IMPERIAL INSTITUTE OF HIGHER EDUCATION
Table of Content Table of Content .................................................................................................................... 1 1.0
Introduction ................................................................................................................. 2
1.1 Industry Selection ...................................................................................................... 2 1.2 Organization Profile ................................................................................................... 2 2.0 Market Structure Theory Analysis ................................................................................. 3 2.1 Perfect Competition ................................................................................................... 3 2.2 Monopoly Competition .............................................................................................. 3 2.3 Oligopoly Competition .............................................................................................. 4 2.4 Monopolistic Competition ......................................................................................... 4 3.0
Market Structure of the Organization ......................................................................... 5
3.1 Competition................................................................................................................ 5 3.2 Differentiated Products .............................................................................................. 5 3.3 Freedom of Entry ....................................................................................................... 6 3.4 Pricing of firm ............................................................................................................ 6 3.5 Independent Decision Making ................................................................................... 7 3.6 Market Capturing Strategy......................................................................................... 7 4.0
Conclusion .................................................................................................................. 8
5.0
Reference .................................................................................................................... 9
Managerial Economics
Masters of Business Administration
Page 1
IMPERIAL INSTITUTE OF HIGHER EDUCATION
1.0 Introduction Managerial Economics is the application of management skills in economics to overcome the issues of organizations. Those issues could be related to costs and pricing, HR management, forecasting future market and etc. Objectives of the project as a whole Research about the market structure of the organization Understand the market structure Provide Justifications by using examples and facts for the above decision.
1.1 Industry Selection This research is conducted on the software industry in Sri Lanka. Sri Lanka does not have a long term history in Software usage. But during past decade a huge acceleration was shown for the software market as well as for job opportunities. IT industry has become the 5th largest export earner according to the EDB. There are huge numbers of software development companies exist in Sri Lanka including foreign software outsourcing companies. Most of organizations in Sri Lanka tend to use custom made software for the management of the organizations due to comfortability. In this documentation the main discussion is done about the OpenArc Systems Management (Pvt) Ltd.
1.2 Organization Profile “OpenArc Systems Management (Pvt) Limited is a privately held company founded in 1991 by an experienced team of entrepreneurs, and technologists who have been building innovative software applications for almost two decades. Today, OpenArc has a team of more than 200 software professionals uniquely poised to deliver quality custom application software development upon our creative and technical expertise.” (OpenArc Pvt Ltd, 2009)
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OpenArc Systems Management is a Software Development company which has a history of 19 years. OpenArc is a group of companies and the software development division is situated in Kirulapone area. Other companies are Open Arc School of Computing and OpenArc College of Business and IT. Figure: OpenArc Source: OpenArc Sri Lanka
2.0 Market Structure Theory Analysis There are mainly four types of market structures available. They are Perfect Competition, Monopolistic Competition, Oligopoly and Monopoly. Each of them has unique features of their own and they are completely different from each other as below.
2.1 Perfect Competition Transport cost is negligible within market. No entry barriers No exit barriers Large Number of firms Homogeneous products (Eggs, Salt etc) Horizontal demand curve (Perfectly Elastic) Buyers as well as sellers know about the market perfectly. Factors of production has perfect mobility
2.2 Monopoly Competition No freedom to entry No Substitutes Only one producer Practice price favoritism. Managerial Economics
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There are four types of monopoly competition types. o Natural Monopolies – (Diamond, Nickel, Uranium etc.) o Legal Monopolies – (Trade Marks, Copy Rights etc.) o Social Monopolies – (Water Bill, Light Bill etc.) o Voluntary Monopolies
2.3 Oligopoly Competition There are only few large firms in the market (2-10) All are independent firms Imperfect oligopoly refers to differentiated products as cars, vans. Perfect oligopoly refers to products such as Oil, Steel. If a firm increases the price exceeding the market price, other firm will not follow and the above stated firm will lose sales eventually. If the particular firm decrease the price it will increase the sales but other firms will not follow. These firms use other strategies to capture the market than the price wars. Kinked demand curve
2.4 Monopolistic Competition Many firms exist but less than the amount in perfect competition Differentiated products are produced in each firm There is freedom to entry Even the firm increases its price it will not loose its customers If the firm decreases the price it will not win the market and the customers who are with competitors. Uses promotions and advertising technique to win the market Often firms cut prices to increase the market.
