Background

Toyota Motor Corporations is a Japanese company that belongs to an automobile industry. The company has achieved a global leadership in the car manufacturing industry through its consistent performance. The company has successfully adopted the generic and intensive strategies towards its growth and development. The major reason behind the leading performance of the company is its monopolistic operations system since it has already achieved a dominant position in the market place in the areas of car exportation.

In order to achieve the global leadership in the car manufacturing industry, the company has adopted the most effective approach called globalisation. The globalisation phenomenon has allowed the company to take its business to the international boundaries so as to achieve the core purposes of growth and expansion. In the recent times, Toyota manufactures various parts of the automobiles and sends such manufactured parts to United States for the purpose of their assembly (Stearns, 2016).

Structure, Conduct and Performance paradigm (SCP) is an analytical framework that is used by an economy to make sound relations among the three factors i.e. market structures, market conduct and the market performance. The major elements of this theory are structure, conduct and the performance. Structure is the collection of variables that are found relatively stable over a period of time and influences the behaviour of sellers and buyers of the market. Conduct defines the manner in which the buyers and sellers of the market behave amongst themselves and with each other as well. Performance is measured by comparing the outcomes and results of different firms across the entire industry in various terms such as efficiency, profitability. To measure the firm’s performance, different variables such as quality, quantity, resource allocation and efficiency can be used.

In order to achieve the maximum efficiency, profitability and growth of the business, Toyota has also adopted the paradigm of structure, conduct and performance. This framework has allowed the company to study the behaviour of its consumers in the market towards the desired quality of the products. Generally the firms in the industry adopt the pricing policy of cost plus profits. However, knowing to the price sensitivity of the consumers, Toyota has adopted the pricing policy of price – cost = profits. The conduct element has allowed the company to evaluate the behaviour and sensitivity of the consumers of Toyota brand. This enables them to perform in the ways that can satisfy its customers in the best possible way. Globalisation has allowed the company to make use of best technologies in the manufacturing of its cars products and to utilise the best labour force across the world. Also, because of globalisation the company has achieved a wide customer base in the international market (Schifferes, 2007). The performance element of SCP paradigm has allowed the company and its stakeholders to gauge its financial as well as non financial performance.

Globalisation and Toyota’s success

From, the above study on Toyota Motors Corporation, it can be said that globalisation has majorly contributed to the company’s success across the world. It has not only allowed the company to reach the international market in search of growth and expansion motives but also enabled the company to achieve global business leadership in the highly competitive market.

Concept of demand and supply

Practical illustrations of demand and supply function

Opportunity cost to consumer’s demand for normal goods:

Economists define the term ‘demand’ as the quantity of products or services which the consumers in market place are willing and able to purchase at the particular price. Supply of any goods or services in the market is defined by economists as the quantity which the sellers or providers of such goods or services are willing and able to sell at a particular price. Consumer behaviour is a phenomenon of how the consumer units at individual level, firm level or household level change their patterns of consumption of any goods or services to fulfil their requirements and wants (Bouchaud, Farmer & Lillo, 2008). It primarily refers to the consumer’s actions in the market and the underlying reasons of such actions.

 Generally, it is observed that the potential consumers tend to buy more units of a product when it is available in the market at a low price. Therefore whenever, the price of a normal good decrease in the market, its demand increases and when the price of such goods increase, their demand automatically reduces. This phenomenon is called as law of demand in the market. Generally, sellers are willing to sell their products at higher prices as it offers them better profitability. In case of normal goods, the price and quantity supplied are positively correlated as whenever the prices of goods increases, the supply for such goods also increase in the market place and when the prices fall, the supply also declines for such goods and services. This relation between the price and quantity supplied is termed as law of supply.

For example: The price of gasoline product, currently in the market, is £ 2 per gallon and at this quantity 600 gallons of gasoline are demanded in the market. When the price per gallon for the gasoline declines, it amounts to increase in quantity demanded for such product as shown in the table below:

Quantity of Gallons Demanded	Price per gallon
1000.00	£                               1.00
800.00	£                               1.50
600.00	£                               2.00
400.00	£                               2.50
200.00	£                               3.00

at price £ 2.00, the suppliers of gasoline product are able to sell 600 gallons but when the price increases, they are willing to sell more and when price decreases it results in decrease in the supply.

Quantity of Gallons Demanded	Price per gallon
1000.00	£                               3.00
800.00	£                               2.50
600.00	£                               2.00
400.00	£                               1.50
200.00	£                               1.00

Structure, Conduct and Performance paradigm

The above graph shows the demand and supply curve of a product. The point at which the demand curve and supply curve intersects is the point of equilibrium.

There are various factors that affect the consumption patterns of the consumers in the market such as personal factors like consumer’s income, education, gender and age, psychological factors like tastes and preferences and social factors like social status of the consumers etc.

Opportunity cost is one of the key concepts of economics and it defined by expressing the relationship between the resource scarcity and resource choices. A consumer demands those goods that are the part of its necessity and desires. At a time, a consumer may require multiple goods or resources. However, due to the multiplicity of demand of goods and services and limited availability of funds, it has to decide which products to be selected for the purpose of buying (Delgado, 2003). The selection criteria must be based on the benefit derived from the selected goods and benefits compromised or forgone on the goods that are not selected. The opportunity cost of selected goods is the benefit forgone on the unselected goods.

