Читать книгу STRICTLY GROWTH BUSINESS - Mike Illsley - Страница 7

Classical Economic Theory reduces market behavior to a few simple but intrinsic consumer characteristics. At the heart of the market theory is the concepts of Utility and Elasticity of demand.

Utility is a combination of the need for the product and its degree of satisfaction. This is a very personal thing as the degree of need and satisfaction varies person to person, or business to business. Products with high degrees of utility are not price sensitive whilst those with little utility are. This the economist calls the Elasticity of Demand. The strictly growth business must understand the relationship between demand and investment. This requires understanding the elasticity of demand for the business’s products, whether they are or are like to become commodities or survive as differentiated products throughout their product life. The Elasticity of Demand for a commodity product will generate large volume increases with small price changes whereas the volumes demanded of highly differentiated products are hardly affected by price changes.

The graphs shown above demonstrate this. A small price reduction from p1 to p2 results in a large increase in volume for the commodity product, q3 to q4, but a small price increase for the differentiated product only generates a small volume increase from q1 to q2.

Profitable businesses can be built upon either circumstance for so long as the business understands the type and extent of investment that will be required.

Strong investment in low cost manufacturing will be essential to generate worthwhile volume and profits from a commodity product. Investment in a highly differentiated product will more likely be related to strong research and development and marketing.

The Utility of the product is partly a generic issue relating to the entire market and partly a particular issue relating to the design of the individual business’s product. It is important to understand the actual and potential Utility of the generic market product as well as the individual products offered by each competitor. The Utility of the generic industry product is a function of the market environment. Technologies as well as customer needs and fashions change and all products compete one with another for their share of the consumer’s disposable income. The business needs to be sure that the generic product market it is choosing to exploit has a long term future providing utility to the customer base. Commodity products tend to have very long term utility whereas highly differentiated products may be more sensitive to fashion and be relatively short lived. The long term future of the product market is central to the establishment of the business mission.

The Utility of an individual firm’s product in the market will relate to its competitive position. The more utility consumers see in a product the more competitive and less price sensitive it will be.

New products will initially behave as monopolistic products but could become competitive products very quickly. Patents and speedy product development will tend to extend this monopolistic nature.

Established products require differentiating if they are to be less price sensitive. Utility can be improved by product quality, added value, customer service, brand strength and promotion.

Obviously the strictly growth business would like it’s products to have as much utility as possible, remain monopolistic as long as possible and thereby command both a higher price and a more competitive position.