Category: Management Notes

A product may be defined as a set of tangible, intangible and associate attributes capable of being exchanged for a value with the ability to satisfy consumers and business needs.  It is anything that can be offered to a market to satisfy the needs or wants of the customer. The products that are marketed include physical goods, services, experiences, events, person, place, properties, organization, information and ideas.

Many authors define the term ‘product’ in the following manner:

• Philip Kotler: “A product is anything that can be offered to a market for attention, acquisition, use or consumption. It includes physical objects, services, personalities, place, organizations and ideas.”
• Alderson: “A product is a bundle of utilities consisting of various features and accompanying services.”
• Schwartz: “A product is something a firm markets that will satisfy a personal want or fill a business or commercial need and includes all the peripheral factors that may contribute to consumer’s satisfaction.”
• William J. Stanton: “A product is a set of tangible and intangible attributes, including packaging, colour, price, manufacturers and retailers prestige and services, which the buyer may accept as offering satisfaction of wants and needs.”
• Rustam S. Davar: “A product may be regarded from the marketing view point as a bundle of benefits which are being offered to consumers.

Thus, we can say a product is both what a seller has to sell and what buyer has to buy. Buyer will buy a product which can offer him expected satisfaction.

Levels or Dimensions of Product

A product has many dimensions beside its physical appearance. In fact, a product is like an ‘onion’ with several layers and each layer contributes to the total product image.

According to Philip Kotler, “The consumers will favour those products that offer most quality, performance and features.”.  Philip Kotler has described the five levels of products.

Customers will choose a product based on their perceived value of it. Satisfaction is the degree to which the actual use of a product matches the perceived value at the time of the purchase. A customer is satisfied only if the actual value is the same or exceeds the perceived value. Kotler attributed five levels to products:

The five product levels are

1. Core benefit

The fundamental need or want that consumers satisfy by consuming the product or service. For example, the need to process digital images. This is the basic level that represents the heart of the product. Here, the focus is on the purpose for which the product is intended. It answers the question ‘What is the buyer really buying? For instance, a woman doesn’t purchase a washing machine merely because of its machinery but for her comfort and praise from her family. Likewise, we buy a warm coat to protect us from the cold and the rain. Thus, the basic job of marketing manager is to sell the core benefits of the product.

2. Generic product (Generic Product or Tangible Product)

The second level of the product, the tangible product (also called the actual, physical or formal product) is the physical product or service offered to consumers. A version of the product containing only those attributes or characteristics absolutely necessary for it to function.

For example, the need to process digital images could be satisfied by a generic, low-end, personal computer using free image processing software or a processing laboratory.

3. Expected product

The set of attributes or characteristics that buyers normally expect and agree to when they purchase a product. For example, the computer is specified to deliver fast image processing and has a high-resolution, accurate colour screen.

4. Augmented product

The inclusion of additional features, benefits, attributes or related services that serve to differentiate the product from its competitors. For example, the computer comes pre-loaded with a high-end image processing software for no extra cost or at a deeply discounted, incremental cost.

5. Potential product

This includes all the augmentations and transformations a product might undergo in the future. To ensure future customer loyalty, a business must aim to surprise and delight customers in the future by continuing to augment products. For example, the customer receives ongoing image processing software upgrades with new and useful features.

Benefits

Kotler’s Five Product Level model provides businesses with a proven method for structuring their product portfolio to target various customer segments. This enables them to analyse product and customer profitability (sales and costs) in a structured way. By organising products according to this model, a business’ sales processes can be aligned to its customer needs and help focus other operational processes around its customers – such as design and engineering, procurement, production planning, costing and pricing, logistics, and sales and marketing.Grouping products into product families that align with customer segments helps modelling and planning sales, as well as production and new product planning.

Characteristics of Product

Careful analysis of concept of product essentially reveals following features:

1. Product is one of the elements of marketing mix or programme.
2. Different people perceive it differently. Management, society, and consumers have different expectations.
3. Product includes both good and service.
4. Marketer can actualize its goals by producing, selling, improving, and modifying the product.
5. Product is a base for entire marketing programme.
6. In marketing terminology, product means a complete product that can be sold to consumers. That means branding, labeling, colour, services, etc., constitute the product.
7. Product includes total offers, including main qualities, features, and services.
8. It includes tangible and non-tangible features or benefits.
9. It is a vehicle or medium to offer benefits and satisfaction to consumers.
10. Important lies in services rendered by the product, and not ownership of product. People buy services, and not the physical object.

