ANDREWS UNIVERSITY - MBA K8

MANAGERIAL ECONOMICS

INDIVIDUAL ASSESSMENT

Lecturer: Assoc. Prof. PhD. Tran Nguyen Ngoc Anh Thu

Class: AU08 -HCM

Student: NGUYEN MINH THANG

Table of content
Question 1:An Analysis of Porter’s Five Forces Model..................................................................1

Question 2: Price Discrimination Strategy......................................................................................6

Question 3: Advertisement Decision...............................................................................................9

Question 4: Drawing Demand Curves...........................................................................................11

Question 5: Strategic Approaches To Gain Advantages...............................................................15

Question 6: Adverse Selection and Screening...............................................................................17

Question 7: Preventing Moral Hazard...........................................................................................18

References......................................................................................................................................21

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Question 1: An Analysis of Porter’s Five Forces Model

Porter’s Five Forces analysis is a model attempting to give an analysis of competitiveness within

a certain industry among counterparts. What is so beneficial of this model is that it helps

managers to know when to start a new business or when to enter a new industry sector. The

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combined influence of the five forces in the illustration below decides the profitability of an

industry, hence its potentials.

In the following passages, we will look into each force and its danger upon Coop’s business.

Each force will be given an definition first, followed by an explanation for the case study, and

finally a conclusion for the force.

Threat of new entrants: High

The threat of new entrants claims that given a lucrative industry, if a new company entering the

market can make a good profit both effectively and efficiently, the threat is considered to be

high, and vice versa.

As regards the case, producing private label products is a golden opportunity for other

competitors apart from Co-op Mart. For instance, it is reported that LOTTE Mart can offer its

own private label products with over 1,000 kinds of goods after 1 years, while Saigon Coop

possessed 3,000 kinds in 13 years. The difference between the number of goods is considerable

when comparing Coop and LOTTE, and that is not to say that fact that it took 13 years for Coop

to produce 3,000 kinds, while for LOTTE, it took only a year. Besides, Saigon Food JSC, which

supplies over 50 dishes to 7-Eleven convenience stores, is also attempting to enter this lucrative

business.

As such, with domestic and foreign competitors trying to be the new entrants, the threat is high

for Coop.

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Bargaining power of suppliers: Low

This force analyzes how much power and control a company’s supplier (also known as the

market of inputs) has over the potential to raise its prices or to reduce the quality of purchased

goods or services, which in turn would lower an industry’s profitability potential.

As is evidenced by the case study, manufacturers can benefit from distribution channels of

supermarket chains in corporation for private label products, meaning a low level of bargaining

power of suppliers.

Bargaining power of customers: High

This force refers to the pressure that customers/consumers can put on businesses to get them to

provide higher quality products, better customer service, and/or lower prices.

In terms of the case, the number of tough competitors entering the success in diverting customers

to consume their private labels products, such as LOTTE, BigC and Mega Market, has increased

considerably. These competitors have provided customers with offers, packages that reduce

products prices, in order to promote their private label products. It is because of this fact that

customers have a potent influence in this force.

Competitive rivalry: Moderate

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The control of a company in a business may reach a saturation level when too many competitors

are rivaling. In general cases, consumers expect products from a company whose products are of

reasonable price and quality.

The rivalry in this sector is competitively moderate. To elaborate, even though there is an

increase of players seeking for private labels promotion strategy by increasing their acquired

quality of their products at the lowest possible price, Coop Mart has, in a sense, succeeded in

establishing the position of providing private label products for 13 years. And because such

products have become acquainted to a lot of customers, customers, thanks to their loyalty, are

likely to choose Coop private label products.

Threats of substitutes: Low

When alternatives are available, customers may choose to buy them rather than private label

products, if whose quality is not as good as the others based on price expectations.

It is apparent that because private label products of Coop Mart are vast, with up to 3,000

products ranging from different kinds of household appliances, customers can have a variety of

choices regarding what to buy when going shopping at weekend. Therefore, customers are

always introduced with Coop products through advertisements and promotions, in which

situations the threat of substitution is relatively low.

Conclusion

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Because the overall strength of these five forces are competitively high, Coop must have a

strategic approach to tackle any problems that may arise in the future.

As regards the threat of new entrants, Coop should prioritize producing more private label

products by extending to other kinds of goods, such as plants and flowers, because living green

and protecting environment is a trend nowadays, and many companies are adopting green

policies to gain customer loyalty. If Coop Mart can act promptly, customers will be acquainted

with Coop products, and that will establish long-term commitment among customers with Coop.

