Evolution in Consumer Experience and Purchasing Behaviour of Luxury Goods
Title: Consumer Experience and Purchasing Behaviour of Luxury Goods. This dissertation aims to determine whether behaviour changes in consumers have been affecting sales of luxury branded accessories over recent years. The research is significant to the luxury products particularly the sale of accessories within the fashion industry. The fashion and design industry stakeholders range from store-owners to merchandisers and business executives whose decisions reflect on the customer’s reactions and the behaviours toward product thus affecting sales of that particular product. The purpose of conducting this research is to find out whether the luxury products’ perception has depreciated over time due to impacts brought about by changes in customers’ behaviours. The research also aimed at determining whether luxury accessories have become readily available in the market and the impacts of the associated factors which make the brands less luxurious.
The consumer behaviour is basically affected by factors such as change in mode of communication, social networking, globalization, mass consumption, harmonization of the culture, e-tail, celebrity branding and the 2008 economic recession. The researcher has collected data from a wide range of literature such as academic sources and journals to help in finding out the main changes existing in consumers’ behaviour. These academic materials represent the theoretical section of this research. The research conducted involved carrying out interviews which were compiled per oral and written format. This were then sent to luxury retailers as a section of case study and later analyzed. The author finally managed to compare and contrast the obtained results on the theoretical analysis in parallel to the company case. The results were compared with a report conducted on luxury spending habits which have been published by the American Express representing part of this research discussion.
Luxury Goods Brands Dissertation
Dissertation objectives
To determine the consumer’s experience and purchase behaviour changes in the recent years within the luxury market
To find out whether the consumers’ behaviour changes phenomenon depreciates the luxury value of luxury brands
To find out whether the consumer experience and purchasing behaviour changes influenced consumption and consumerization of the luxury brands leading to the wider accessibility of luxury in the fashion industry
Dissertation Contents
1 – Introduction
Background of the study
The aim of the study
Objectives of the research
General objective
Specific objectives
Research questions
Research hypothesis
Research methodology
Expected outcomes
Problems and limitations
Theoretical framework
2 – Literature Review
Background information
The history and evaluation of luxury goods branding in high fashion
The key concepts
Accessories
The relationship between the price and quality in the luxury market
Globalization and changes in the luxury goods market communication
Social networking
Blogs
Mass consumption
The global marketplaces, global consumer culture and harmonization
E-tail
Celebrity branding and endorsement
Celebrities as a reference group
Celebrities as style icons
From the point of view of a fashion luxury brand
From the point of view of the luxury goods market as a whole
Future of the luxury products and market after the recession
3 – Research Methodology
Research Design
Data Collection Methods
Compiling Interviews
Sampling Frame
Piloting
Company Cases
ASOS
Helsinki 10
FINSK
Data Analysis
Limitations
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This post includes an introduction, a body, and a conclusion. The introduction introduces the concept of cognitive psychology and how it influences the responses of individuals. It also gives out a detailed history of how cognitive psychology has evolved through the ages. The body has explained the components of cognitive functions. The study of these cognitive functions defines the whole concept of cognitive psychology. These functions include language, perception, memory, and attention. The body also explains the how the computer analogy compares with the processing procedure of information in the human brain. The succeeding section includes three paragraphs that elaborate the importance of cognitive psychology. Lastly, the last section contains two paragraphs that summarize the whole essay.
Introduction
Unarguably, the scientific study of the human mental and cognitive functions has led to many discoveries and observations. Foremost, various psychologists and anatomists have tried to elaborate the human cognitive human processes. For instance, history elicits that Plato was among the first individuals, who tried to explain how the human mental processes function. Cognitive psychology entails the scholarly and practical study that tries to comprehend the manifestation of the various mental processes.
Indeed, the brain is a complex organ that operates in a complex manner to process and coordinates the various processes in our bodies. Thus, cognitive psychology tries to outline how the brain compartmentalizes functions such as memory, perception, language, reason making, and perception (Thorndyke, 1977). It is relevant to mention that this study emphasizes how mental processes affect the way humans act, operate or feel. Furthermore, it is crucial to add that cognitive psychology requires an understanding of cognitive science and the fundamental foundations of cognition.
As mentioned earlier, cognitive psychology utilizes various research and studies that elaborate the various mental processes. Thus, this study has links to the various branches of psychology. For instance, these concepts exist in the fields of personality, social, educational, and developmental psychology. Various concepts entail the functioning of the brain with regard to mental processes.
Plato came up with the notion that the brain is the foundation of the various cognitive processes. Various philosophers and psychologists have argued for or against this notion. History elicits that there were scholars, who argued that human thought was innate. This concept tried to show that human thought was not experiential. Alternatively, other philosophical debates tried to elaborate that human thought depended on the sensory situations.
In fact, philosophers such as John Locke extensively supported this idea. Crucially, comprehension of the various cognitive functions requires an understanding of the anatomy and functioning of the brain. Notably, the 18th century paved the way for this understanding. Broca’s area is an anatomical part of the temporal region of the brain associated with language development and production (Mandler & Johnson, 1977).
Paul Broca discovered that this anatomical area determined the nature of language production in humans. This discovery was very crucial, since, it strengthened the foundations of cognitive psychology. Consequently, Broca’s aphasia relates to the dysfunctional production of language. Carl Wernicke identified the region associated with the processing and understanding of language. Damage to the Wernicke’s area due to trauma, infections or congenital malformations causes Wernicke aphasia.