Types of Product

A company sells different products (goods and services) to its target market.

They can be classified into two groups, such as:

1. Consumer Products

Consumer products are those items which are used by ultimate consumers or households and they can be used without further commercial and engineering processes.

Consumer products can be divided into four types as under:

• Convenient Products: Such products improve or enhance users’ convenience. They are used in a day-to-day life. They are frequently required and can be easily purchased. For example, soaps, biscuits, toothpaste, razors and shaving creams, newspapers, etc. They are purchased spontaneously, without much consideration, from nearby shops or retail malls.
• Shopping Products: These products require special time and shopping efforts. They are purchased purposefully from special shops or markets. Quality, price, brand, fashion, style, getup, colour, etc., are important criteria to be considered. They are to be chosen among various alternatives or varieties. Gold and jewelleries, footwear, clothes, and other durables (including refrigerator, television, wrist washes, etc.).
• Durable Products: Durable products can last for a longer period and can be repeatedly used by one or more persons. Television, computer, refrigerator, fans, electric irons, vehicles, etc., are examples of durable products. Brand, company image, price, qualities (including safety, ease, economy, convenience, durability, etc.), features (including size, colour, shape, weight, etc.), and after-sales services (including free installation, home delivery, repairing, guarantee and warrantee, etc.) are important aspects the customers consider while buying these products.
• Non-durable Products: As against durable products, the non-durable products have short life. They must be consumed within short time after they are manufactured. Fruits, vegetables, flowers, cheese, milk, and other provisions are non-durable in nature. They are used for once. They are also known as consumables. Mostly, many of them are non-branded. They are frequently purchased products and can be easily bought from nearby outlets. Freshness, packing, purity, and price are important criteria to purchase these products.
• Services: Services are different than tangible objects. Intangibility, variability, inseparability, perishability, etc., are main features of services. Services make our life safe and comfortable. Trust, reliability, costs, regularity, and timing are important issues.

The police, the post office, the hospital, the banks and insurance companies, the cinema, the utility services by local body, the transportation facilities, and other helpers (like barber, cobbler, doctor, mechanic, etc.,) can be included in services. All marketing fundamental are equally applicable to services. ‘Marketing of services’ is the emerging facet of modern marketing.

2. Industrial Products

Industrial products are used as the inputs by manufacturing firms for further processes on the products, or manufacturing other products. Some products are both industrial as well as consumer products. Machinery, components, certain chemicals, supplies and services, etc., are some industrial products.

Again, strict classification in term of industrial consumer and consumer products is also not possible, For example, electricity, petroleum products, sugar, cloth, wheat, computer, vehicles, etc., are used by industry as the inputs while the same products are used by consumers for their daily use as well.

Some companies, for example, electricity, cements, petrol and coals, etc., sell their products to industrial units as well as to consumers. As against consumer products, the marketing of industrial products differs in many ways.

Industrial products include:

• Machines and components
• Raw-materials and supplies
• Services and consultancies
• Electricity and Fuels, etc.

Dimensions of a Product

According to Philip Kotler, the total product has three layers or dimensions.

These three dimensions need to be distinguished from each other:

1. Core Product

The core product covers the physical attributes—tangible and intangible—offered for sale. These attributes consist of the materials, quality, weight, design or shape, size, colour, style, smell, package, brand name, label, etc. Services like auto repair, bus travelling, electricity supply, management consultancy, legal advice, etc., are products with intangible features.

2. Augmented Product

It is a broader conception including the various benefits and services that accompany the core product. It is the totality of benefits that a person receives in buying a product. For instance, along-with the T.V. set, a customer gets the dealer’s reputation, warranty, home delivery, free installation and maintenance, instructions for use, etc. This is an important dimension because in a competitive market, it provides a plus point to the seller. Neglect of this dimension may result in the failure of the product or loss of sales opportunities.

3. Symbolic Product

It is product as the customer perceives it. It is the psychological feeling or expectations of the customer about the product which influence his decision to buy. To the consumer a product is actually a symbol or a meaning.