Besides, in order to compete with other rivals, Coop should not stop improving the quality of its

private label products, or maintain the quality at least. Other approaches include offering

promotions and sales off which can attract more customers so that they can get to know more

about these private label products. In fact, this method is quite common in the current business

world, where Grab and Baemin constantly induce new customers to use their app by providing

sales off codes.

Question 2: Price Discrimination Strategy

Price discrimination, strictly speaking, is a strategy that charges customers differently for

branches of products or services based on customers’ income or expectations and on what the

seller thinks they can get the customer to agree to. The maximum rate that the seller charges each

customer is the full price he or she will pay. However, in some common forms of price

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discrimination, the seller places customers in groups based on certain attributes and charges each

group a different price.

In our case study, Coop has introduced three segments of products: Happy, Select, and Finest.

Happy is for customers with limited budget, Select is for those who can afford better quality

products, and Finest products are the best among the three, despite the high prices. We will focus

on each segment to see how Coop should use price discrimination strategy to develop its private

label products.

The Happy segment is mostly products that satisfy basic needs, such as toilet paper, washing

powder, cooking oil, sugar, salt, and rice. The prices of such products are considerably lower

than those from other segments.

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The Select segment, on the other hand, focuses more on fresh meat, electronics and household

appliances, clothes, and cosmetics. The price level is higher than Happy, for middle-income

families in Vietnam.

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Last but not least, The Finest segment consists of premium quality products which are carefully

selected and must pass the screening stage. Wealthy customers may choose this segment to

satisfy their high expectations of their living standards.

What is worth noting here is that customers are extremely satisfied with these private label

products, as is evidenced by Ms. Huyen, who gave a positive remark in an article (Tuoi Tre

2019). It seems that the price discrimination strategy is effective for the benefit of Coop, in that it

helps Coop to have valuable insights into customers’ behavior, while also provides better

strategic approach to product segmentation.

Question 3: Advertising Decision

According to the textbook Managerial Accounting by Garrison Norren, in order to evaluate the

performance of a proposed plan, Asset Turnover formula will come in handy. The following

formula shows how it should be analyzed:

With the information we gain from the question,

Sales = Expected Sales Units Increase x Average price of products

= 89,000 x 32,500

= 1,612,500,000 VND

Capital Employed = 1,280,000,000

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Hence,

1,612,500,000
Asset Turnover = 1,280,000,000 = 1.26 = 126%

The following table summarize all of the above information:

Advertisement budget 1,280,000,000

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 investment (VND)

Expected sale units increase 89,000

Average price of products 32,500

(VND)

Expected revenue increase 1,612,500,000

(VND)

Asset Turnover 126%

The meaning of Asset Turnover shows that for every 1,000 VND of capital employed, 1,260

VND of revenue is gained in return. Because the Asset Turnover is an advantageous number to

care about, Coop Mart should carry out this advertising program to further achieve better

revenues, hence better profits.

Question 4: Drawing Demand Curves

According to the textbook Principles of Economics by N. Gregory Mankiw, the demand model is

helpful to illustrate the questions raised in the case study. The following illustration helps shed

light on what we need to focus on to solve each question.

The demand curve for Sai Gon Coop’s detergent is as follows:

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 Price of Coop’s Detergent

Quantity of Coop’s Detergent

 The price of Omo detergent rises

Because Omo detergent belongs to Unilever, this means that Omo is a product of Coop’s

competitors. In fact, Omo detergent is called substitute products, meaning that a fall in demand

for Omo will benefit Coop’s detergent, whose demand line will shift to the right as a result.

In this case, customers may choose to purchase Coop’s detergent, so the number of buyers for

Coop’s detergent increase. As such, when the price of Omo detergent increases, this will have an

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effect on the demand curve of Coop’s detergent, as represented by a shift of the demand curve

to the right.

Price of Coop’s Detergent

D2

D1
Quantity of Coop’s Detergent

 The prices of Saigon Coop’s detergent falls

When the price of a product itself changes, it will cause a movement along the demand curve,

but not a shift, as illustrated below.

Initially, at point A, the price is indicated with P0 and the quantity is Q0. However, when the price

increases to P1, people will notice this change and thus they will buy less of it. When people buy

less, this means a decrease will ensue, hence the leftward movement in the demand curve, as

indicated by Q0. Notice that point B is the result of the change in price.