Fundamentally, various situations and occurrences in history increased the awareness of cognitive psychology. In fact, psychologists drew various concepts from the various occasions in history. For instance, the introduction of the computer technology induced various concepts concerning cognitive psychology. The understanding of how the artificial intelligence affects the computer performance was very crucial. It enabled psychologists to draw contrasts and comparisons between this process and how the mental functions operate. It is fundamental to note that computer experts such as Herbert Simon and Allen Newell cooperated with cognitive psychologists. These synergic efforts helped the evolution of cognitive psychology (Tversky, 1981). Significantly, the World War II led to various insights regarding the understanding of behaviorism. There was a general motivation for scientists, who wanted to increase the performance of soldiers.
Various individuals, such as Donald Broadbent developed concepts of behaviorism that provided more insight about the field of cognitive psychology. Indeed, human cognitive functions play various roles in the survival of human beings. Sensory input plays the role of information in the human’s brain. Thus, it has to go through various transformational and conversion stages so as to produce relevant interpretations. It is important to mention that cognitive psychology may have various distinctions or branches depending that improve the general comprehension of cognitive psychology.
Cognitive Psychology Dissertations
The main distinction involves a classification of the various sources of information related to cognition. As mentioned earlier, mental processes and computer functionality have a couple of similarities. Therefore, the main branches include cognitive neuroscience, experimental psychology, and computer analogies approach. Using this classification, individuals may comprehend how mental cognitive functions operate.
Cognitive neuroscience involves how the brain functions when under various types of stress or duress. For example, cognitive dysfunction may occur due to trauma, congenital malformations, infections or brain tumors. Thus, an understanding of how these factors affect the general cognitive functions explain the scope of cognitive neuroscience. Human experimental psychology entails the study of the various mental activities and how they interrelate with the sensory input. The effect of various situations on language or memory may enhance the comprehension of human experimental psychology. Notably, computers receive data input and process it through various sequential procedures. Thus, there is a branch of cognitive psychology that dwells on the comparisons and contrasts between computer functionality and mental procedures. In summary, this paragraph provides more insight on how the various cognitive psychology concepts evolved.
Humans constantly receive data in the form of sensory input. The various sensory perceptions include the sense of sight, smell, taste, sound, and touch. Physiology explains how these senses coordinate the behavior and state of humans. Sensory input travels through nerves to the nervous system. The central nervous system includes the brain and the spinal cord. Thus, these organs have the capability of interpreting data and converting it into useful information. Significantly, the cerebral cortex plays a crucial role in converting the sensory input. For example, the occipital cortex processes visual stimuli (Siegler, 1976).
The body, consequently, utilizes the information to perform bodily functions that manifest as responses. The body may react to painful stimuli by moving that part of the body. Indeed, the fundamental areas of study in cognitive psychology involve mental functions that influence behavior. This essay shall elaborate the contents of the major mental processes. These include attention, perception, memory, language and metacognition. Foremost, attention affects the way humans behave and act.
There is no proper definition for this term. However, it defines the presence of alertness towards a certain sense of perception. Attention has two major branches. Psychologists categorize attention depending on the type of control type. Hence, attention may have exogenous or endogenous control. This distinction aids in elaborating the various ways in which attention operates. In fact, psychologists use various models to explain how the influence of attention on our behaviors and actions.
The endogenous type of attention originates from the brain, especially, from the cerebral cortex. In this model, the brain actively sends impulses that control the awareness of the sensory input from the external environment. For instance, an individual studying a section of a book elicits this type of attention. Alternatively, the exogenous kind of attention refers to awareness of sensory impulses from the peripheral regions of the body. Exogenous attention, often, manifests in our daily activities. The significance of attention is evident when the brain is receiving different kinds of stimuli from the environment.
The brain discriminates between the crucial and irrelevant kinds of sensory input. Thus, attention enables the brain to perform its cognitive functions effectively. It filters and picks out the important aspects of data. This effect helps the brain to concentrate on the various aspects of data in the environment.
Unarguably, many cognitive psychologists have studied the various aspects of divided attention. People are able to critically analyze and process diverse forms of sensory input. This phenomenon occurs due to divided attention. Thus, friends at a loud party can talk to each other and, concurrently, appreciate the decent music at the background. Researchers are still trying to figure how the brain picks attention and how it processes sensory input so as to produce information (Anderson, 1990). In summary, attention is crucial, since, it avoids the overload of data at the brain. Too much unfiltered information may lead to confusion and poor concentration.
Language is a fundamental aspect of cognitive function. Cognitive psychologists extensively research and conduct various experiments on this field of study. Language involves the use of phonetic and articulation sounds to communicate. This cognitive function affects the way individuals relate to each other. There are various disorders associated with the poor development of language. Dysarthria refers to the poor articulation of sounds in relation to talking or speech formation. Alternatively, dysphonia describes the inability to produce speech sounds.
Often, it manifests due to the impairment of the vocal organs which include the tongue, throat, mouth, and lips. This elaboration emphasizes on the relevance of language in the lives of humans. In fact, the main form of communication in humans is through the use of language. It acts as an auditory form of sensory input. Thus, language is not a communication tool in the auditory impaired individuals. As mentioned earlier, cognitive psychology involves the study of how cognitive functions influence the way humans behave. Language is a principle factor that affects the way humans act or behave.
The temporal region of the cerebral cortex takes part in the development, production and processing of language. The Broca area of the cerebral cortex plays the crucial role of language production. Paul Broca provided the insight about how the brain perceives input and produces language. He discovered that the cerebral cortex coordinated the audio output through at this area of the brain. Physiologists and psychologists refer to the dysfunction of language production as Broca aphasia.
