Full Speed Ahead (Case Transcript)

Firms face a shifting demand and supply landscape and must respond appropriately to survive and prosper. A firm's ability to appropriately anticipate trends in consumer demand is crucial to its success. For more than 50 years, Fortune Magazine has reported "Fortune 500" companies, a revenue-ranked list of top firms based in the United States. Less than 12% of companies included in this list 1955 were still on the list in 2017, and 88% of these companies had gone bankrupt, merged or been displaced by larger firms. (Perry, 2017). While many factors can influence firm success, successfully navigating demand is certainly an important concern.

In 2020 an additional, previously unperceived risk affected firms' ability to compete. The Corona Virus Pandemic precipitated a deep economic downturn in early 2020. Public health concerns were not previously expected to severely limit economic activity and require broad changes in the way business is conducted. As a result of this changing threat landscape, digital alternatives and alternatives allowing greater social distancing became the new normal. Business is likely to incorporate these elements into the future, given that a viral risk is no longer just a theoretical possibility.

Firms can respond proactively to both demand and public health risks. A firm can successfully manage consumer demand by considering price and income elasticity, plus elasticity of supply. Elasticity of supply will limit a firm producing at capacity, or switching production processes; both of these options are most likely to become available in the mid or long-term, rather than in a current time period. In a recession, a firm is likely to be producing below capacity if the goods the firm produces are income elastic. Meanwhile, a firm is less likely to have spare capacity if the income elasticity of the goods it produces are income inelastic - because demand for its products is not strongly affected by shortfalls in income that occur in an economic contraction.

In producing most goods, firms anticipate that a price increase will decrease demand for their goods and vice versa. For this reason, firms usually estimate elasticity for their produces and demand characteristics. Many goods have also been the subject of research establishing elasticity. Firms utilize this data in pricing and production decisions. Using purchasing data, firms can divide a percentage change in quantity demanded by a percentage change in price to calculate consumers' anticipated response to a change in price. A similar calculation can discern sensitivity of demand to changes in income, or the price of related goods including substitutes and complements. Firms also consider demand from a theoretical standpoint, knowing beforehand that goods vary in the terms of both price and income elasticity in predictable ways. For instance, broad varieties of goods are known to be discretionary in nature. Dental care may be discretionary unless a painful emergency occurs. However, certain medications are necessary and are therefore not considered to be discretionary. Usually, firms begin with an idea of the demand characteristics of their products, working from general marketplace experience as consumers.

Health concerns exposed economic vulnerabilities related to a firm's ability to institute social distance measures among production staff and clientele to avoid shrinkage in total revenue. Health concerns are correlated with an increased tendency to stay at home and practice social distancing. Health concerns may also keep consumers from visiting retail space, which imposes large month-to-month (fixed) costs on firms as demand falls. Perceiving the threat of pandemic causes many firms to embrace change and move full speed to develop economically robust, recession-proof and pandemic-proof supplements or substitutes to their product line. For instance, schools can move educational services online, and physicians examine patients virtually. Retail outlets and veterinarians implement curb-side pick-up services. Liquor distilleries may add hand sanitizer to their product lines even as automobile manufacturers shift resources to ventilator production. Retailers can limit numbers of customers entering retail space and offered more recession proof (income and price inelastic) products such as hand sanitizer. Retailers can also offer greater numbers of items for use at home, such as home-office, baking, craft and gardening equipment. These efforts are likely to indicate practices that will lead to continued success in meeting consumer demand in an environment characterized the possibility of recurrent or periodic public health risks. Markets may continues to be awash in challenges associated with this new risk (Vigna, 2020), and its effects - like those of the Financial Crisis of 2008-2009 - are unlikely to be forgotten.

Your Role:

You will play the role of an Economic Analyst specializing in corporate repositioning. Your role at Econ-Aid (a fictitious firm) is to provide economic research to mid-size firms seeking advice on shifts in product revision and development, and production if necessary. In this unique recessionary time-period, a steep downturn in product demand has affected most sectors of the economy. The recession was precipitated by an economic shock brought on by policy measures put in place to control a public health challenge. Amid a general economic downturn (the recessionary phase of the business cycle characterized by shrinking employment and output across the whole economy), some firms found demand rising or remaining stable. If you own a business, it is useful to know how a change in the price of the good you sell will influence the amount of your revenue. Your revenue is calculated by multiplying the amount of a good sold by the price charged for that good. A firm's ability to maximize total revenue is, on average, due to:

1. Shifts in demand resulting from falling income.
2. Shifts in demand resulting from public health concerns.