Industry demand and Company demand.docx

8/8/2019 Industry demand and Company demand.docx

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Difference between Industry demand and Firm (Company) demand:

Industry demand has reference to the total demand for the products of a particular

industry, e.g. the demand for textiles. Company demand has reference to the demand

for the product of a particular company which is a part of that industry, e.g., the demand

for textiles produced by the DCM. The company demand may be expressed as a

percentage of industry demand. The percentage so calculated would indicate the

market share of the company. The market-share of the company normally depends on

the nature of competition and the market structure. nder monopoly where a single firm

constitutes the industry, company-demand and industry-demand will be same. nder

non ! monopoly situation, the market share will depend on factors like price spread "i.e.,

the difference between the price charged by one company and the price charged by

another company#, product impro$ement, promotional expenditure like ad$ertisement,

and go$ernmental interference like protection. The study of industry demand is useful

guide to analysis and forecasting of company demand.

Most goods today are produced by more than one firm or company and so there is a

difference between the demand facing an indi$idual company or firm and that facing an

industry " %ll firms producing a particular good constitute an industry engaged in the

production of that good#. &or example, cars in India are manufactured by Maruti

dhyog, 'industan Motors, (remier %utomobiles and )tandard Motor (roducts of India.

Demand for Maruti car is a firm*s "company# demand where as demand for all kinds of

cars is industry*s demand. )imilarly, demand for +odre efrigerators is a firm*s demand

while that for all brands of refrigerators is the industry*s demand.

% &irm*s demand is fairly elastic. If there is product differentiation or monopolisticcompetition among the firms, then the demand cur$e for the indi$idual firm will be

downward sloping. Industry*s demand cure as a whole is downward sloping indicating

an in$erse price uantity relationship. In the case of monopoly, the firm itself is industry/

so its demand is identical with industry demand. &igure illustrates different demand


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conditions of industry and firm. % business economist or a business manager has to see

the share of firm demand in the industry demand.

Difference between Short-run demand and Long run demand

In economics, it0s extremely important to understand the distinction between the short

run and the long run demand. %s it turns out, the definition of the short run $ersus the

long run differs depending on whether the terms are being used in a microeconomic or

a macroeconomic context. There are e$en different ways of thinking about

the microeconomic distinction between the short run and the long run demand.

• )hort run1 2uantity of labor is $ariable but uantity of capital and production

processes are fixed "i.e. taken as gi$en#

• 3ong run1 2uantity of labor, uantity of capital, and production processes are all

$ariable "i.e. changeable#

• )hort run1 &ixed costs are already paid and are unreco$erable "i.e. 4sunk4#

• 3ong run1 &ixed costs ha$e yet to be decided on and paid, and are thus not truly

4fixed4

• )hort run1 The number of firms in an industry is fixed "e$en though firms can

4shut down4 and produce a uantity of 5ero#

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• 3ong run1 The number of firms in an industry is $ariable since firms can enter and

exit

The Short un:

• &irms will produce if the market price at least co$ers $ariable costs, since fixed

costs ha$e already been paid and, as such, don0t enter the decision-making

process.

• &irms0 economic profits can be positi$e, negati$e or 5ero.

The Long un:

• &irms will enter a market if the market price is high enough to result in positi$e

economic profit.

• &irms will exit a market if the market price is low enough to result in negati$e

economic profit.

• If all firms ha$e the same costs, firm profits will be 5ero in the long run in a

competiti$e market. "Those firms that ha$e lower costs can maintain positi$e

economic profit, e$en in the long run.#

Difference between Durab!e goods" demand and #on-durab!e goods demand

Consumers buy an enormous $ariety of products. )ome are goods that will last for

many years. 6ther items are consumed on the spot when we purchase them. To

businesspeople and economists, these are known as durable and non-durable goods.

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The production of durable and non-durable goods is the basis for important measures of

economic trends.

7ature of demand for durable goods is of special interest in demand theory. Demand for

durable goods is more $olatile than the demand for non-durable goods. In economicsdurable goods are defined as those goods that go on yielding ser$ices to the consumers

o$er a number of periods in future. &urther, because of their durability they can be

stored for longer periods of time. It is due to the use of ser$ices of durable goods for a

relati$ely long term that consumers* demand for them is more $olatile, that is, fluctuates

$ery much.

7ow what accounts for the large $olatility in demand for durable goods8 &irst, since

durable goods can be stored, producers, distributors and consumers usually keep large

in$entories of such goods. Therefore, increase in demand for them may not show up in

more production of such goods for uite some time because the greater demand for

them can be met by drawing upon their in$entories.