For instance, a customer buys a T.V. set not as a box of components but as an instrument of entertainment, pleasure and status. Similarly, a woman buys hope and beauty by purchasing a lipstick. Consumer’s perception of a product is critical to its success or failure.

Target market represents a group of individuals who have similar needs, perceptions and interests. They show inclination towards similar brands and respond equally to market fluctuations.

Individuals who think on the same lines and have similar preferences form the target audience. Target market includes individuals who have almost similar expectations from the organizations or marketers.

Obese individuals all across the globe look forward to cutting down their calorie intake. Marketers understood their need and came up with Kellogg’s K Special which promises to reduce weight in just two weeks. The target market for Kellogg’s K Special diet would include obese individuals.

Individuals who sweat more would be more interested in buying perfumes and deodorants with a strong and lasting fragrance.

Target Market Selection

It is essential for the organizations or marketers to identify the set of people whom they want to target?. Marketers must understand the needs and expectations of the individuals to create its target market.

The target audience must have similar needs, interests and expectations.

Similar products and brands should entice the individuals comprising the target market.

Same taglines and advertisements attract the attention of the target audience and prompt them to buy.

To select a target market, it is essential for the organizations to study the following factors:

• Understand the lifestyle of the consumers
• Age group of the individuals
• Income of the consumers
• Spending capacity of the consumers
• Education and Profession of the people
• Gender
• Mentality and thought process of the consumers
• Social Status
• Kind of environment individuals are exposed to

Selection of Target Market and Positioning

Once the process of segmentation of the market has been achieved, the next step follows, that is, selection of suitable segment or segments which the firm can serve most effectively. Thus, target marketing is the act of evaluating, selecting and focusing on those market segments that the company intends to offer its marketing programme and serve it most effectively. Market segmentation is the prelude to targeting. Through segmentation, a firm divides the market into many segments. But all these segments need not form its target market. Target market signifies only those segments that it wants to adopt as its market. A selection is thus involved in it.

In choosing the target market a firm basically carries out an evaluation of the various segments and selects those segments that are most appropriate to it. The evaluation of the different segments has to be actually based on these criteria and only on the basis of such an evaluation target segments be selected.

The firm must assess the sales and profit potential of each segment to know whether the segment is relevant to the firm, whether it is sizable, accessible, attractive and profitable. It must examine alternative possibilities, that is, whether the whole market has to be chosen for tapping, or only a few segments have to be chosen, and if so, which one.

It may look for segments that are relating less satisfied by the current offers in the market from competing brands. It must look at each segment as a distinct marketing opportunity. It must also evaluate its resources and choose the segments that match its resources.

Selection of Target Markets

The selection of target markets helps the marketer to correctly identify the markets and the group of target customers for whom the products or services are produced. In these days, market targeting is used for all types of markets including developing and emerging markets.

It helps in sub-dividing the market into many segments, and then deciding to offer a suitable marketing offer to some selected segments. Market targeting is the act of evaluating and comparing the identified groups and then selecting one or more of them as the prospects with the highest potential.

1. Establish criteria to measure market attractiveness and business strength position.
2. Evaluate market attractiveness and business strength factors to ascertain their relative importance.
3. Assess the current position of each market potential segment on each factor.
4. Project the future position of each market segment based on expected environmental, customer and competitive trends.
5. Evaluate segment profitability.
6. Evaluate implications of possible future changes with respect to strategies and requirement of resources.

Product Positioning

Why do buyers or consumers prefer one product to another? In today’s over-communicated society and highly competitive markets, consumers have numerous options in almost all product categories. For instance, buyers can buy a PC from IBM, Sony, Apple, Zenith and others including low-cost; assemblers. Every day, an average consumer is exposed to numerous marketing related messages and the marketer must successfully create a distinct and persuasive product or service image in the mind of the buyer of consumers.

Once the organization has decided which customer groups within which market segments to target, it has to determine how to present or position to product to this target audience. Segmentation, targeting and positioning (STP) constitute the fundamental pillar of any marketing function. Product positioning is the final stage in STP continuum.

The marketing manager needs to decide which segment to enter and how to target that segment with a product offer through selection of market segment and target marketing strategy. The challenge is to decide what position the company wants its products to occupy in the selected segment or segments.

