APPLYING ECONOMICS TO BUSINESS PLAN

Economics is a sector that is usually ignored by most businesses with the

assumption that it is only applied by policy makers on government level. This is
simply not true. A good mixture of macro and micro economics on business level
can help a business make useful strategies and gain market power.

In order to develop winning strategies, we need to understand the purchasing

behavior of buyers, the market structure and how the invisible hand plays a role
in affecting demand and supply and the effect of government policies on the
business.

PURCHASING BEHAVIOR

Most SMEs make mistakes while developing market entry strategies by assuming
that a low price will generate demand. In a marketing perspective, this is true
however economics doesn’t agree. People don’t purchase items because they are
cheap, people purchase items because it is what they can afford.therefore price
affects the quantity demanded and not necessarily demand itself. To understand
this point, we need to know what demand and quantity demanded is. Demand is
simply a desire and quantity demanded is how much of that desire that someone
wants.

To further elaborate on this point, the two main factors that affect demand ie
income and tastes and preferences is what businesses need to focus on while
developing market strategies. Take an example of yourself, when you walk into a
supermarket to purchase goods, do you first look at the price of the product you
want to purchase or the money that you have in your pocket. In most cases it’s
the money that you have in your pocket that drives you to make purchases. After
understanding this, let’s look at the purchasing process

The purchasing process begins with demand. The desire of something. This desire
can not be created however it can be altered. You can make someone believe that
their skin rash is not a rash but an infection depending on what product you’re
trying to sell, however you can’t create the rash. Taking an example of cars;
people start with the desire which is; I want to buy a car. After they realize this
desire then depending on which tastes and preferences they have, they choose
whether the car they want to buy is a Toyota or a Honda. After they ascertain that
they want to buy a Toyota, they look at their income and choose what model they
can afford. Incase someone chooses the Toyota Landcruiser the price of the
Landcruiser helps them determine whether they will get the 1992 model or the
2020 model.
This explains that most people look at the price of a product last but they don’t
even realize it. Therefore business shouldn’t front price as an entry strategy
rather focus on the tastes and preferences of the buyers because sometimes
buyers may not be able to afford a product but borrow the money to buy it
because it is what they want. This is a discussion for another day.

MARKET STRUCTURE

The cosmetics industry in Uganda is highly competitive. With nearly zero barriers
to entry, there’s a huge struggle for market share and dominance. This therefore
means that firms in this industry have settled with sharing revenues and
maintaining status quo.

This is what we call the red ocean.. Business leaders often accept and act on two
fundamental assumptions. One is that market boundaries and industry conditions
are given. You cannot change them. You have to build your strategy based on
them. The other is that, to succeed within these environmental constraints, an
organization must make a strategic choice between differentiation and low cost.
Either it can deliver greater value to customers at a greater cost and hence a
higher price, or it can deliver reasonable value at a lower cost. But it can’t do
both. This is simply WRONG. The red ocean mindset only keeps a company in the
competitive environment but it will never give the company market dominance.

In order to achieve market dominance and render the competition irrelevant,

companies need to offer a balance between differentiation and low cost thus
creating their own market space and jumping out of the red ocean. This therefore
is called the Blue ocean( fresh waters).

In the blue ocean strategy, firms can adopt high quality products that standout
and offer affordable prices through maintaining low cost by using a mixture of
two of these perspectives ie; creative destruction and Disruptive innovation.
Creative destruction simply means that we create a product that renders the ones
before obsolete eg, the making of the digital camera rendered the film cameras
obsolete. This completely destroys the market for film cameras. The second
option is disruptive innovation which simply means innovating an already existing
product in order to gain market share e.g the laptop and desktop computers still
co exist but the laptop is an innovation that came from the desktop computer and
created a totally new market without necessarily destroying market for the
desktop computers.

The company needs to find a fine line between Creative destruction and
Disruptive innovation which is Disruptive Creation. This means that the business
creates a completely new product that doesn’t destroy any of the existing ones
but rather disrupts the market by activating the buyers tastes and preferences
hence gaining market dominance.