Evaluation Of Competitive Environment

Evaluation Of Competitive Environment INTRODUCTION In any businesses, understanding micro-economic and macro-economic environment that business is operating in is very important stage because the factors in these two environments have strong influence on the success of business. Micro-economic environment involves demand and supply for the business, market structure and cost structure. In other words, those are internal factor of the business that to some degree business can control. On the other hand, macro-economic environment comprises of external factors that cannot be controlled by the business but have strong influence on the business for example: economic situation, inflation, interest rates. This report will describe and analysis the impacts of micro and macro-economic environment on Dominos pizza business. The purpose of this report is to use knowledge and theory in economics for manager subject to apply into practical situation. MICRO-ECONOMIC ENVIRONMENT The business overview Dominos Pizza is an American restaurant chain and international franchise pizza delivery corporation. Founded in 1960, Dominos is the second-largest pizza chain in the United States and has more than 10,000 corporate and franchised stores in 70 countries and all 50 states of United State. Dominos Pizza was bought out by Bain Capital in 1998 and went public in 2004. In Australia, Dominos Pizza is the largest pizza chain in terms of both network store numbers and network sales. In addition, Australias franchisee is the largest for the Dominos Pizza brand in the world. Dominos Pizza holds the exclusive master franchise rights for the Dominos brand and network in Australia, New Zealand, France, Belgium, the Netherlands and the Principality of Monaco. The Dominos brand is owned by Dominos Pizza, Inc, a listed US company. Dominos Pizza Enterprises are operating in five countries, with approximately 845 stores hiring about 21,000 people and making more than 60 million pizzas a year. Dominos Staff Products The current Dominos menu features a variety of  Italian-American  entrees and side dishes. Pizza is the main focus, with traditional, specialty and custom pizzas available in a variety of crust styles and toppings. Besides, Dominos also try to appeal to a larger base of customers by expanding its menus offering pastas, sides and desserts, chips. http://blog.vovici.com/Portals/60483/images/dominos_pizza_pie.png http://whatifeedmyhusband.files.wordpress.com/2010/12/img_2916.jpg https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhdNzRMIqGedYxcRrD0Yi5MVRLlSGThamhMaEA9T4bKnXaRIwExHCUhMb6-gq5_XRv7QspXom5bgc6t8YiC7V4PAEVy5EmMrrFgliVnhS3AG41GxJZTipH2K3Emfm_xpyzC0ivAGY5TU23h/s1600/DSC_5602.JPG http://slice.seriouseats.com/images/2013/01/20130108-dominos-chain-reaction-bread-bowl-pasta-5.jpg Customers Dominos target market is the consumers who is looking for reasonably-priced pizza and quick delivery. Dominos mainly focuses on delivery and pick-up customers. Demographically, Dominos does not target at a specific segmentation. Instead, it targets. Moreover, Dominos also concentrates on online pizza orders, so it can reach the greatest number of consumers while also improving its ability to meet customer demand, by 2012 online and mobile ordering account for up to 40% of sales. Competitors Domestically, Dominos faces highly competitive with main challenges coming from Pizza Hut, Papa Johns and various local/regional competitors. Direct competitors Pizza Hut: 271 stores Pizza Haven: 150 stores Pizza Capers: 95 storesC:UsersQuanDesktopdownload (2).jpgC:UsersQuanDesktopimages.jpgC:UsersQuanDesktopdownload.jpg Crust Gourmet Pizzas Eagle Boys Pizza: 281 stores C:UsersQuanDesktopdownload (1).jpgC:UsersQuanDesktopcrust_logo_vine__Square_normal.jpg Indirect competitors Dominos pizza has a huge variety of indirect competitors or close substitute products within fast food industry like Mc Donald, KFC, Subway, Nandos, Hungry Jack, Sushi†¦ Market share Dominos Pizza is the market leader in the Australian chained pizza market with 46.1% followed by Pizza Hut (29.8%), Eagle Boys Pizza (14%), Pizza Haven (3%) and other (7%) Figure : Market share Evaluation of competitive environment Monopolistic competition is a market structure where many producers of somewhat different products compete with one another (Robert, 2010, p 401). Dominos chain is operating in a fast food industry with a number of similar producers. These producers are competing together within Australia to gain market share in pizza market. Although the products produced and sold are basically the same among these producers, there are still different