A product’s position is the definition that a consumer gives to the product on important attributes. It is the position in the perceptual space of the consumer’s mind that the product takes in relation to competitor’s products, which is often verbalized by customers on certain attributes.

Positioning is an act of developing the company’s offerings and image to occupy a distinct place in the minds of the target market. Positioning is a consumer driven strategy in which the objective is to occupy a unique place in the customer’s mind and maximize its potential benefit for the firm.

Positioning

Positioning is the act of designing the company’s offering and image to occupy a distinctive place in the target market’s mind. The end result of positioning is the successful creation of a market- focused value proposition, a cogent reason why the target market should buy the product.

Each company must decide how many differences to promote to its target customer. The position of a product is the sum of those attributes normally ascribed to it by the consumers-its standing, its quality, the type of people who use it, its strengths, its weaknesses, any other unusual or memorable characteristics it may possess, its price and the value it represents.

Many marketers advocate promoting only one central benefit what Rosser Reeves has referred to as Unique Selling Proposition (USP) Number one positioning’s include “best quality”, “Best service”, “lowest price”, “best value”, “safest”, “more advanced technology” etc.

Positioning is a platform for the brand. It facilitates the brand to get through to the target consumer. Positioning is the act of fixing the locus of the product offer in the minds of the target consumers. In positioning, the firm decides how and around what parameters, the product offer has to be placed before the target consumers. The significance of product positioning can be easily understood from David Ogilvy’s words: “The results of your campaign depends less on how we write your advertising than on how your product is positioned.”

Positioning of a product or service is nothing but creating an image in the consumers’ mind. Consumers generally tend to use images while making a purchase; they buy brand images rather than actual products. There are many brands that have a powerful influence on the consumer’s mind. Just think of Pepsi or Coca Cola in the soft drink market, Maruti or Santro in the passenger car market, BPL or Onida in the television market and so on.

Brand names add to the offering and create a “meta product”, an emotional loyalty with consumers. Consumers associate brand names with life-styles, social positions, professional roles and these associations combine to form an image or position. The terms “position” or “positioning” are frequently used to mean ‘image’. To build up a brand image or corporate image a marketer generally used advertising as a tool.

Product Position Vs Brand Position

Brand positioning is a major decision in marketing. It is believed to be the source from which all other decisions marketing mix should flow. The entire combination of marketing mix elements attempts to communicate the brand’s “position” to consumers.

Product position and brand position are different in scope. According to Smith and Lusch, product position refers to the objective attributes in relation to other products, and brand position refers to subjective attributes in relation to competing brands and this perceived image of the brand does not belong to the product but is the property of consumers’ perceptions of a brand. However, the terms “product positioning” and brand positioning usually mean the same thing.

A product cannot exist unless it finds a place in consumer’s perception of the world of products around him. Any product or brand is noticed only when it occupies a particular point or space in the individual consumer’s mind relative to other brands in the same product category.

The perception of product is subjective and is governed by the individual’s needs, values, beliefs, experience and environment. The position is the way the product or the brand is defined by consumers on important attributes. Positioning is the perception of a brand or product it brings about in the mind of a target consumer and reflects the essence of that brand or product in terms of its functional and non-functional benefits as judged by the consumer.

Maggi Brand of noodles has been successfully positioned as the “two minute” noodle in the minds of target consumers and has created a distinctive brand image. HLL’s Lux soap is hypothetically positioned as the “beauty soap” of female film stars and Dettol is the antiseptic for minor nicks and cuts, while possessing a plethora of uses, from preventing nappy rash to doubling as effective after shave lotion.

BMW car is positioned as the “ultimate driving machine”, and Volva is positioned on safety and durability. As markets become more crowded and competitive with similar types of products, consumers rely more on the product’s image than on its actual characteristics in making their buying decisions.

Product positioning brings us to the idea of functional value whereas brand positioning talks about something above and beyond functional value for which the customer is willing to pay more and when asked to recall, he may recall the brand more and given a chance to replay, he will associate the brand with so many elements which are beyond the functionality of the product.

Therefore a product position refers to a brand’s objective or functional attributes in relation to other brands in the category. It is a characteristic of the physical product and its functional attributes. Simply speaking, it stands for what it can do in the market.

