Business concepts and applications

Business

Factors of Production

Monopolistic markets, such as the market in which soda drinks producers activate in, present a series of advantages and disadvantages. For example, there is little possibility that one player could control the market. Entry barriers are not significant, while producers are able to control price at some level. The downside of this type of market consists in the fact that products mainly differentiated by quality, appearance, or price. Therefore, producers must rely on factors of production in order to gain competitive advantage.

The factors of production, or productive inputs, used in soft drinks production are basically the same as for most products: natural resources represented by land, also labor, human capital, capital goods, and financial capital.

One of the most expensive factors of production is represented by land. Even if land is not directly involved in the actual production of soft drinks, the production plant in case is built on land, for which the owner must pay the rent. The financial crisis affecting the world nowadays has significantly influenced the real estate market in general, and the price of land, in particular.

Before the crisis, the trend in the real estate market consisted in the fact that the value of the land was more important than the value of the building on the land (Walsh, 2006). Although before the crisis the price of land had a general tendency to grow, the crisis has diminished the demand, and as a result, the prices decreased in most regions.

It is expected that land on coasts will experience a slower price reduction. The price reduction will be more significant for the land in the middle of the country. As mentioned above, the demand will decrease in the case of land, but the supply is expected to remain constant on short-term. On medium term and long-term, once the effects of the crisis will diminish, the demand will probably start to grow, which will lead to increased prices. The supply is likely to remain constant.

The land as indirect factor a production has a significant impact on the product's cost and consumer price. The higher the rent paid for the land, the higher the price of the product will be. In order to turn this into a competitive advantage, the company in case must find cheaper land, situated in areas that are not extremely requested by other buyers.

Labor is probably the most important factor of production any company could exploit. Although the general demand and supply for this type of production factor remain relatively constant, they vary for each sector of activity. As for the production factor discussed above, the financial crisis has significantly affected the evolution of the workforce market, determining important modification within the demand and supply.

In the U.S., the estimated unemployment rate was 7.2% in 2008 (CIA, 2009). The highest unemployment rates can be found in African and Asian countries. Also in the U.S., the highest unemployment rate since 1983 was reached in August, and was rated at 9.7% (AP, 2009). Generally speaking, the demand has increased, based on the fact that many companies had to close, adding many jobless to the already existing unemployed persons, and decreasing supply.

Given the context, the cost of the workforce is likely to decrease on short-term and medium term. Many companies cannot afford to produce their goods at the same cost as before the crisis. Therefore, they can either reduce wages, or reduce personnel, if not both. In these conditions, employees will be willing to work for less. On long-term, once the economy starts to recover and new jobs are created, it is expected that the labor price will increase progressively.

For large companies producing soda drinks and related products, outsourcing production in Regions like China or India, where the workforce is significantly cheaper, can be a solution for creating competitive advantage. The level of skilled work required in this industry is not a very high one, which means the quality of the product would not decrease.

Capital goods are a vital factor of production. Without suitable equipment used in the production plants, the actual production of goods, in this case soda drinks, would not be possible. The production process requires chemical treatments, which makes it even more important for the equipment to be of good quality.

The supply and demand for production equipment is mainly dependent on new and advanced technologies provided by various types of equipment. For example, once a certain type of equipment becomes more obsolete, the demand for that product will be lower. The price is higher for new developed equipments. This is reflected in both the quality of the product and its price.