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 Price of Coop’s Detergent

B
P1
A
P0

D
Quantity of Coop’s Detergent
Q1 Q0
 The prices of Comfort softener falls

What happens when the price of sprinkle falls? According to the law of demands, people will

buy more of it. But they will also consider buying more ice cream, because ice cream and

sprinkle is usually used together. In fact, the two goods are called complements.

Similarly, because softener and detergent is usually used together (as softener adds scent to

clothes), when the price of Comfort softener falls, customers may choose to buy Coop’s

detergent too. Therefore, the demand curve for Coop’s detergent will shift to the right.

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 Price of Coop’s Detergent

D2

D1
Quantity of Coop’s Detergent

Question 5: Strategic Approaches To Gain Advantages

To get an advantage over other competitors, Coop Mart should be acutely aware of current

situations, thereby promptly reacting to what society needs the most. As a matter of fact, an

economic performance is crucial to the sustainability of the company in the future.

In a traditional sense, when an overall cost is less than revenue, which means profit is attainable,

the economic performance is said to be prospective, while a negative figure in profit indicates an

undesired aim for any companies. So the question emerges as how Coop Mart seeks to gain

further profit, and there are many approaches to this. However, some are notably clear to shed

light on this question.

 See costs as investments and capabilities

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First, Coop should connect costs and strategies. This mean Coop Mart managers should look at

every opportunity to see which costs should be spent so that they can translate into profit in right

products and in the right time. For instance, because private label products of Coop Mart are

gaining profits in recent years, managers should expect these costs to be high as compared to

other product types. Even though the costs will rise, ultimately they will help earn better profits

because private label products are gaining popularity, which will offset the costs.

 Innovate and improve products quality

Many traditional products are being replaced with better versions. This means that innovation is

at the core of earning customers’ valuable confidence. For instance, in the past, housewives

would need to use their hands to wash mops, but through innovation, mops were upgraded so

that housewives could clean dirt and stains on mops without touching their hands thanks to

specific equipment.

Because Coop Mart is “the friend of every household”, it should focus on improving products’

convenience and ease of using products so that it can live up to its slogan. As such, researching

and development is extremely crucial to attract potential customers, while keeping old

customers’ loyalty.

 Branding and marketing

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Good products may be useful to many customers, but without marketing, they would not be well-

known. Marketing plays an important in raising awareness of such products to customers.

At the very heart of a successful marketing lies implanting a deep-rooted mindset among

customers. To elaborate, marketing strategists should make customers know that Coop Mart’s

private label products are worthy of their quality, and by repetitive advertisements, or hiring

celebrities to run marketing campaigns, customers will soon have a positive image of this brand.

Another way to keep a good branding is to show the public that Coop Mart takes great care of

Corporate Social Responsibilities (CSR). Coop Mart can run some charities for orphanages and

disaster-stricken areas, donating meals to homeless people, giving scholarships to poverty-

stricken families. All of these methods are beneficial to Coop’s image in the public eye.

Question 6: Adverse Selection and Screening

Adverse selection is a problem that arises in labor markets in which the employee knows more

about their personalities and competencies than the employer does. In such a situation, the

employer runs the risk of hiring a lazy, undesired employee.

In view of Saigon Coop, when selecting employees, the human resources department must be

acutely aware of adverse selection. The employer should know who to trust and who tells the

truth so as not to hire a “lemon” (a person with no valuable asset to a company). Doing so would

require some strategic approaches, one of which is screening.

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As a matter of fact, screening is useful in revealing hidden information that the employee wants

to hide. Because the employer is a trained specialist in recognizing human potentials, he can

somewhat know the personalities of the employee by listening to the speaker’s tone, voice, and

his language body. If that employee acts politely during an interview, dresses neatly and talks in

a calm tone, chances are that he is reliable. It is also worth keeping in mind that he should have

all of the good impressions, otherwise he would still be unsuitable. For instance, If he is well-

dressed, but behaves pessimistically when asked a hard question, chances are that he finds it

difficult to cope with pressure.

Another way of screening is to use social media to see whether the employee is dependable or

not. Although some people are well-behaved in real life, on the Internet, particularly on

Facebook and Instagram, they may post statuses with vulgar words and rude comments.