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3.0
Market Structure of the Organization
After analyzing and considering all the characteristics of the market sturectures above it can come to the conclusion that OpenArc Systems Management Company Pvt Ltd belongs to the Monopolistic Competition market structure. The justification is given as below
3.1 Competition In monopolistic competition there are large numbers of competitors but not to the amount of competitors which are there for Perfect Competition. For the oligopoly competition there could be 2 – 10 number of competitors where as in software industry it has around 70 -80 well known competitors. Therefore oligopoly competition is negligible. In perfect competition there are many firms which are almost uncountable. But in monopolistic competition all the firms which are available are stable than perfect competition. Therefore we can state that software development industry (OpenArc Systems Management Company) clearly belongs to the Monopolistic Competition.
3.2 Differentiated Products Most of the software companies has their own methodologies and functionalities in software developed. Most companies alter the functionalities according to the necessity of the organization. Therefore each software development company produces differentiated products to each other. The service given for the products are also differed according to the development organization.
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In OpenArc Systems Management Company, they offers special software like hotel management software, School management software etc. and functionalities of the systems are different from other competitors. The after services are depending on the agreement and also depend on the company. The customer service is totally differentiated from the competitors as well as the technologies used. Methodologies used in development of the software, and products are differentiated from other competitors.
3.3 Freedom of Entry All the Software Development companies have no boundaries coming in to the market. If the company is registered in the government regulations, it has the freedom to develop softwares. The government has not put any control over software development companies.
3.4 Pricing of firm According to the theory; If the firm increases the prices it will not make the company/firm loose all its customers And If the firm decreases the prices it will not attract all the customers who are with competitors. This is quite true in the software industry. Most of the clients go to software Development Company for the service and the quality of the software product. Therefore even the specific firm increase the price t will not make the customer go away. If the firm decrease the price it will not make the customers of competitors come to them because most of the clients like to work with same software Development Company for long time by signing agreement. May be reducing the price it will make advantage in future deals but it will not make any sudden difference.
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3.5 Independent Decision Making All the software development companies are independent and use their own technique and technologies to develop the softwares. In OpenArc software Development Company they use different techniques to different customers depending on customer need. Most of the times, the customer decide the technology and method. The functionalities of the software product are totally independent.
3.6 Market Capturing Strategy In monopolistic competition Reduction of price is not a favorable marketing strategy. in software development industry price is not the advantage in the business. The quality and improvement of the product is major strategy. In software development customers mainly go for the quality of the product, Development methodology, development technology than the price tagged to it. Therefore in software industry the major weapon of advertising is the quality and less price war. In OpenArc software solutions the major breakthrough is the delivery of the project on time and the methodology followed for the success of the project. And another advantage is the value added services of the OpenArc. Added features for the softwares and after services are one of the major ―market catching strategy‖. Customer service is also another important factor when it comes to the strategy that can be used as advantage of the company.
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4.0
Conclusion
This documentation is presented about the software development industry in order to identify the market strategy which OpenArch Systems Management company belongs to. At the beginning of the document all the available market structures are discussed and theories explained. Then after analyzing all the necessary theories the relevant market structure is justified with the organization. The main analysis is done on Market capturing strategy, independent Decision making, Pricing, Freedom of entry, Differentiated products and competition. After analyzing all the above factors the decision is justified. And the final decision is OpenArc Systems Management Pvt Limited belongs to Monopolistic Competition Market strategy.
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Reference
AmosWEB is Economics: Encyclonomic WEB*pedia. Available at: http://www.amosweb.com/cgibin/awb_nav.pl?s=wpd&c=dsp&k=monopolistic+competition [Accessed June 28, 2010]. Egwald Economics - Microeconomics. Available at: http://www.egwald.ca/economics/monopolistic1.php [Accessed June 28, 2010]. MONOPOLISTIC COMPETITION. Available at: http://www.peoi.org/Courses/mic/mic6.html [Accessed June 28, 2010]. Monopolistic Competition. Available at: http://www.investopedia.com/terms/m/monopolisticmarket.asp [Accessed June 28, 2010]. Monopolistic Competition. Available at: http://ingrimayne.com/econ/International/MonoComp.html [Accessed June 28, 2010]. monopolistic competition (economics) -- Britannica Online Encyclopedia. Available at: http://www.britannica.com/EBchecked/topic/390037/monopolistic-competition [Accessed June 28, 2010]. Monopolistic Competition 1. Available at: http://faculty.lebow.drexel.edu/McCainR//top/prin/txt/imch/mc1.html [Accessed June 28, 2010]. Monopolistic Competition Between Differentiated Products With Demand For More Than One Variety — HBS Working Knowledge. Available at: http://hbswk.hbs.edu/item/6173.html [Accessed June 28, 2010]. Monopoly / Monopolistic Competition. Available at: http://www.econmodel.com/classic/ucost2.htm [Accessed June 28, 2010].
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