6n the other hand, when in$entories of durable goods are low e$en a small increase in

demand for them by their consumers may actually lead to greater market demand

because producers and distributors would also tend to increase their demand for

holding more in$entories to accommodate their large demand in future.

The other factor responsible for $olatility in demand for durable goods is that replace-

ment of these durable goods can be deferred by undertaking additional maintenance

expenditure on existing durable goods possessed by them. &or example, an old car

may be got replaced or its old model may be used for a longer period. )imilarly, the

purchase of new furniture may be postponed by tolerating the use of old furniture for

one more year.

Thus, analysis of demand for durable goods must consider not only new consumers*

demand for them but also consider the need for building up their in$entories by

distributors and producers and replacement demand for them which may be deferred. It

is not mere physical deterioration which calls for replacement of durable goods but more

important is the fact that models of the durable goods being currently used may go out

of fashion and therefore lose their prestige $alue.


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'owe$er, the important difference between non-durable and durable goods is that non-

durables are purchased for current consumption only, whereas durables are demanded

for getting their ser$ices in future periods. Conseuently, their demand for them crucially

depends on consumers* expectations regarding their future incomes, especially when

they buy them on credit, a$ailability of these durables in future, expectations regarding

future prices, rate of change in technology that make them obsolete.

Thus, fluctuations in demand for durables are relati$ely greater as it depends on

expectations of consumers about future de$elopments. If the expectations of consumers

are such that prices of durables will rise in future due to their short supply, their demand

for them will increase not only to meet their current consumption needs but also for

storing them for future use. )imilarly, if consumers expect their prices will fall in future,

they will postpone their purchases resulting in large decline in their demand.

Deri$ed Demand1

There are some goods which are not demanded by indi$iduals to satisfy their wants

directly but for using them to produce other consumer goods which directly satisfy their

wants. Demand for them is called deri$ed demand as its is deri$ed from the demand for

other goods. Thus, demand for car and housing loans is not determined directly but is

deri$ed from the demand for cars or houses which are purchased with the loan money.

'owe$er, the important case of deri$ed demand is demand for producers* goods such

as raw materials, machines and other types of capital euipment, spare parts etc.

These producers* goods are not consumed directly by indi$iduals to satisfy their wants.

&or example, demand for copper does not solely depend on indi$iduals* desire for

copper itself but rather for using it to produce products which are wholly or partly made

of copper In fact indi$iduals, wants for them may be uite independent of the fact that

copper is used in their production. Therefore, for the analysis of demand for the product

for which there is deri$ed demand we must consider the factors that affect demand for

ultimate goods in the production of which producer goods are used.

$% &hat are the prob!ems faced in determining the demand for a durab!e good'I!!ustrate Short-run demand and Long run demand with eamp!e of demand for househo!d"s refrigerator or te!eision set%


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7ature of demand for durable goods is of special interest in demand theory. Demand for

durable goods is more $olatile than the demand for non-durable goods. In economics

durable goods are defined as those goods that go on yielding ser$ices to the consumerso$er a number of periods in future. &urther, because of their durability they can be

stored for longer periods of time. It is due to the use of ser$ices of durable goods for a

relati$ely long term that consumers* demand for them is more $olatile, that is, fluctuates

$ery much. 9hen in$entories of durable goods are low e$en a small increase in

demand for them by their consumers may actually lead to greater market demand

because producers and distributors would also tend to increase their demand for

holding more in$entories to accommodate their large demand in future.

&luctuations in demand for durables are relati$ely greater as it depends on expectations

of consumers about future de$elopments. If the expectations of consumers are such

that prices of durables will rise in future due to their short supply, their demand for them

will increase not only to meet their current consumption needs but also for storing them

for future use. )imilarly, if consumers expect their prices will fall in future, they will

postpone their purchases resulting in large decline in their demand.

6n the basis of time, market is di$ided into short-run and long-run. The short-run is a

period of time in which output can be increased or decreased by changing only $ariable

factors. In short run there is the distinction between $ariable factors and fixed factors.

&ixed factors like factory building capital euipments etc. cannot be $aried for bringing

about a change in output. In short period fixed factors like installation machinery,

building of factors shed, etc. cannot added as the time period is $ery short.

Thus it is not adeuate to ha$e fullest adustment of supply to change in demand.

6utput is produced only by the extensi$e use of the existing plants and euipments. 7o

increase in short-run output can be made by expanding the existing plants and

euipments.

