Question

Describe a real world business problem and propose a solution or solutions to the problem by applying managerial economics concepts. Focus on a problem and its solutions. What will be the pros and cons of the solution or solutions.

Answer 1

Ans.

PROBLEM

Let us suppose the conventional California Pizza company called 'EXTREME PIZZA' wants to expand itself to increase their revenue as well as market share, they have got two choices as growth strategies:

1. To either increase the number of outlets in their own country (COST = $1,000,000)

or

2. To set up outlets worldwide and becoame global (COST= $1,500,000)

MANAGERIAL ECONOMICS CONCEPT : Opportunity Cost Concept

Now, considering the resources that they possess, they can choose any of the two options. If they decide to open more outlets in their own country, it will have an opportunity cost of not opening outlets elsewhere globally ($1,500,000). And if they decide to go global, they have an opportunity cost of not enhancing themselves in their own country ($1,000,000).

SOLUTION

In order to decide the best option out of the available two:

1. Firstly a SWOT analysis should be done to identify the strengths, weaknesses, opportunities and threats of diversifying in the two alternative ways.

2. An Ansoff matrix must be developed to understand which market or which product to diversify into.

3. Understanding the competitiveness of some other country in which you want to diversify or states of home country.

PROS AND CONS OF OPPORTUNITY COST CONCEPT

PROS of expanding in home country:

1. Expanding in home country will always be easier with respect to the knowledge of the laws prevelant.

2. Economies of scale can be achieved in home country if the company decides to expand through new outlets at various locations within their own country.

3. When people already are aware of the brand and its reputation, it is not very difficult to expand and establish an image in their minds.

CONS of expanding in home country:

1. Those corporations which decide to stay in their own country are not able to capture market globally.

2. They lose out on customers at various locations and there is an opportunity cost of loss of revenue.

3. Such companies will not get an opportunity to diversify and become versatile catering to needs of people of different countries.

PROS of expanding in host country/countries:

1. It helps to increase both sales and profit.

2. Strategies can be developed to cater to needs of different people in various other countries and become more versatile.

3. It helps to increase the market share gloabally.

CONS of expanding in host country/countries:

1. Sometimes, the corporations may not be able to grow considering the variation in tastes, preferences and culture in different countries.

2. People may not readily accept a new brand when they have already been habitual of taking services from an already existing brand.

3. Political complications and laws of different countries might be too tedious to deal with.

4. Governmental rules and regulations might increase the cost of production which ultimately leads to loss of profit for the company which is diversifying in the other country.