Broca aphasia has various causes. However, the main cause of this type of aphasia occurs due to brain injury at the Broca’s area. On the other hand, the Wernicke area participates in the processing of language. It is relevant to mention that the human body perceives the various forms of sensory input and undergoes a sequential process to produce relevant information (Williams et.al, 1988). This information may be in the form of audio input. Physiologists and psychologists have extensively studied this area in a bid to understand how this area incorporates signals to produce output. Indeed, language is a vital aspect of human development. In fact, pediatricians concentrate on language development in infants because it may predict the cognitive function (Bruning et.al, 1999). Various factors influence the way people develop language. For example, memory and socioeconomic status are major determinants of language development.
Significantly, memory is a fundamental component of cognitive functions. There are two major distinctions of memory. Short term memory defines memory over a short period of time. Cognitive psychologists dedicate most of their research in studying the aspects of memory. Amnesia is a common symptom of patients, who have suffered from concussions. It refers to the lack of memory. Various factors may affect memory. Of course, individuals vary in the way they remember events, people or names. Thus, genetics affect memory. In fact, research shows that gene variations may influence the functioning of the cerebral cortex in terms of the formation of the neural circuits. Therefore, this effect may also elaborate the differences in learning rates. Amnesia occurs after concussions due to the traumatic injury of the head. Practitioners and psychologists use various ways to gauge the memory levels of various individuals.
For instance, a practitioner may ask a patient to tell him or her the name of the president as a mode of gauging the long-term memory. There are various concepts that cognitive psychologists utilize to elaborate the different instances of memory. For instance, the Ebbinghaus experiment involves the naming of a list of items. This experiment elicits that it is easier for people to recall items mentioned at the start or the end of a list. Nevertheless, some words in the list may attract more attention more than others. Long-term memory has various types. A common type of long-term memory is the semantic memory, which individuals use to identify popular things or names.
Cognitive psychologists extensively study on how the mental processes process and dedicate information. Thus, they utilize various approaches to studying the impact of these mental functions on behavior. A good example of a psychological approach is the reductionist approach. This approach refers to the ideology that regardless of the complexity of human behavior, filtering of cognitive functions is possible. Thus, it is important to emphasize the role of practical studies and applications on the study of cognitive psychology
Of course, scientific studies require practical applications and studies that prove the accuracy and legitimacy of the concepts (Rosch, 1975). Therefore, cognitive psychology also requires a laboratory utilized for testing the credibility of the various theories. Nevertheless, it is important to mention that some laboratory studies might lack the appropriate laboratory validity. Notably, this branch of psychology involves the extensive use of experimental methods. Cognitive psychology has theories that oppose some of the concepts of behaviorism and conditioning. It also antagonizes the concepts of the various psychoanalytical theories developed by famous psychologists such as Sigmund Freud.
Critical analysis of the various cognitive processes shows that the invention of the computers induced an elevating interest in the comprehension of the whole concept of thinking. Psychology scholars agree that the field of cognitive psychology gradually progressed during the 1960s. Famous psychologists such as Jean Piaget laid the foundation for the development of principles regarding cognitive thinking and reasoning. The artificial intelligence system of the computers resembles how the various mental functions.
Computer analogy provides a rough description regarding how the computer processes information. Consequently, cognitive psychologists link this process to the sequence of cognition. The paradigm of cognitive information starts with the perception of various stimuli from the environment. It is relevant to point out that there are various distinctions between behaviorism and cognitive psychology. Behaviorists always study the external manifestations of human behavior. Thus, they can only observe the body stimulus and response. Hence, they only study the input and output. Alternatively, cognitive psychologists believe that human behavior has an external and internal component. They, therefore, study the input and response. Also, they study how the internal processes coordinate to mediate the production of a response after stimuli perception. As mentioned earlier, these coordination processes may involve language, attention, and memory.
Significantly, perception is a vital determinant of humans’ behavior. It involves the ability to sense the external stimuli. Perception often occurs at the peripheral organs. They include the skin, eyes, ears, tongue, and nose. These organs have nerve endings that can receive stimuli from the external environment. Consequently, conversion of stimuli to nerve impulses takes place at these sites. Visual and auditory stimuli are some of the common stimuli. Cognitive psychology deals with how the central nervous system interprets these stimuli.
Perception is an example of a cognitive process that occurs constantly in normal humans. Comatose patients may have inadequate or impaired perception. Unarguably, the study of cognitive psychology involves a collection of various concepts from the various fields of study. Cognitive science and cognitive psychology share certain similarities. It is difficult to distinguish between these areas of study. Nevertheless, critical examination elicits various contrasts. Foremost, cognitive psychology involves the understanding of the motivating factors of human behavior. Thus, it seeks to explain why individuals act in different ways after exposure to the same kind of stimuli. Alternatively, cognitive science involves an accumulation of various concepts from diverse subjects of study, especially, neuroscience. It extensively depends on practical research and the utilization of case studies.
Importance of Cognitive Psychology
Notably, cognitive psychology plays a fundamental role in the various branches of medicine. The treatment of depression uses the concepts of cognitive therapy. Depression is steadily increasing in various regions. Essentially, many practitioners and medical experts use pharmacological therapy to manage depression. However, statistics show that only 60% of patients benefit from the use of antidepressants. Antidepressants have adverse side effects.
Many patients taking antidepressants experience weight gain. Moreover, there are various reports of patients experiencing hypersensitivity reactions due to the use of antidepressants. Thus, the management of depression should include the combination of pharmacological and non-pharmacological therapy. Non-pharmacological therapy, often, involves the use of cognitive therapy. In this treatment model, the patient teaches himself to control the depressive symptoms. Studies show that there is a gradual improvement of symptoms using this model. In fact, the use of antidepressants only is not a better alternative because patients lose the internal ability to control their moods.
