Economist agree that demand is caused by a number of things such as the prices of related goods, the supply of that commodity, the power of the consumer to buy that product and also the consumer preferences. While these are some of the major reasons why a commodity may be highly or lowly demanded, the difference between demand and supply of the commodity has major implications for the company.
During times of falling demand, many companies fold as they are overwhelmed by diminishing returns. But this does not have to be so. If organisations intend to survive falling demand for their products, they have to learn how to manage demand (Crumand & Palmatier 2003).
One of the commonly used techniques by firm to try and survive falling demand is to adjust prices of the commodities downwards. Many companies opt to cut the prices of their commodities to endear customers to their products as affordable.
This is informed by the notion that demand of a commodity is influenced by the price (affordability) as compared to similar commodities. Companies that use this model hope that they can make as much as possible from a reduced market for their commodities. This measure though, may not generally address the problem as falling demand lead to an over supply of the commodity.
This means that there will be too much of the commodity that is selling at a lower price and as such a company’s returns experience a significance reduction, which may lead to closure of companies. This occurred in the printing industry in the USA in the 1900s (Davis 2011).
Falling demand and falling prices mean that there is too much supply of the commodity in the market and as such companies may be operating at a loss because they are producing too much commodities that they sell at significantly reduced prices. This means that the companies may not be able to meet sales targets.
In this case most of the commodities may go to waste, which means further losses for the company. To avid further losses the companies ought to conduct a demand survey and reduce their supply of commodity to match the existing demand for that product. Therefore, a company may only be able to supply what will be absorbed by the constrained market in terms of demand.
Period of falling demand are usually preceded by a period of increasing demand where company take advantage of that demand to establish mechanism for growth of their business. This includes increasing the capacity to produce so as to meet the rising demand. But when demand starts to fall it leaves the company with a high capacity to produce.
Falling demand leads to falling of prices and an oversupply of commodities in the market. If companies reduce their supply to just meet fallen demand it means that they are left with large commodities held up waiting to be sold. To clear this stockpile of commodities, companies can either increase their sales and marketing activities targeting new markets.
This includes rebranding of the commodities as well as strategic market positioning of their commodities (Crumand & Palmatier, 2003). This can be combined with scaling down the companies’ production of the commodity to a level that the company only produces what it is able to sell (Hill & Jones 2008).
The USA steel industry used this strategy in the early 1990s the result of which many of the steel companies only operated at minimally but reduced the losses and the impacts of fallen demand. Managing demand is crucial in order to ensure that companies overcome the perils associated with falling demand. To avoid being caught off guard by sudden fall in demand companies should conduct market survey to estimate future demand patterns. This will give them time to prepare in advance.
Reference List
Crum, C., & Palmatier, G., 2003, Demand Management Best Practices: Process, Principles, And Collaboration. New York: J Ross Publishing.
Davis, R., 2011. Economic & Print Market: Flash Report. Web.
Hill, C., & Jones, G., 2008, Strategic Management: An Integrated Approach. Ohio Houghton Miffling, Co.