Case Study 1
The definition of what makes a good business is varied from one individual to another, depending on their objectives and experiences. One of the basic characteristics of a good business is that it should be focused, which means that all variables in the market have been taken into account before coming up with plans. According to Hirschey (2012), a good business should be ready for changing trends via focusing techniques such as trend analysis. Forecasting ensures that the business stays on course despite changes in the market. Being ready to take risks is another characteristic of a good business. Changing trends in marketing strategies, technology and consumer preferences mean that the management should be ready to try new strategies as old ones become ineffective. Another characteristic of a good business is being able to take care of employees (in terms of remuneration and good working conditions) since they are its driving force. A good business should also be hinged on the interests of the owner or manager. A business is more likely to succeed if it is appealing to employees and the owner.
Coca-Cola, Gillette, Exxon Mobil Corp. and FedEx Corp. are some of the most successful companies that possess the abovementioned characteristics. The companies display above-average annual rates of growth in stockholders equity, therefore, it be can be said that it enjoys high-margin growth. Coca-Cola and Gillette are able to adapt to different market conditions in the world over because of careful planning and the ability to take risks. The companies were started long ago when the market conditions were different from what they are today. This exemplifies their ability to anticipate and adapt to changes. Most graduates would wish to get a position in them. This is because they are also among the best paying ones in the globe. Employees are satisfied and consequently give optimum output.
The best indicator of a good business for purposes of investment is above-average stock market returns. However, short-term results can be average or below-average if the qualities of these good businesses are predictable in the marketplace. The overall stock market is good at adjusting prices so that potential investors will earn a risk-adjusted normal rate of return. Therefore, one would know their analysis was correct if they get above-average returns. Conversely, they would know their analysis was wrong if short term results are average or below-average.
Case Study 2
a) Results from empirical studies carried out on different firms vary. Some have shown a positive link between firm size and profitability, while some indicate a negative link. However, profitability of a firm largely depends on profit maximization factors. Large firms are, thus, at an advantage since they may meet all factors that affect small firms. The correlation between profit rates and size for firms in the DJIA does not yield a significant figure in the coefficient in profit margin = f (sales) relation. This shows that profit margins may not necessarily rise with sales revenue. Moreover, the insignificant figure, in the coefficient, in return on equity (ROE) = f (stockholder’s equity), shows that profit rates may not be influenced by the capital invested in a firm.
When the least square regression approach is used to investigate the relationship between firm size and profit rates, the size does not have an obvious advantage. However, for large firms in the DJIA, the coefficient in profits = f (sales) relation shows that the profit margin rises with sales revenue. In another way, the coefficient profit = f (net worth) relation shows that profit rates increase in direct proportion with the capital invested in a firm. This information shows that large firms do not have an advantage because of their size but rather that they make more profits.
b) The Dow Jones Industrial Average (DJIA) refers to a market index (weighted by price) made up of 30 most prominent stocks on the New York Stock Exchange and the National Association of Securities Dealers Automated Quotations (NASDAQ). The DJIA was started in 1896 by Charles Dow, and it began with 12 stocks, mostly rail road companies. To calculate figures, the stock price of chosen companies was added up and then divided by the number of companies in the index.
To account for a significant flaw that occurred whenever components had stock splits or stock dividend, the value of the DJIA is calculated before and after the stock split to obtain a divisor. According to Kennon (2012. p. 1), ”the post-split divisor is modified so that a change in the stock price of the company results in the same percentage change in the overall index as if the split had never happened.”
Profit rates for the firms on the DJIA vary from time to time. Some consistent firms on the DJIA in terms of profit rates and firm size include AT& T. Inc, General Motors, United Technologies Corporation. It is vital to note that Wal-Mart Stores Inc. and Exxon Mobil Corporation are some of the largest firms in terms of sales.
Wal-Mart’s ROE is quite sound, even though, they record low profit margins. This can be attributed to the firm’s enviable customer-satisfaction strategies. Another firm that is consistent in the DJIA is Coca-Cola, and it has continued to retain global dominance over its rivals because of its sound business policies. For one, the firm concentrates on its most profitable lines while selling those that are not profitable (The Times 100, 2012). Among other strategies, the firm focuses on consumer satisfaction by employing tactics such as differentiation in different markets and reinvestment of profits.
c) Several factors can be included in a detailed study of determinants of corporate profitability. One of the crucial factors is advertisement. Most profitable firms invest massive amounts in advertisement. It is a well known fact that most consumers are easily persuaded by quality adverts that are timely and strategically placed.
Another decisive factor is research and development. This involves investigating consumer needs and developing products that satisfy them which is majorly achieved through collecting feedback from them. Collecting feedback involves making a follow-up to know what complains consumers have about a product and using the information in developing products that give the consumer the highest satisfaction. Other factors that may affect corporate profitability include competition from other firms, government restrictions, environmental regulations and economies of scale (Uctum, 1995).
According to Hirschey (2012), demand refers to the amount of goods consumers are able to purchase under different market conditions. On the other hand, supply refers to the amount of goods availed for sale under different market conditions.
There are two basic ingredients for the creation of a good demand. The first is a sense of value for the particular good or service. This is measured in terms of the satisfaction derived from using particular good or service. The second one is power of purchase; consumers must have an ability to afford and be ready to spend on the particular product for demand to exist. For instance, the United Arab Emirates has managed to place itself as one of the best tourist destinations and shopping paradises. This creates a desire among tourists and shoppers to visit the country in order to satisfy the aroused need.
For supply to exist, two basic conditions should be met. The first is the willingness among producers to supply the product or service profitably. The second is that there has to be an economic capability to do so. Producers have to posses the ability to produce goods and services to satisfy demand. In reference to the United Arab Emirates example, the demand created is satisfied through supply of exotic goods and services facilitated by economic power gained from sales of oil products. Revenues from these sales have enabled state-of-the-art beaches, hotels and shopping paradises to be created.
According to Hirschey (2012. p. 5), macroeconomic forecasting involves predicting average economic activities at the national, regional or international levels. Microeconomic forecasting is based on “prediction of economic data at industry, firm, plant or product levels.” This can be achieved by analyzing data such as industry performance and profit margins.
For instance, the necessity of a product should be established to realize a successful entry. Luxury goods such as private jets or designer clothing may not record high sales in weak economies while they record high sales in strong economies. Another factor is government control; for instance, if the government subsidizes tax on motor vehicle imports, then the demand for vehicle accessories and spare parts is also likely to go up in following months or years.
Revenue and profit data provided by shippers such as FedEx Corp. and United Parcel Service Inc. can provide useful information about the trends in the overall economy because the rate at which goods are shipped can give an indication on future sales. This is why the sales and profits for shippers fluctuate before sales and profits of the shipped goods reach audited financial statements of manufacturers.
Common costs refer to the expenses incurred in the manufacture of a product. Some of the expenses include the cost of raw materials, equipment and labor. However, it should be noted that the costs are associated with a specific product. For instance, the costs incurred in manufacturing a motor vehicle are separate from those incurred in shipping it. On the other hand, costs incurred in acquiring wheels or leather upholstery are common costs.
The decision to start a firm is a budgeting decision that can only be pursued if returns are appealing. Starting up a business involves deployment of finances to acquire land, construct buildings, hire labor, and purchase equipment, among other expenses. Spending such vast amounts must have a particular motivation and factors such as freedom afforded by self-employment may qualify but for any entrepreneur to start a business, the financial return they expect to get after the break-even point is the main target.