Crucially, personality psychology has enhanced due to the general comprehension of the concepts of cognitive psychology. Evidently, individuals have diverse personality traits. Therefore, the various methods of perception and information processing influence the way people behave. In fact, studies show that some personality disorders may evolve due to cognitive dysfunction. Cognitive therapy is important in the management of personality and mental disorders. It involves training individuals to control their actions and behavior. Also, cognitive psychology has empowered educational psychology. Psychologists can now illustrate how humans handle and process information.
The various theories in the education sector utilize concepts from this branch of psychology. For instance, the various distinctions of long-term and short-term memory have provided more insight on how students learn. Furthermore, teachers can determine the causes of amnesia in a student using the memory model. Cognitive psychology has also increased the understanding of knowledge organization.
Jean Piaget developed various ideologies and theories regarding the cognitive development of humans from adulthood to childhood. His theories elaborated how individuals have diverse forms of behavior. In fact, he came up with a model that explained how skipping certain childhood stages may lead to the manifestation of certain abnormal behavior. Cognitive psychology played a crucial role in the development of his theories. In fact, it is crucial to add that the fundamental concepts of developmental psychology relate with those of cognitive psychology.
The cognitive development of a child extensively uses metacognition. Thus, the child focuses on its thoughts then it assumes that all other individuals also have thoughts and feelings. Metacognition is a cognition process that involves a critical analysis of one’s thoughts. It helps people to gauge their mental performance. Vitally, cognitive psychology aids in defining the various causes of social dysfunction. According to research, anti-social people have a depressed information processing function. They have a limited capability of processing the social stimuli. Also, they cannot evolve an appropriate social response or cue. There are various social models that trace the various stages of humans as they progress to adulthood.
Summary
An analysis of the essay shows that cognitive psychology plays a significant role in the development of human beings. It involves the study of how mental processes influence the behavior and deeds of individuals. It is worth noting that cognitive psychology examines how human beings perceive and process information. It deals with the internal processes that occur before the evolution of a response. As mentioned earlier, there are various cognitive processes that play a principal role in determining the behavior of people.
Attention, language, memory, and perception are the major examples of cognitive processes. They manifest in various ways. For instance, attention filters the raw data that enters the central nervous system. This data is always in the form of sensory input. Nevertheless, it avoids the overload of information in the brain. There are various criticisms against the concepts of cognitive psychology.
Behaviorists such as B.F. Skinner oppose the theories of cognitive psychology. According to them, the only determinant of behavior was external stimuli. They claim that there are no information processing procedures that take place in the central nervous system. Moreover, some of the behaviorists such as Carl Rogers believe that using the laboratory for practical research is not suitable and credible.
Conclusively, the post elaborates the various merits of cognitive psychology. Many fields of study utilize concepts that originate from cognitive psychology. It has led to an enhanced comprehension of educational psychology. Teachers and educational professional can now understand how the various forms of memory determine the learning rates of students. Besides, sociologists can now explain the origins of the various forms of social problems. An evaluation shows that aggressive individuals lack the appropriate schematic procedure of sensory perception and information processing. The field of developmental psychology has majorly benefited from understanding how the various cognitive functions relate. For instance, Jean Piaget extensively utilized the concepts of cognitive development to explain the various stages of development from childhood to adulthood. In summary, cognitive psychology is a fundamental section of psychology that explains the behavior of individuals.
References
Anderson, J. R. (1990). Cognitive psychology and its implications. WH Freeman/Times Books/Henry Holt & Co.
Bruning, R. H., Schraw, G. J., & Ronning, R. R. (1999). Cognitive psychology and instruction. Prentice-Hall, Inc., One Lake Street, Upper Saddle River, NJ 07458.
Mandler, J. M., & Johnson, N. S. (1977). Remembrance of things parsed: Story structure and recall. Cognitive psychology.
Rosch, E. (1975). Cognitive reference points. Cognitive psychology.
Siegler, R. S. (1976). Three aspects of cognitive development. Cognitive psychology.
Thorndyke, P. W. (1977). Cognitive structures in comprehension and memory of narrative discourse. Cognitive psychology.
Tversky, B. (1981). Distortions in memory for maps. Cognitive psychology.
Williams, J. M. G., Watts, F. N., MacLeod, C., & Mathews, A. (1988). Cognitive psychology and emotional disorders. John Wiley & Sons.
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Title: Economic Circular Flow. Everyday expenditure is determined by the current treads on the economic status of a country. The prices of commodities has been influenced greatly by the prices treads of the energy generating fuels such the prices of the petroleum products. In addition the economic stability of a country is another key factors that determine the prices. For example in a country that is experiencing inflation, the prices of most commodities are relatively high, a fact that is contributed by poor performances in exchange rate earnings.
In most cases, the interest rates are mostly determined by the central bank. They are used as the main monetary tool that is used by policy makers and the economist to control the supply of money in the economy thus regulating the inflation rate in the economy. The central bank is there to issue loans to the commercial banks so that they can circulate the money to the citizens. In addition the commercial bank gives the commercial banks the directives on the minimum rate at which they are going to lend their customers. Therefore the federal system is the main determinant of the interest rate irrespective of the market forces on demand and supply of money.
Basically interest rate are use as incentive as well as disincentives to the people willing to take loans from any commercial banks. As an incentive, the commercial banks well give out loans at an affordable interest rate that will attract many business and other people willing to take a loan. This will increase the aggregate money supply in the economy. This is commonly used in case an economic stimulus is necessary. On the other had high interest rates discourages business taking loans.