Ta*ing eamp!e of a T%+ consumers buy an enormous $ariety of products, some are

goods that will last for many years. 6ther items are consumed on the spot when we

purchase them. 'ence products like durable goods "T.:# purchased once last for long


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period of time and the demand in the market also remains for short period of time

comparati$ely goods which are non durable ha$e got long run demand in the market.

,% na!y.e the method by which a firm can a!!ocate the gien adertising budgetbetween different media of adertisement%

/ethods for Setting up of dertisement 0udget under Top down 0udgeting

/ethod1

This approach is so called because here a budgetary amount is established generally at

an executi$e le$el. The decision and the money then trickle down to the $arious

departments.

These budgets are essentially predetermined at the top le$el who generally fails to get a

clear-cut field le$el picture and hence the models under this approach ha$e no true

theoretical basis. The following figure illustrates the approach.

The following figure Illustrates $arious methods of setting up of ad$ertisement budgets

under top down budgeting method1


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2% ffordab!e method:

This is a $ery simple method of budget allocation. %fter the budget has been allocated in

all the areas i.e. all the other expenses ha$e been taken care of the company then

allocates the left o$er money for the ad$ertisements. This method is also called ;%ll you

can afford


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The fact that some firms follow this method is a clear indication of their lack of

knowledge and poor understanding of the role of ad$ertisements.

$% rbitrary !!ocation:

This method seems to be a weaker method than the affordable method for setting a

budget. The arbitrary allocation method is completely dependent on the management*s

discretion and hence has no theoretical basis. The budget is determined by

management solely. They on the basis of what they feel to be necessary. )o ultimately

the decision depends on the psychological and economical build up of the people in the

management and not on the market reuirements.

The arbitrary allocation approach has no ob$ious ad$antages because

i. There has been no systematic thinking

ii. 7o obecti$es ha$e been budgeted for

iii. The concept and purpose of ad$ertising and promotion ha$e been largely ignored.

It is thus understood that that the manager belie$es some money must be spent on

ad$ertising and promotion and that is why he picks up an amount, which has no logical

explanation. %ma5ingly there are many companies both large and small, profit making

and non-profit making who continue to set their budgets this way. It is now upon the

readers to decide whether this method should be used or not.

,% 3ercentage of Sa!es method:


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This is the most commonly used method for budget setting. 3arge firms generally go by

this method. %ccording to this method, ad$ertising and promotions budget is based on

sales of the product. Management determines the amount by either.

i. =y taking a percentage of the sales re$enue

ii. %ssigning a fixed amount of the unit product cost to promotion and multiplying this

amount by the number of units sold.

)ome companies instead of considering the past sales consider the percentage-of-

proected future sales as a base. This method also uses either a straight percentage of

proected sales or a unit cost proection. In the straight-percentage method, the

marketing manager estimates proected sales for the coming year. The budget is a

percentage of these sales, often an industry standard percentage.

In its simplest application, a fixed percentage of last year*s sales figure is allocated as

the budget. &or example, suppose the total sales of a company %=C ($t. 3td. in >??@-

>??A were s >?, ??,???. 7ow according to this method the simplest calculation for

ad$ertisement budget is say B? of the last year*s sales. )o the ad$ertisement budget

for the year >??A->?? is B? of s >?, ??,??? i.e. s >?,??,??.

In case the ad budget is to be decided on the basis of sales units, let us assume that

the manufacturing cost per unit of table fan for %=C ($t. 3td. is s @?? and the

ad$ertising money allocated per unit is s E?. The proected sales figure is B,??,???

fans for the coming year >??->??F, then the total ad$ertising budget can be calculated

as s B,??, ??? x E? G E?,??, ???#.


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The percentage figure selected is definitely not a standard percentage across any

industry. This figure $aries from one industry to the other and also among different firms

in the same industry. It depends on the company policy. %ctual money spent $aries

considerably depending on the indi$idual company*s total sales figure.

%s shown in the example the budget for a current year depends on the sales of the last

year. 7ow if a company keeps the percentage fixed and then sales this year decreases

then ad$ertisement budget for next year is also less. =ut marketing says that if the sales

are less in a year one way out of many to increase it in the next year could be an

increase in the ad$ertisement and promotional budget.

Thus one ad$antage of using future sales as a base is that the budget is not based on

last year s sales. %s the market changes, management should consider the effect of

these changes on sales into next year*s forecast rather than relying on past data. There

are a number of ad$antages associated with this method.

i. It is somewhat financially safe and helps a company keep ad$ertisement spending

within limits irrespecti$e of the fact whether the base is past year*s sales or what the

firm expects to sell in the upcoming year.

ii. This method is simple, straightforward, and easy to implement.

iii. egardless of which basis-past or future sales-is employed, the calculations used to

arri$e at a budget are not difficult.

i$. This budgeting approach is generally stable when competing firms spend

approximately the same percentage of their sales on promotion


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$. (romotion expenditures $ary with what company is aiming for in terms of sales

$i. It encourages management to think of the relationship among promotion cost, selling

price and profit per unit.

