, a strong margin may also serve as a standard or an objective for the company management to use in order to measure the success of the company.
The issue of bankruptcy is broad and encompasses a lot of things around the financial resources of a company. Bankruptcy comes as a result of a given business failing to take the necessary measures in order to earn its sustainability. The financial resources that are available to any given business may be highly limited, and companies need to ensure that these resources are well planned. With the marginal concepts in place, companies are able to get insights on the ways to allocate among the competing needs given the scarcity of resources. Appropriate choices will lead to a company’s sustainability and profitability. However, poor choices also have dire consequences, as they can signal the termination of a company or lead to a company’s bankruptcy.