However, this method is only useful when the employee shows public posts.

In order to test the employee, the employer can also forewarn him. For example, if he uses

smartphone during working hours and gets caught by a manager, he will be severely punished.

Or unless the employee reaches KPI, the manager won’t allow him to have bonus and may be re-

evaluated to check his work performance.

Question 7: Preventing Moral Hazard

Moral hazard usually happens when employees do not wish to shoulder any responsibility at

their places of employment. Over time, an employee may notice that he can do little work while

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still earning the same wage as other employees. And sometimes, he will let new employees who

are just hired do much workload for him. In fact, this can occur many a times in not only

Vietnam but worldwide.

In the case study, Coop’s long-commited employees may turn bossy or lazy due to moral hazard.

This is indeed detrimental to the working culture of Coop. Bossy employees tend to make new

ones do the work for the former instead, but in fact, they don’t have the right to do so. As such,

new employees will bear grudges against bossy employees, and hostility at workplace is likely to

happen. Lazy employees, on the other hand, will tend to shirk their responsibilities, which will

hinder the collective progress. Suppose a sales team has to reach monthly KPI, if one employee

is lazy, other members have to do the work for him in order not to upset their boss. When one

employees is lazy, other members may find that they can actually be as lazy as him, because if

they work more, they will just earn the same wage, so there is no point in trying to stand out

from the rest. Overall, it is a vicious circle.

Therefore, here are some approaches to tackle the above-mentioned problems:

 Promotional levels

Many companies now adopt this method to reward employees who are loyal to working for a

long time. For example, when you have just graduated from a university and succeeded in

applying for a job, you will be an intern. After months of probation, you will be promoted to be

an official employee, at fresher level. After a year of working, you may request a promotion, and

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if possible, you will reach junior level. Having accumulated experience for two to three years, a

senior level may be rewarded to you. And the list goes on and on. Of course, each level will have

different bonus and salaries. The aim of this method is to constantly give employees rewards so

that they feel they are recognized, and always try to thrive to be better.

 Providing incentives

As one of the ten principles of economics states: “Humans respond to incentives”. When a good

employee can reach KPI, managers should publicly praise him to the whole company. Titles such

as “Employee of the month” or “Best salesperson of the year” is extremely important to their

recognition. Jealousy might happen among employees, but thanks to jealousy, people will work

better to earn the titles. Or perhaps providing monetary rewards is the most comfortable

approach to incentivize employees.

 Punishments

Even though this method is not wanted by many employees, managers and leaders nonetheless

feel that it is necessary as a last resort. In point of fact, this strategy is introduced many centuries

ago and is still popular nowadays. As Niccolo Machiavelli points out in his book The Prince,

managers should control their employees by fear. When employees show negative attitude

towards work and persuasion has come in no use, punishments should come in handy instead.

Mild punishments involve correcting false attitude of bossy or lazy employees, while severe ones

tend to cut salaries or even demote them.

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Also, managers can punish someone really bad and make it as an example to anyone having the

same attitude. Making an example of lazy and bossy employees will prevent others from doing

the same, because they will be afraid of being criticized in front of so many people.

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 References

Porter, Michael E. "The Five Competitive Forces That Shape Strategy." Special Issue on HBS

Centennial. Harvard Business Review 86, no. 1 (January 2008): 78–93.

Alexandra Twin, Price Discrimination, 2020. Available at

https://www.investopedia.com/terms/p/price_discrimination.asp

N. Gregory Mankiw, Principles of Economics, 8th edition, USA; 2018, 67 p.

Garrison Norren, Managerial Accounting, 14th edition, New York; 2012, 475 pg.

The Saigon Times 2017. Private-label products hold high potential. Available at

https://english.thesaigontimes.vn/55112/private-label-products-hold-high-potential.html

Tuoi Tre 2019, Hang nhan rieng ghi diem nho gia re chat luong. Available at

https://tuoitre.vn/hang-nhan-rieng-ghi-diem-nho-gia-re-chat-luong-20190925190126886.htm

Harvard Business Review. 2017. Creating New Market Space. [online] Available at:

<https://hbr.org/1999/01/creating-new-market-space> [Accessed 23 April 2017].

Cosans, C., & Reina, C. (2018). The Leadership Ethics of Machiavelli’s Prince. Business Ethics

Quarterly, 28(3), 275-300. Available at  https://doi.org/10.1017/beq.2017.13

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