$ii. This method is suitable for the companies whose ad budget is small relati$e to sales

'owe$er the percentage-of-sales method has some disad$antages as well.

The basic premise on which the budget is established is sales. %s ust discussed if the

le$el of sales determines the amount of ad$ertising and promotions to be spent then the

cause-and-effect relationship between ad$ertising and sales is re$ersed. It treats

ad$ertising as an expense associated with making a sale rather than an in$estment.

Companies that consider promotional expenditures an in$estment and reap the

rewards.

In explaining the ad$antages it was ust mentioned that since it is a percentage of sales,

either past or future expected, the method is stable. 7ow this can happen when all firms

in the industry uses a similar percentage, but then what happens if one firm $aries from

this standard percentage8 The problem is that this method does not allow for changes

in strategy either internally or from competitors. =ut this is a highly impractical

proposition because there are many kinds of market structures and in any time the

leader can choose to di$ert from the standard.

The percentage-of-sales method of budgeting may result in se$ere misappropriation of

funds i.e. o$er budgeting or under budgeting. 9hen sales decrease we may need more

budget in ad$ertisement as decrease in budget might lead to further decrease in

incremental sales.


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The percentage-of-sales method is also difficult to employ for new product introductions

because in this case there is no sales history a$ailable. %lso proections of future sales

may be difficult, if the product is highly inno$ati$e and absolutely new in the market.

/ar!boro:

Marlboro cigarettes were introduced in the BH>?s. The brand share was only one per

cent in the early BH@?s. The company in$ested hea$ily in building brand image in BH@

"cowboy country# and now the brand share among young smokers is in excess of A?

in the )%.

4!ao:

9hen +laxo introduced Jantac "Jinetac in India#, the medication for gastric ulcer, it was

forecasted to gain no more than B? share against the well-entrenched Tagamet.

+laxo*s in$estment-dri$en campaign helped Jantac achie$e more than @? share and

became the leading brand.

5% 3ercentage of 3rofits method:

In this method, companies set their budget at a certain percentage of their current or

forecasted profits. The problems and ad$antages of this method is more or less in line

with the pre$ious method. Moreo$er the cost factor is also there which has an effect on

profit. 7ow due to changes in macro en$ironmental factors like, political, social,

demographic, economic "inflation# and legal the cost component might change o$er

time and across geography in the same industry. This in turn will affect the stability of

this method of budget setting.

6% 7nit of Sa!e /ethod:


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Consumer durable firms make use of this method as a $ariant on sales percentage.

9hile it mostly works out same as a sales percentage, here the firm puts an amount of

ad$ertising expenses on the unit as add on. This method may also be referred to as the

fixed-sum-per-unit-of product method. It is based on the premise that a specific amount

of ad$ertising is reuired for marketing each unit.

This method pro$es more useful specially in the case of ad$ertising of speciality goods

with higher prices, howe$er this method might not pro$e efficient for consumer goods of

lower price bracket because the market situations are $ery $olatile and change

freuently. This method is further undependable in case of fashion products as the

market is e$en more dynamic.

8% 9istorica! /ethod:

In this method last year*s ad$ertising budget is adopted for the year with a $iew that

practically no change has taken place in the market and market growth is slow, which

does not ustify any addition to the budget. 3ast year*s budget could be multiplied by a

factor to co$er media rate increase.

% Competitie 3arity /ethod:

This method in$ol$es setting budgets to match competitors* outlays and funds. In this

method, the company monitors competitors* ad$ertising and follows it. This method is

generally used in markets in which ad$ertising is hea$ier and it is felt absolutely

important to the companies not to be left behind the competitors.

7ormally, it is felt that the brand leader needs to spend proportionately less as a share

of total ad$ertising to maintain its market share, while con$ersely a brand trying to

impro$e its market share will ha$e to spend proportionately more. =ut such a type of


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budgeting plan fails to reflect the firms* own ad$ertising needs or marketing

reuirements.

7one of the marketing managers in practice e$er will accept the fact that they set their

ad$ertising and promotions budgets on the basis of what their competitors allocate. =ut

a close examination of their ad$ertising expenditures, both as a percentage of sales and

in respect to the media where they are allocated, will show little $ariation in the

percentage-of-sales figures for firms within a gi$en industry.