feature differentiate them, namely brand image, store design, location, additional services. What helps customers distinguish Dominos from other pizza stores are the distinct logo and design in store, easy online order and tracking as well as quick delivery service. In addition, barrier to entry pizza market is not really high. Although differentiation is a large and necessary expense for the large fast food chains, it is not difficult for private startups to overcome and thus not a significant barrier to market entry. As a result, it can be concluded that Dominos is operating in Monopolistic competition environment. Evaluation of Demand Curve Operating in Monopolistic competition environment and occupying 46.1% chained pizza market give Dominos a certain power to determinate pizza price in the market. Ii is assumed that Dominos increases its price; majority of customers would switch to other place for pizza like Pizza Hut, Eager Boys Pizza or switch to substitute products of pizza like burger, chicken, sushi. However, not all customers will do that; some of them will still buy Dominos pizza because of its convenient location or quick delivery. Therefore, demand curve for Dominos is relatively elastic but not horizontal as can be seen in the graph. Figure : Demand curve of Dominos As a nature of Monopolistic competition environment, firms that are operating in that environment can pursue the objective of maximizing their profit. As a result, price will be above marginal cost (as can be seen in the graph). Dominos also can maximize its profits by producing and selling the quantity of pizza at q* at which the pizza price will higher marginal cost of producing pizza. However, this pricing strategy need to be considered carefully and should be only employed in the short run because of the fact that in the long run if Dominos keep the price so high and its competitors reduce the price, Dominos will lose its customers base which means that the demand curve for Dominos will shift to the left leading to decreased profit of Dominos. In addition, this strategy also encourage new entrant to enter into the pizza market which also have the effect of shifting demand curve of Dominos to the left. Cost structure of Dominos Fixed cost and variable cost The short-run total costs of Dominos break down into two categories: fixed costs and variable costs. Fixed costs are the costs change with the level of outputs (Robert, 2010, p 296). For Dominos, these costs comprise of Management salaries, Plant and equipment, marketing expenses, occupancy expenses, store related expenses and communication expenses. On the other hand, variable costs are unchanged with the level of output. The variable costs of Dominos include the expenditure on Food and paper and employment. (For more detail refer to appendix 3) Figure : Cost structure of Dominos Evaluation of cost structure As can be seen from the cost structure of Dominos, the proportion of variable cost is relatively higher than fixed cost, 71% as opposed to 29%. In short term, declining average fixed cost is primary reason for the falling average total cost and with high output, diminishing marginal product causes marginal cost to increase which eventually causes average variable cost and average total cost to rise (Robert, 2010). Therefore, cost structure of Dominos indicates that as its pizza stores increase their sold pizza to stores capacity, the effect of declining average fixed cost will soon disappear and the effect of diminishing marginal product will be soon prominent leading to average total cost increasing quickly. This also explains why more Dominos pizza stores are going to be opened quickly within one year so that the average total cost will decrease again. This is illustrated in the graph below, as the average total cost increase quickly from A to B and its current stores nearly reach to capacity, Dominos will open another store to reduce the cost to C so that it can keep competitive price with its competitors. Diseconomies of scale occur as the firm finds it increasingly difficult to handle the complexities of large scale management (Robert, 2010, p 306). However, at the moment it is not a case for Dominos as the expansion strategy employed by the company is franchising. This strategy allows Dominos to expand operation without adding complexity to the management because the business model has been standardized to be able to be copied within a market and easily managed by manager. Therefore, in the long run Dominos still can manage its cost store by store and leverage the economies of scale for each new store opened. MACRO-ECONOMIC ENVIRONMENT Political environment in Australia