The action leads to reduced business transactions and hence less amount of money circulation in the economy. The action is used during the period of inflation. When the interest rates are high, the prices of commodities are also relatively high, the consequence is high cost of financing the loans. For this reason people tend to purchase commodities that are of lower prices, this is always subject to quality. During my purchased the interest rate were lower therefore the price of my vehicle was relatively low. At the period the interest rate was about 14% compounded on reducing balance.
The price of gasoline was relatively lower compared to the previous prices. In every economy the prices of the petroleum products greatly influence the prices of other commodities. This is due to the transportation of commodities from the area of manufacturing to the market. Lower prices of gasoline in during the time of the purchase therefore ensured that the prices were lower and affordable. The prices for the crude oil and other related products were also low. Therefore even the maintenance of the vehicle was cheaper. When I made my purchase the prices of gasoline were dropping which was an implication that the future prices are going to be lower. This was just a prediction that is always necessary thing to do before buying any consumable good.
Securing a loan requires collateral and other securities. Most banks will. Always give loans to individual who after a careful appraisal shows the ability to pay the loan. In addition to this banks prefer giving loans to the people who are employed or business people who show to have a sustainable businesses that can be able to finance the acquired loan. I went for a loan after I was employed having considered all the above factors. These are the once that led to a successful loan application.
During the recession period the economy is characterized by high inflation rate meaning that the prices of most commodities are considerably high. During the purchase the interest rates were lower a probable recession times. The lower interest rates in the commercial banks were to encourage more people to take loans. This is a move that facilitates the increment in the supply of money circulation in the economy. In addition to this reduced interest rate facilitates more investors to borrow loans to set up more investments. This action is there to improve the production business cycle that improve the production of an economy.
During recession period there are chance of unemployment and therefore it’s risky to take a loan during the period. However when taking a loan it is important to reconsider other sources of income that can fund the loan once the source of income is suddenly withdrawn. Before making my decision on whether to take the loan or not I had considered other factors that will finance my loan in case of such uncertainty.
Due to the great recession of 2008 that the country realized its impact the government is still operating on with the fiscal expansionary policy measures despite of the deficit that the country was experiencing. Fiscal policies involved reduction on taxes and adjustments on government expenditures. The tax relieve lowered the prices of the vehicles greatly which gave me a good opportunity to purchase a good Car of my choice.
In addition the international monetary fund study had realized a possibility of positive multiplier effect on the expansionary fiscal policies that had been set. The effect was subjected unemployment and future output. More output and employment implied better future of the economy. These were encouragement to the foreign and local investors, consequently there were prospects of high future productivity. This gave me a prediction that there is a larger probability of retaining my source of income as well as creation of more sources that will cater for the maintenance and financing my loan.
The united state environmental protection agency has been trying over the years to fight the environmental pollution has been a problem in our cities and towns. One of their effort is to encourage the vehicles and other fuel users to purchase machines that are fuel saving and those that operate with complete combustion of fuel to minimize the release of carbon monoxide to the environment.
These efforts should not be ignored as the implication on pollution is both health and economic problems, a fact that a well productive economy is composed of healthy people. For this reason I had to choose a simple vehicle that has low fuel consumption capacity.
The emissions such as carbon dioxide causes acid rain that has adverse effects on metallic structures which most of our houses and other structures are made of. In addition there is adverse effect on agriculture which is one of the source of raw materials for our industries. The emissions also may cause diseases after inhaling these poisonous diseases. This consequently minimizes the production level of the nationals and hence lower GDP.
Basically the circular flow model is made up of two sectors which determine income output and expenditure. Equilibrium state is arrived at when the tendency of income levels, expenditure and output does not exist. This is an implication that income, output and expenditure are equal. The buyer expenditure in this case becomes the sellers’ income. The income gained from sale of their product is also spent to pay for other factors of production. During the processes, there is transfer of income to the owners of these factors. These expenditures consequently leads to the circular flow of payments.
The Circular Flow Model
Circular Flow Model
For many years the position of the circular flow economy has greatly influenced the prices. This is due to the monetary and fiscal policies that an economy takes either to control inflation or to correct a recession. Introduction of injections and stimulus of the economy also influence the expenditure. When the interest rate are high the money in circulation is reduced thus most consumers will have little money to consume. In addition due to uncertainty people will tend to hold money due to fears of the deflation and recession. Uncertainty about future tend to influence people to either hold money or use money in making future investment.
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Capital structure is one of the paramount elements which a firm should consider when undertaking its short term and long term projects. Well, the balanced capital structure enables the company to achieve strike off the balance of growth‚ Continuous improvement and growth‚ risk mitigation thus ensuring production goes on uninterrupted. For this matter the paper analysis the factors to consider when setting the capital structure‚ advantages of proper debt-equity management and lastly the risks of having improperly balanced capital structure when financing various operations. Finally‚ evaluation of best financial management techniques which can help to ensure organizational goals are achieved without compromising its operations.
Enterprises should maintain the proper balance of the capital structure which entails attaining the reasonable level of equity-debt level. Furthermore‚ it is recommendable that there should be the efficient matching of liability to asset level, this implies that only long-term projects should be. Financed by the long-term liabilities and vice versa for short-term projects which should be funded by use of the short-term sources of the funds. Lack of this aspect will compromise the value of the firm which can lead to financial distress in its advance levels‚ as debt capital is very much expensive source of fund (Ding, Wu, & Zhong, 2016‚p 328).
For instance use the short-term loans to build rentals with the anticipation they will raise some money which can be used to service the loan repayment can ditch the firm in financial problems especially when the building fails to get occupants. It should be noted that returns on some projects are probabilistic whereby there is no consistency of their returns as market forces of demand and supply are unpredictable. Thus market assessment and evaluation should be carried out to prevent such advance results which can jeopardize the firm’s operations.