Brand position on the other hand is an outcome of the perception of the target segment customers. It is brand’s subjective or perceived attributes in relation to competing brands in the market. Let us take an example of Vicks Action 500. If you look at its product position, it’s an anti-cold treatment, which has certain composition that reduces the congestion and helps during cold and cough.

Marketing Environment is the combination of external and internal factors and forces which affect the company’s ability to establish a relationship and serve its customers.

The marketing environment of a business consists of an internal and an external environment. The internal environment is company-specific and includes owners, workers, machines, materials etc. The external environment is further divided into two components: micro & macro. The micro or the task environment is also specific to the business but external. It consists of factors engaged in producing, distributing, and promoting the offering. The macro or the broad environment includes larger societal forces which affect society as a whole. The broad environment is made up of six components: demographic, economic, physical, technological, political-legal, and social-cultural environment.

Importance of Environment Analysis

1. It helps in marketing analysis.
2. It can assess the impact of opportunities and threats on the business.
3. It facilitates the company to increase general awareness of environmental changes.
4. It is possible to develop effective marketing strategies on the basis of analysis.
5. It helps to capitalize the opportunities rather than losing out to competitors.
6. It facilitates to understand the elements of the environment.
7. It helps to develop best strategies, in the light of analyzing “what is going around the company”.

MARKETING ENVIRONMENT IN INDIA

India is one of the largest consumer markets in the world, with its population of middle-class consumers expected to reach 200 million in 2020 and 475 million in 2030. But it is a complex and diverse consumer market, and it is vital to tailor your marketing strategies and even your products to local preferences. In addition to intense competition from both small and large local retailers and international companies, you must consider the diversity of cultural backgrounds, differing levels of wealth and sophistication, and the sheer size of both the population and land mass.

The best way to deal with the complexities of the Indian market for marketing and advertising purposes is to invest in and hire local knowledge. Both Indian and international companies specialise in marketing in India. A comprehensive marketing plan that considers core elements such as your brand, stakeholder management, public relations, media (including digital and social media), and your product/brand value proposition is critical.

Be aware, however, that you will need to continually reassess your marketing strategy and plan. The Indian socio-economic environment is constantly evolving and changing, which in turn impacts on consumer choices. You should be particularly mindful of factors.

Brand Awareness

Indian middle-class consumers place strong importance on brands, particularly luxury brands. Status is a key factor  many people will buy luxury goods not because they necessarily like them, but because they are representations of success. Make sure you have a specific strategy focusing on brand localisation, brand building and awareness creation. New entrants to the market with a recognised brand may wish to consider a product launch or media conference to announce their arrival in India.

Price Consciousness

For everyday commodities, price is an important consideration for Indian consumers, particularly at the lower-middle class and lower- income levels. As opposed to status items on which wealthier Indian consumers are willing to spend more, non-status items are likely to be chosen based on price.

Demographic Dynamics

India’s middle and upper- middle income households in larger cities are demanding quality across a wide range of products and services, especially those that focus on health and wellness, as well as education. The rural consumer market in India, comprising 700 million people, is largely underserviced at the moment for health and wellness goods and services, education and other consumer goods and services, leaving ample opportunity for growth.

Logistics

As explored earlier in this guide, India is still a developing country with a less sophisticated logistics supply chain than in Australia and many of Australia’s traditional, more developed export markets. Less-developed infrastructure in some poorer regions in particular may cause delays in getting goods to markets and consumers.

Product and Service adaptations

You may need to adapt your product to meet Indian preferences or requirements. Adapting to local regulations, tastes and cultural preferences vastly improves your chances of success.

Brand Marketing and Advertising

Language, culture and symbolism need to be considered when marketing and advertising in India. Generally, you canpreserve your English company name when trading in India. However, if you choose to adopt a name with a more local flavour, seek trusted advice before you register the name. Advertising is subject to some regulation in India. Enforcement of these regulations is not as strict as in some other countries unless an advertisement incites public outrage.

The four major ingredients of the marketing-mix are described below:

1. Product

A product is any good or service that consumers want. It is a bundle of utilities or a cluster of tangible and intangible attributes. Product component of the marketing- mix involves planning, developing and producing the right type of products and services. It deals with the dimensions of product line, durability and other qualities.

