IntroductionAs the GM Case Study indicates, competition between the local brand and the foreign brand can give the local brand an edge especially when the foreign brand has more cost attached to it. GM, for example, was obliged to cut the costs of its cars in China because the national brands were gaining market share “by offering cheaper sport utility vehicles” (Bloomberg, 2015). In Kuwait, there is a lot of potential for local businesses to grow and edge out foreign competitors. In various fields, Kuwait is showing potential and innovation. It is behind only Saudi Arabia and Turkey in the number of scientific and technological patents produced (USPTO, 2015). Kuwait has emerged as a leader in Gulf Cooperation Council (GCC) countries in terms of innovation (“Kuwait sees fastest growth of GCC countries obtaining patents,” 2016). And as the Kuwait Times (2018) reports, “Kuwait has witnessed an extraordinary rise in entrepreneurship and small business start-ups.” Many Kuwaitis are using Instagram, for instance, as online store fronts to showcase products and boost sales, which is an innovative approach to business that correlates well with the local culture (Greenfield, 2013). However, one of the biggest factors in business growth is price. The GM Case Study shows that no matter what the brand is or how great the engineering may be, consumers are always going to be attracted to low prices. For businesses in Kuwait the lesson to be learned here is that why innovative practices can enhance visibility, the main goal of a growing business should be to attract customers by applying the right price at the right time to the right products. This paper will evaluate the GM Case Study, discuss the role of demand theory in GM’s decision to lower prices, and examine how the Case Study applies to Kuwaiti businesses and what lessons can be learned.
The GM Case Study
The GM Case Study is important to understand because it shows how a major foreign brand can run into hard times when it applies the wrong pricing to its products. For a company like GM, there is a need to protect its margins, which is one reason why it generally has higher prices in the first place (Bloomberg, 2015). However, for local competitors in the auto industry in China, this same need was not as evident and they could afford to undercut the GM brand by offering similar automobiles at a lower price to local consumers. This forced GM to have to make a decision: would it suffer a loss of market share as local, national brands took over the market with their low-cost, low-price products? Or would it try to maintain market share by slashing prices and trying to be competitive with the national automakers? Following in the footsteps of Volkswagen AG, GM announced that it would indeed cut prices on its 40 models made under the Buick, Chevrolet and Cadillac brands by more than 50000 yuan per product (Bloomberg, 2015). Because sales were dropping month over month at a rapid pace (nearly 10% in some instances), GM felt that there was no real alternative (Bloomberg, 2015). It had to start looking at the big difference between itself and its competitors—price.
To make up for the price gap GM also tried to offer various incentives to lure customers its way. It tried to introduce “subsidized insurance, zero down payment, interest-free financing, exemption of purchase tax and trade-in subsidies”—however, at the end of the day, what the consumer wants is a low price (Bloomberg, 2015). Subsidies and other incentives might sound nice but the price tag is the immediate eye-catcher: it is the factor that jumps out at the consumer more than...
By making prices elastic to consumer demand, GM could maximize profits while demand was strong and lower prices when demand fell in order to try to increase demand once more. The important point to learn from this strategy is that markets fluctuate and price must continually rebalance with demand.
What the GM Case Study Reveals
What the GM Case Study reveals is that when it comes to business, price is one of the most important factors. Brand might help to boost sales in the early stages of entering into a market. A brand offers a novelty to consumers. After a while, however, the novelty can wear off. The consumer will begin to think more and more about his finances. The economic aspect of making the right purchase begins to override the novelty of sporting a new brand. From a business point of view, products must therefore offer consumers an economic incentive—and that comes by way of price. The low price product will always have appeal, even if the quality is not equal to major brands. Why is this? The low price product speaks to the consumer in simple, economic terms: it says, “If you would like this product at an affordable cost to you, I am the one to buy.” Economics is crucial to the consumer: money, pricing, affordability, cost, income, expense—all of this matters to the buyer in the long run because there is only so much that the purchaser can afford, and there are a lot of purchases to be made. The buyer must, therefore, be scrupulous and thoughtful when making purchases over time; one big purchase can mean that many other purchase will have to be abandoned. If a consumer is price-conscious, a business must also be price-conscious.
Demand theory holds that “setting the price for a product is crucial for the product’s and a company’s success” and in the light of that theory the business must ask: “what is the best price for a particular product?” (Textbook, n.d., p. 31). The factors that go into determining the best price for a product will vary. For example, a company like GM has to take into consideration the cost of materials used to manufacture the car, the cost of labor, the cost of supplies, and so on. But this is just one set of factors. There is also another set of factors that comes from the market. Competitors have prices too and a business must be aware of where competitors are pricing their products so that they can use this information to arrive at their own best price. In this sense, the market is what determines the best price of any one product at the end of the day. When companies that offer discount prices gain market share, the biggest reason is that they have paid attention to demand theory and given consumers that which they demand—the best possible price for the product. When prices become too expensive, demand for the product disappears—and that is exactly what was happening with GM in China.
How the GM Case Study Applies to Kuwait
Kuwaiti customers are really no different from any other customers around the world. Whether it is China or the U.S. or the Middle East, consumers are always going to be price-conscious. Thus, the GM Case Study can teach Kuwait businesses a few lessons about what it means to understand demand theory and how to apply it in their own business plans.
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