Factor to Consider When Setting Appropriate Capital Structure
In recent past, there has been the development of various theories to expound on factors which should be considered when determining proper level debt-equity ratio to be maintained by the company (Öztekin, 2015 ‚p 302). Most of the theories suggest that before choosing the capital structure to use firms should consider various factors which include the following;-
Cost-benefit‚ the companies should come up with the capital structure which yields the highest return with the least risk involved. For instance, if the shareholders capital is capable of financing the operations of the firm or they have sponsors. Dong, Yanmin, Kaul, Charles ‚Yui, and Tsang, (2016‚p 200) noted that having these organization helps in achieving proper control and management of capital structure The management should opt to maintain the high level of equity to debt ratio in its capital component. Furthermore‚ depending on the risk propensity and attitude of the management one can opt to go for debt capital due to tax shield benefit.
Financial flexibility‚ this involves ease at which the enterprise can interchange debt to equity without possible cases of financial distress. For instance, promptly the airline industry is capable of making significant returns‚ while at bad times it can consider raising working capital through debt capital.
Management style may be classified as either aggressive or conservative. Aggressive managers have the appetite for risk‚ hence taking the risk for them is not a big deal (Zawadzka, Szafraniec-Siluta, & Ardan, 2015‚p 358). For conservative managers, they are risk averse, so they will tend to avoid debts.
The growth phase of the firm -The companies in growth stage tend to finance their operations through debt capital while well-established firms prefer equity capital more than debt capital.
Market condition‚ if the company is raising funds to finance new plant having high market volatility. In such situation, there are high chances of the company to land in financial distress whereby the returns accrued from the plant are not sufficient to service the loans.
Illustration
Assuming that a company has borrowed £5,000,000 to be repaid for eight years at an interest rate of 12% pa to invest in both shares and real estate. The repayment will be systematically be amortized as follows:-
Year
Opening Balance
Annual repayment
Interest
Principal
Closing balance
1
5,000,000
1,006,514
600,000
406,514
4,593,486
2
4,593,486
1,006,514
551,218
455,296
4,138,190
3
4,138,190
1,006,514
496,582
509,931
3,628,259
4
3,628,259
1,006,514
435,391
5,711,223
3,057,136
5
3,057,136
1,006,514
366,856
639,658
2,417,478
6
2,417,478
1,006,514
290,097
716,417
1,701,061
7
1,701,061
1,006,514
204,127
802,387
898,674
8
898,674
1,006,514
107,841
898,673
–
Amount to be repaid annually is 5,000,000=PMT (1-1/ (1+r)/r
£5,000,000=PMT (1-1/ (1+0.12)8)/0.12=£1006514.
Assuming after the company bought shares the value of returns on stocks deteriorated and stabilized at £50,000 at the interest rate of 10%. The present value can be computed by use of present annuity formula as follows
Amount=50,000 (1-1 / (1+0.10)8)/0.10=266746
From above illustration the due to unforeseen market condition during loan acquisition. The firm will be unable to meet the debt obligation as even cumulative returns for eight years cannot pay for the loan in the first year. As there is the deficit of 1,006,514-266,746=£749,768.
Advantages of Above Arrangement
Robust accessibility of capital‚ efficient utilization of the debt capital can help the firm achieve the significant level of growth especially when the management have ventured in the viable industry. For instance ‚ by venturing in real estate the company will be capable of recouping the money required to service the loan in a very short. After which it can invest back the capital accumulated. The net effect of this will be multiplier effect‚ which will help the firm achieve its goal for sustainable development.
Best for buyout and acquisition for strategic growth‚ due to the risky nature of the debt capital it is only effective when the firm has short term strategic needs which are geared towards achieving a particular short viable objective. For instance buying of shares in the profitable company.
Tax shield benefit- debt capital is tax deductible thus a high level of returns to shareholders.
Disadvantage of Above Arrangement
Costly‚ for instance in case the enterprise has secured the loan to invest the in the financially geared products such as high-yield bonds and leveraged loans. For this matter managers must monitor the interest effectively that it does not suppose the intended rate of return on investment (Homburg, 2014‚ p 414). For investors to be convinced to take such investment risk, they will need compensation regarding premium of which in case of the unfavorable market condition the firm may be unable to raise.
It is the risky source of finance‚ even though financial gearing is one of the effective methods of financing operations of the firm. Extreme levels increase the risk level of the company to land at the lead to financial distress which at the advanced level can lead the Company to be put into receivership. For this reason, managers must ensure proper maintenance of liabilities and assets trend off is maintained to prevent adverse results which can jeopardize the firm’s operations. Hence, leading to financial failure which signifies the failure of the enterprise.
The sophisticated analysis required before taking loans. Most financial institutions need proper business plan from borrowing individuals and companies. In such situation, the borrowing entity may be compelled to hire financial analyst consultant to do some market feasibility and come up with the business plan which is very expensive, and it does not guarantee the proposal will be accepted by the prospected lending institution.
Financial Gearing and Capital Structure
Conclusion
Going by the above discussion, it is clear that although using debt capital to finance operations has advantages. Such as Powerful accessibility of capital due to tax shield benefit and is best for buyout and acquisition strategic growth. It has inherent risks and disadvantages which can lead to financial distress hence bankruptcy. Thus‚ management must ensure proper trend off of risk and returns of borrowed loans and anticipated projects to be financed by such debt.
References
Ding, X. (Wu, M., & Zhong, L. 2016. ‘The Effect of Access to Public Debt Market on Chinese Firms Leverage’. Chinese Economy, no 49(5), pp 327-342.