Product policy of a firm also deals with proper branding, right packaging, appropriate colour and other product features. The total produce should be such that it really satisfies the needs of the target market. In short, product-mix requires decisions with regard to

• Size and weight of the product
• Quality of the product
• Design of the product
• Volume of output
• Brand name
• Packaging
• Product rang
• Product testing
• Warranties and after sale services, etc.

2. Price

Price is an important factor affecting the success of a firm. Pricing decisions and policies have a direct influence on sales volume and profits of business. Price is, therefore, an important element in the marketing-mix. In practice, it is very difficult to fix the right price. Right price can be determined through pricing research and test marketing.

A lot of exercise and innovation is required to determine the price that will enable the firm to sell its products successfully. Demand, cost, competition, government regulation, etc. are the vital factors that must be taken into consideration in the determination of price. Price-mix involves decisions regarding base price, discounts, allowances, freight payment, credit, etc.

3. Promotion

Promotion component- of the marketing-mix is concerned with bringing products to the knowledge of customers and persuading them to buy. It is the function of informing and influencing the customers. Promotion-mix involves decisions with respect to advertising, personal selling and sales promotion. All these techniques help to promote the sale of products and to fight competition in the market.

Advertising is a major tool used to communicate a message (called advertising copy) through; newspapers, magazines, radio, television and other media of advertising. Advertising component of the promotion-mix requires several decisions with regard to the theme of advertising, the media to be used, the advertising budget, etc. Large firms employ advertising agencies and specialists to run advertising campaigns and to prepare individual advertisements.

Personal selling is an effective means of communication with consumers. It involves direct face-to-face contact between salesmen and consumers. Sales managers plan, direct and control the efforts of individual sales persons.

Advertising cannot aim directly at the prospect to win his patronage. Therefore, personal selling is required to complement advertising. Personal selling is particularly useful when the product is of a technical nature or where goods are to be sold to industrial and commercial establishments.

Sales promotion consists of all forms of communication with the customers except advertising and personal selling. Free samples, prize contests, premium on sale, displays, shows and exhibitions, etc. are the main techniques of sales promotion.

No single method of promotion is effective alone and, therefore, a promotional campaign usually involves a combination of two or more promotional methods. Growing competition and widening market have made simultaneous use of more than one promotional method all the more necessary.

Combination of two or more methods in a single promotional campaign requires an effective blending of promotional inputs so as to optimize the expenditure on each. There is no one ideal promotional-mix that fits all situations. While devising a promotional-mix nature of product, type of customers, the promotion budget, stage of demand, etc. should be taken into consideration.

4. Place

This element of the marketing-mix involves choice of the place where products are to be displayed and made available to the customers. It is concerned with decisions relating to the wholesale and retail outlets or channels of distribution.

The objective of selecting and managing trade channels is to provide the products to the right customer at the right time and place on a continuing basis. In deciding where and through whom to sell, management should consider where the customer wants the goods to be available.

A manufacturer may distribute his goods through his own outlets, he may employ wholesalers and retailers for this purpose. Irrespective of the channel used, management must continuously evaluate channel performance and make changes whenever performance falls short of expected targets. In addition, management must develop a physical distribution system for handling and transporting the products through the selected channel.

In the determination of distribution-mix or marketing logistics, a firm has to make decisions with regard to the mode of transporting of goods to middlemen, use of company vehicles or a transporter, the route over which the goods are to be moved, type of warehouses where the goods are to be stored, etc.

Managerial economics is a discipline which deals with the application of economic theory to business management. It deals with the use of economic concepts and principles of business decision making. Formerly it was known as “Business Economics” but the term has now been discarded in favour of Managerial Economics.

Managerial Economics may be defined as the study of economic theories, logic and methodology which are generally applied to seek solution to the practical problems of business. Managerial Economics is thus constituted of that part of economic knowledge or economic theories which is used as a tool of analysing business problems for rational business decisions. Managerial Economics is often called as Business Economics or Economic for Firms.

“Managerial Economics is economics applied in decision making. It is a special branch of economics bridging the gap between abstract theory and managerial practice.” – Haynes, Mote and Paul.

“Business Economics consists of the use of economic modes of thought to analyse business situations.” – McNair and Meriam

“Business Economics (Managerial Economics) is the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management.” – Spencerand Seegelman.