The rationale for setting the budget this way is that the collecti$e wisdom of the industry

is in$ol$ed. )ome are of the opinion that since it takes the competition into

consideration, marketplace is more stable and marketing warfare is minimi5ed in turn

minimi5ing the unusual or unrealistic ad expenditures. 'owe$er there are a number of

disad$antages with this method.

i. It ignores the fact that ad$ertising and promotions are designed to accomplish specific

obecti$es and not merely to face competition.

ii. It assumes that the ad campaigns will be eually effecti$e because firms ha$e done

similar expenditures. This highly ignores the contributions of creati$e executions andKor

media allocations.

iii. It ignores a $ery natural possibility that some companies simply make better products

than others.

i$. There is no guarantee that competitors will not increase or decrease its own

expenditures, regardless of what other companies do because competition cannot be

fully assessed at the beginning of a financial year.


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$. &inally there is no reason why competiti$e parity should a$oid promotional wars. 9e

are a witness to the Coke $ersus (epsi wars.

7e$ertheless companies employ the competiti$e parity method. =ut a wiser decision is

not to ignore the competition but use this method in conunction with the percentage-of-

sales or other methods. Marketing ne$er suggests to always keep parity with

competitors howe$er it suggests a $ery meticulous $igilant on them.

;% eturn on Inestment (


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other important factors, such as the rate of competiti$e ad$ertising and the effecti$eness

of company*s ads.

2>% The compromise mode!:

In actual practice, marketing executi$es usually blend some well-accepted methods and

arri$e at a compromise budget. The compromise howe$er does not mean a senseless

a$eraging of the different methods/ instead it is a logical and practical approach. The

marketing men know that they will ha$e to find answer to certain basic uestions

described below in order to arri$e at the compromise budget.

i. 9ho are the target audience8

ii. 9hat is the si5e of audience and location8

iii. 9hat are the media a$ailable for ad$ertising8

i$. 9hich media combination is suitable8

$. 9hat kind of campaign is reuired8

$i. 9hat freuency of ad$ertisement is reuired8

22% ?ohn !itt!e mode!:

This method is an adapti$e control method for setting the ad$ertising budget. %ccording

to this, suppose the company has set an ad$ertising expenditure rate based on its most

current information. It spends this rate in all markets except in a subset of >n markets

randomly drawn. In n test markets, the company spends at a lower rate and in the other

n markets it spends at a higher rate.


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This procedure will yield information on the a$erage sales created by low, medium and

high rates of ad$ertising that can be used to update the parameters of the sales

response function. The updated function can be used to determine the best ad$ertising

rate for the next period. If this experiment is conducted each period, ad$ertising

expenditure will closely track optimal ad$ertising expenditure.

2$% Tota! 4roup 0udget:

In case of multi location and multi product line firms, a total amount is decided as

ad$ertising and each strategic business unit recei$es a share according to their needs.

This method helps the group to segregate some amount for corporate group ad$ertising

for building the image of the organi5ation.

2,%


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that as long as the cost of producing one extra unit is less than the re$enue generated

by it, the business is a profitable one. %ny further production after the le$el at which the

additional per unit cost euals the per unit additional re$enue will be unprofitable.

% similar approach can be applied for ad$ertisement as well. %d$ertisers can keep on

increasing the ad$ertisement budget to the extent where the last unit spent on

ad$ertising is eual to the net profit contribution by the additional sales generated from

the promotion.

&rom managerial economics $iewpoint, this is the optimum ad$ertisement expenditure

gi$ing maximum profit. This is also referred to as the concept of marginality. In other

words the ad$ertisement expenditure should be carried on to that point where there is

no further scope of increasing the incremental re$enue from the incremental

expenditure on ad$ertising. %lso the total ad$ertisement budget should be apportioned

among $arious media and product lines until marginal returns are eual.

Inspite of being theoretically sound, this model is $ery difficult to be implemented

because it is $ery difficult to measure the additional profit generated by additional

expenditure on ad$ertisement.

In a #utshe!!:

The readers might be wondering as to why did they spend so much time understanding

$arious methods of top-down ad$ertisement budgeting when e$ery method has some

flaw. =ut dear readers, these are the methods, which are most widely used worldwide.

)o as long as you do not know them along with their negati$e and positi$e aspects, you

as a marketer will not be able to decide which method to go for. 7onetheless the top-


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down methods are all udgmental approaches, which lead to predetermined budgeting,

often not linked to obecti$es and the strategies designed to accomplish them.

Industry demand and Company demand.docx

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