Dong, C., Yanmin, G., Kaul, M., Charles Ka Yui, L., & Tsang, D. 2016. ‘The Role of Sponsors and External Management on the Capital Structure of Asian-Pacific REITs’: The Case of Australia, Japan, and Singapore. International Real Estate Review, no 19(2), pp 197-221.
Homburg, S. 2014. ‘Overaccumulation, Public Debt and the Importance of Land. German Economic Review’, no 15(4), pp.411-435.
Öztekin, Ö. (2015). ‘Capital Structure Decisions around the World: Which Factors Are Reliably Important?’. Journal of Financial & Quantitative Analysis, no 50(3), pp 301-323.
Zawadzka, D, Szafraniec-Siluta, E, & Ardan, R 2015, ‘Factors influencing the use of the debt capital on firm, Research Papers of the Wroclaw University of Economics / Prace Naukowe Uniwersytetu Ekonomicznego we Wroclawiu, no. 412, pp. 356-366.
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The management of organisational change is very important for the long run success and sustainability of the business. Business that has loyal workers will have the process of change management easily adopted. People of the organisation may be resisting change that will pose threats for the organisation. The highly competitive industry and dynamic environment requires the organisations to manage change properly. There are many theories and approaches developed by the hard work of researchers that have developed guidance for the organisation for adopting the appropriate practices that would increase the chances of the organisation to manage change in an effective and efficient manner (Taylor, P. & Hirst, J. (2001).
The process of change management involves changes in the direction, capabilities and structure of the organisation (Moran & Brightman, 2011). The study conducted by Burnes (2004) states that the change is an inevitable thing that will take place in the life of an organisation having an impact on the operational and the strategic level of the business.
The organisation should rigorously research about the future of the business so that proper planning is conducted that will enable the organisation to achieve the objectives of the business. The main emphasis was laid around the fact that the change in the organisation cannot be just focused without the organisational strategy being considered. It is very important that the business has aligned the objectives of the employees with the organisational objectives to increase the chances of success and growth. Businesses that are not effectively running have identified certain issues that restrict them to adapt to the changes that are essential for the long run success and growth of the business.
Graetz (2000) has identified that the information revealing about the increasing trend towards globalisation, the deregulation, growing knowledge of the employees, changes in social and demographic trends all over the world have led to a change in the perspective of the leadership of the organisation to consider change management very important. The advancements around the world regarding the trends and the globalisation have not been ignored by the business organisations.
Change management is crucial for businesses as there are many factors that have to be considered. Information not shared properly with the employees of the organisation so it will not motivate the employees to contribute towards the efforts of the organisation to manage change effectively. The work of Balogun & Hope (2004), have shared the results of about 70 percent organisations that are not capable of successfully implementing change in the organisation.
There is work conducted by the people in the past regarding change management. It has been identified that the change that takes place has been equal to the level of change in the environment of business in the current time (Balgon & Hope, 2004; Carnall, 2003). The change that takes place in the organisation has been considered to have all shapes, forms and sizes.
There can be drastic changes in the structure of the organisation, the product line can be diversified further and the number of employees needed for the different positions in the organisation can also change with time. The high level of competition in the industry has created certain challenges for the organisations to acquire the best possible talent in the industry to support the organisation. The information that is available for the organisations is very important for the people to improve the operations of the business in the long run (Kotter, 1996).
The change management is a crucial factor for the business organisations because that is the requirement for businesses to stay in competition. There has been a high level of focus on the importance of the management of change in the organisation but there is less empirical research conducted to support the topic (Guimaraes & Armstrong, 1998).
The work of Senior, (2002) has identified the three categories that are focused from the perspective of the characteristics of the change. The important concepts like total quality management (TQM) and the business process re-engineering (BPR) along with other initiatives for the change have not been focused very much. The main area of focus for the organisation is the sustainability and the long run growth of the business so the management of change is crucial (Pettinger, 2004).
The work of Rieley & Clarkson, (2001) has clarified that constantly changing organisations are not performing well because it is very difficult to manage change that is taking place regularly. The routine work performed by the employees of the organisation allows them to learn from their mistakes and specialise in the tasks they perform so it is difficult to adapt to new changes in the organisation. If the business has the ability to identify methods that would enable the organisation to manage change effectively that will be fruitful.
Luecke, (2003) states that changing environment has allowed employees to mould with the surroundings to adapt properly to the business changes to be able to survive in the competitive industry. The work of Nelson, (2003) has clarified that the change in the organisation does not occur in a steady manner as the level of change that is experienced varies with the nature of the business, changes in technology and the degree of competition in the industry. Many organisations have developed proper plans and implemented the effective strategies developed by skilled managers to adopt change and manage it properly.
Grundy (1993) has been able to identify that the process of change can be manipulated by the organisations by dealing with changes in a proper way by ensuring that the incremental and slow change is taking place at the right time as the organisation prepares the required human resource and other resources for the change management. When the level of change is viewed from the perceptive of the cause of change then Bamford & Forrester, (2003) have identified several factors that the organisation toward the process of change. The planned process of dealing with the change that is going to take place in the organisation is the appropriate strategy as it allows the business to identify the most appropriate practices that will guide the organisation for dealing with the change effectively. If the change is taking place that will result the organisation to pass through different states of changes so it is crucial to deal with it properly to shift the business from an unsatisfactory place to a desirable state (Eldrod & Toppett, 2000).
The planned change approach was developed by Lewin, (1946) having the background in the study of intergroup and interpersonal relationships in the community. According to the study the individuals have to understand the importance of three main steps for the management of change that include the level of unfreezing present, moving to the new level and then refreezing the current level. It is a good way to discard the previous information to be open to understand and properly manage the new information that is being shared with the employees.