“Managerial economics is concerned with application of economic concepts and economic analysis to the problems of formulating rational managerial decision.” – Mansfield

Nature of Managerial Economics

(i) The primary function of management executive in a business organization is decision making and forward planning.

(ii) Decision making and forward planning go hand in hand with each other. Decision making means the process of selecting one action from two or more alternative courses of action. Forward planning means establishing plans for the future to carry out the decision so taken.

(iii) The problem of choice arises because resources at the disposal of a business unit (land, labour, capital, and managerial capacity) are limited and the firm has to make the most profitable use of these resources.

(iv) The decision making function is that of the business executive, he takes the decision which will ensure the most efficient means of attaining a desired objective, say profit maximisation. After taking the decision about the particular output, pricing, capital, raw-materials and power etc., are prepared. Forward planning and decision-making thus go on at the same time.

(v) A business manager’s task is made difficult by the uncertainty which surrounds business decision-making. Nobody can predict the future course of business conditions. He prepares the best possible plans for the future depending on past experience and future outlook and yet he has to go on revising his plans in the light of new experience to minimise the failure. Managers are thus engaged in a continuous process of decision-making through an uncertain future and the overall problem confronting them is one of adjusting to uncertainty.

(vi) In fulfilling the function of decision-making in an uncertainty framework, economic theory can be, pressed into service with considerable advantage as it deals with a number of concepts and principles which can be used to solve or at least throw some light upon the problems of business management. E.g are profit, demand, cost, pricing, production, competition, business cycles, national income etc. The way economic analysis can be used towards solving business problems, constitutes the subject-matter of Managerial Economics.

Thus in brief we can say that Managerial Economics is both a science and an art.

Scope of Managerial Economics

The scope of managerial economics is not yet clearly laid out because it is a developing       science. Even then the following fields may be said to generally fall under Managerial Economics:

• Demand Analysis and Forecasting
• Cost and Production Analysis
• Pricing Decisions, Policies and Practices
• Profit Management
• Capital Management

These divisions of business economics constitute its subject matter.

Recently, managerial economists have started making increased use of Operation Research methods like Linear programming, inventory models, Games theory, queuing up theory etc., have also come to be regarded as part of Managerial Economics.

1. Demand Analysis and Forecasting

A business firm is an economic organization which is engaged in transforming productive resources into goods that are to be sold in the market. A major part of managerial decision making depends on accurate estimates of demand. A forecast of future sales serves as a guide to management for preparing production schedules and employing resources. It will help management to maintain or strengthen its market position and profit base. Demand analysis also identifies a number of other factors influencing the demand for a product. Demand analysis and forecasting occupies a strategic place in Managerial Economics.

2. Cost and production analysis

A firm’s profitability depends much on its cost of production. A wise manager would prepare cost estimates of a range of output, identify the factors causing are cause variations in cost estimates and choose the cost-minimizing output level, taking also into consideration the degree of  uncertainty in production and cost calculations. Production processes are under the charge of engineers but the business manager is supposed to carry out the production function analysis in order to avoid wastages of materials and time. Sound pricing practices depend much on cost control. The main topics discussed under cost and production analysis are: Cost concepts, cost-output relationships, Economics and Diseconomies of scale and cost control.

3. Pricing decisions, policies and practices

Pricing is a very important area of Managerial Economics. In fact, price is the genesis of the revenue of a firm ad as such the success of a business firm largely depends on the correctness of the price decisions taken by it. The important aspects dealt with this area are: Price determination in various market forms, pricing methods, differential pricing, product-line pricing and price forecasting.

4. Profit management

Business firms are generally organized for earning profit and in the long period, it is profit which provides the chief measure of success of a firm. Economics tells us that profits are the reward for uncertainty bearing and risk taking. A successful business manager is one who can form more or less correct estimates of costs and revenues likely to accrue to the firm at different levels of output. The more successful a manager is in reducing uncertainty, the higher are the profits earned by him. In fact, profit-planning and profit measurement constitute the most challenging area of Managerial Economics.

5. Capital management

The problems relating to firm’s capital investments are perhaps the most complex and troublesome. Capital management implies planning and control of capital expenditure because it involves a large sum and moreover the problems in disposing the capital assets off are so complex that they require considerable time and labour. The main topics dealt with under capital management are cost of capital, rate of return and selection of projects.