Recently, Australia stood out as an attractive investment destination due to a political system that has been evaluated as being highly effective in responding to economic challenges .The adaptability of Australian government policy to economic changes has been ranked in the top two countries in the region (IMD World Competitiveness Yearbook, 2009). Australia also has an open, efficient and transparent legal framework due to a strong system of checks and balances, and a highly respected judicial and law enforcement system. Moreover, tax policy, labour law, environmental law, trade restrictions and tariffs are carefully constructed and implemented consistently which provide a clear guideline and safe environment for businesses (Australian Trade Commission, 2011). Economic environment in Australia The economy of Australia is one of the largest economies in the world. In 2011, it was the 13th largest national economy by nominal GDP and the 17th-largest measured by PPP adjusted GDP, about 1.7% of the world economy. Australia is the 19th largest importer and 19th largest exporter. Service sector is the main contributor to the Australian economy with 68% of GDP. The mining sector presents 19% of GDP. Economic growth is largely dependent on the mining sector and agricultural sector with the products to be exported mainly to the East Asian market. Australia is a member of the APEC, G20, OECD and WTO. The country has also signed free trade agreements with ASEAN, Chile, New Zealand, Thailand, and the United States. The ANZCERTA agreement with New Zealand has greatly increased integration with the New Zealand economy subjecting to form a Single Economic Market by 2015. Growth rate Australia is one of the fastest growing economies among developed countries. Despite of the effect of global financial crisis, Australian economy still shows a good sign of continual growth. The main industries contribute largely to Australian economy include mining, tourism, education, agriculture and manufacturing. Historical Data Chart Figure : Australia GDP growth rate Unemployment rate Jobless rates in Australia fluctuated between 5 to 5.4% between 2010 and 2012, this is a satisfactory indicator of a growth and healthy economy as natural rate of unemployment is 5%, especially in the worlds current situation where the unemployment rates in other developed countries are alarmingly high such as 7.8% in US and 11.8% in Europe.Historical Data Chart Figure : Australian unemployment rate Inflation rate.Historical Data Chart Consumer Price Index (CPI) shows a downward trend over the period from 2010 to 2012 reflecting an effective monetary policy of Australian government. Figure : Australia inflation rate Interest rate Interest rates in Australia tend to decrease significantly during 2011-2012; this indicates a healthy economy that encourages investment and capital markets remain open to corporations Historical Data Chart Figure :Australia interest rate Evaluation of influence of micro-economics on Dominos business Through above overview of macro-economic environment, it can be stated that Australian economy currently is favorable for organizations operating in and Dominos is not an exception. Economy is still growing and creating more jobs indicating that people will have more disposable income to spend, hence demand for pizza will increase in the future. This is demonstrated by the fact that disposable income per capita in Australia over last decade has been increasing 2.6% per year in average, meanwhile revenue of Dominos has been also increasing significantly at average rate of 20%. This fact also shows that pizza is likely to be a normal good because quantity demanded increase with the growth of consumers incomes. In addition, low unemployment rate and interest rate are good indicators for Dominos because it cans easily access to financial and human resources which are the key factors of any business. However, the problem face Dominos is the increase of food price and wages. As these are two main costs that make up for about 75% of total cost, an increase in those cost will influence the ability of Dominos to keep the competitive prices to customers. APPENDIX Appendix 1: Management salary and fees Appendix 2: Statement of income 2012 Fixed cost Value ($000) Variable cost Value ($000) Management salaries 5,142 Food and paper expenses 78,679 Plant and equipment costs 8,588 In store employees wages 60,140 Depreciation and amortization expense 10,029 Occupancy expenses 7,837 Marketing expenses 11,477 Store related expenses 5,887 Communication expenses 6,669 Total 55,647 Total 138,819 Appendix 3: Fixed cost and Variable cost of Dominos in 2012