The work of Bullock & Batten, (1985) has been highly appreciated regarding the management of change for the organisation as they have developed a four phased model for the planned changes that need to take place in the organisation that involve the exploration, planning, action and integration. The model has laid major emphasis on the process of change that allows the organisation to move from one place/state to another that enables the managers or leaders of the business to adapt to certain changes that are very important for the business.
Though the model has gained respect of the researchers in the past but has also faced criticism for the model being focused on the incremental changes taking place at the small scale level, condition that is considered is that organisations are operating in constant environment and movement takes place from one stage to another. The process of change that takes place in the organisation is not taking place in a step by step or predefined manner so it is crucial that effective planning is done to incorporate the needs of the stakeholders of the business in the change management process so it can take place in a successful manner.
The proper manner to adapt to changes for the business organisation is to not take the concepts of change in isolation rather develop a set of integrated steps that can ensure that the performance of the business will be good. The information that is being shared by the employees for developing a strategy for the effective management of change is crucial. If the leadership allows the employees to have a say in the decision making process that will increase the motivation, commitment and loyalty of the employees of the business.
The importance of sincere employees that are willing to support the organisation in good and bad times cannot be ignored so it is the responsibility of the human resource management department of the organisation to ensure that the employees are very much satisfied with the performance of the managers (Dawson, 1994). The growth and career development opportunities in the organisation should be developed for the welfare and growth of the employees. As the skilled workforce of the organisation will feel comfortable with the practices of the organisation there are higher chances that such businesses will be able to perform well in the industry.
Management of Organisational Change
To properly manage the change in the organisation by dealing with high level of uncertainty and the complexity a business must emphasise on the development of the open learning systems so that employees are acquainted with the skills, experiences and abilities that are crucial for the growth, expansion, survival and sustainability of the business (Dunphy & Stace, 1993). There are no proper rules that have been developed for guiding organisations properly to deal with the process of change properly but still it is imperative that business organisations continuously work on strengthening the business procedures and operations in a manner that will ensure the proper flow of operations enabling the business to cope with change effectively (Pettigrew & Whipp, 1993).
Conclusion
Change is inevitable in the dynamic environment, globalisation and high degree of competition in the industry. It is imperative that organisations develop proper plans for dealing with change in an effective manner. The business organisations that are dealing with the change properly have achieved high level of success as they are able to guide the employees in a successful manner towards the achievement of the goals and objectives of the business. There are many theories and approaches that are developed for the guidance and direction to be provided to businesses but it depends on the nature of the business and the industry in which the business is operating to adopt the proper procedure. The successful businesses emphasise on motivating their employees so that they can adapt to changes properly and perform well in the business environment.
References
Balogun, J. and Hope Hailey, V. (2004), Exploring Strategic Change, 2nd edn (London: Prentice Hall)
Bamford, D. R. and Forrester, P. L. (2003) ‘Managing planned and emergent change within an operations management environment’, International Journal of Operations & Production Management, 23(5), p. 546–564
Bullock, R. J. and Batten, D. (1985), It’s just a phase we’re going through: a review and synthesis of OD phase analysis’, Group and Organisation Studies, 10(December), pp. 383–412
Burnes, B. (1996) ‘No such thing as a “one best way” to manage organisational change’, Management Decision, 34(10), pp. 11–18
Burnes, B. (2004) Managing Change: A Strategic Approach to Organisational Dynamics, 4th edn (Harlow: Prentice Hall).
Carnall, C. A. (2003), Managing Change in Organisations, 4th edn (Harlow: Prentice Hall)
Davidson,M. C. G. and De Marco, L. (1999) ‘Corporate change: education as a catalyst’, International Journal of Contemporary Hospitality Management , 11(1), pp. 16–23.
Dawson, P. (1994) Organisational Change: A Processual Approach (London: Paul Chapman).
Dunphy, D. and Stace, D. (1993) ‘The strategic management of corporate change’, Human Relations, 46(8),pp. 905–918
Edmonstone, J. (1995), ‘Managing change: an emerging consensus’, Health Manpower Management, 21(1),pp. 16–19
Eldrod & Tippett, (2002), ‘The “death valley” of change’, Journal of Organisational Change Management, 15(3), pp. 273–291
Graetz, F. (2000), ‘Strategic change leadership’, Management Decision, 38(8), pp. 550–562
Grundy, T. (1993), Managing Strategic Change (London: Kogan Page)
Guimaraes, T. and Armstrong, C. (1998) ‘Empirically testing the impact of change management effectiveness on company performance’, European Journal of Innovation Management, 1(2), pp. 74–84
Kotter, J. P. (1996), Leading Organisational Change (Boston, MA: Harvard Business School Press).
Luecke, R. (2003), Managing Organisational Change and Transition (Boston, MA: Harvard Business School Press)
Moran, J. W. and Brightman, B. K. (2001) ‘Leading Organisational Change Career Development International, 6(2), pp. 111–118
Nelson, L. (2003) ‘a case study in Organisational Change: implications for theory’, The Learning Organisation, 10(1), pp. 18–30
Pettigrew, A. M. and Whipp, R. (1993), Managing Organisational Change for Competitive Success (Cambridge: Blackwell)
Pettinger, R. (2004), Contemporary Strategic Management (Basingstoke: Palgrave MacMillan)
Rieley, J. B. and Clarkson, I. (2001), ‘The impact of change on performance’, Journal of Change Management, 2(2), pp. 160–172
Senior, B. (2002) Organisational Change, 2nd edn (London: Prentice Hall)
Taylor, P. and Hirst, J. (2001), ‘Facilitating effective change and continuous improvement: The Mortgage Expressway’,Journal of Change Management , 2(1), pp. 67–71
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