Conclusion:

From the above report it can be concluded that it is necessary to maintain a proper equilibrium in the market for such goods to achieve the efficiency of the market otherwise it leads to market failure.

Environmental Policy

Fiscal policy:

Supply side policies:

• Infrastructural development:
• Cutting down of taxation rates:
• Creation of highly educated workforce:

Economic prosperity is an important aspect to be looked into by the regulators of the concerned nation. It is achieved when there is presence of various features in the economy such as proper education system, sound employment rate of the country, absence of income disparity among different citizen groups of the country, effective labour force and technological innovation and development etc. As economic prosperity of any country depends on multiple factors, it is important for the governmental bodies of such economy to formulate required policies to deal with all such factors.

For the purpose of bringing economic prosperity in United Kingdom, the UK Government has introduced an environmental policy to control and manage the release of wastes in air, water or land separately. The UK environment policy has adopted the approach of sustained development under which the regulators considered both economic and the social factors of environment. A new framework of Sustainable Consumption and Production has been introduced by the government to identify the most productive of finite and renewable resources of the nature. UK has also adopted New Environmental Policy Instruments such as landfill tax, climate change levy, UK emission trading scheme, the renewable obligations etc. (Pettinger,  2017).

Demand and supply

These policies are formulated with the aim of enhancing the quantum of disposable income of any nation. The government of UK has introduced an expansionary policy with the aim of offsetting the reduced spending of the country’s private sector. The implementation of fiscal policies has increased the demand of overall goods and services that are being traded at the UK markets. The fiscal policies were aimed at slashing down of the taxation rates and improving the government spending. After, the great recession period of 2008, the UK government brought new fiscal policy to combat the severe consequences of the economic recession event. This event had caused the decline in the country’s GDP to 6%. The government reduced the VAT rate to improve the spending of the consumers of the economy. This action has ultimately resulted in increase in nation’s borrowings by 10% of country’s overall GDP. The action proved to be the key contributor of the economic prosperity of the country. The corporate taxation rate was also target by UK regulators to be maintained at the rate that is below 15%. Along with it, the government also set the inflation rate of 2% of consumer’s price index (Allen, 2016).

These policies are formulated and implemented to increase the aggregate supply in the economy. Such policies are aimed at enhancing the productive capacities of the economy by improving the major factors of production in both qualitative and quantitative terms. Supply side policies of any country contribute to the economic growth of the company on a long term basis. Following are some of the supply side policies adopted by UK government:

Recently, the UK government has adopted a new plan which is named as National Infrastructural plan, 2014 to improve the infrastructure of the key sectors of the economy viz. Energy, communication, waste management, science, transportation and water prevention. At the spending round of year 2013, the UK government has announced £ 100 billion investment towards enhancing the infrastructural facilities in the economy (UK Government. 2015).

The rate of corporate tax has been significantly reduced to 20% in 2015, by the government of UK in the country to promote the economic prosperity since year 2010 when it was 23%. The reduced corporate tax has resulted in growth and investment of UK businesses.

The UK government has provided funds to open up around 180 free schools, 20 studio schools and 20 university technical colleges to promote the education system of the economy so as to create more educated workforce in the overall UK economy that can contribute to enhance productivity of the country.

Opportunity cost

From the above report, it can now be concluded that there are various policies formulated by UK government that have contributed to the economic prosperity of the country. Majorly the supply side policies have played major role in the development of the nation.

Financial intermediation is the productive process performed by banks by way of accepting the funds in the form of deposits from the public who have surplus funds to invest and lending such funds to the parties who needs the funds ((Levine, Loayza & Beck, 2000). The business of banking prospers because of its abilities to provide the facilities of financial intermediation. Banks and other financial bodies generate profits by taking the deposits from the parties at a lower interest rate and lends at a comparatively higher rate of interest (Gertler & Kiyotaki, 2010).

Financial instruments are the documents used by the parties to enter into monetary contracts. These contracts are enforceable in the eyes of law, on the parties to the contract. There can be the involvement of two or more parties. Financial instruments help in creation of the contract under which raises a financial asset for one party and financial liability for other party. The examples of financial instruments are bills of exchange, cheques, derivative contracts like futures and options contracts, bonds & debentures, shares etc. (Fabozzi, 2018).

There are different sources available in the market to raise funds. Firms require funds for various purposes such as to carry out basic business operations or to acquire some assets or to carry out some researches etc. To generate funds firm must use diversified sources so as to minimise the cost and risk involved of financing. The various sources are: retained earnings, loans and borrowings from banks or financial institutions, issue of share capital, bonds and debentures. For each source there lie some risks and returns (Hillier, Grinblatt & Titman, 2011). For example, ABC Inc. is of financing its funds requirements through the issue of equity shares. For this purpose it has issued shares of certain amount. Though raising of funds through the share capital mode is cheaper than the raising of funds through debenture or bonds issuance as the latter involves higher cost of financing because of higher interest rate but there exist a risk of dilution of ownership exists as shareholders are given the voting rights in the company in return of their shareholding. In case of arranging funds through the external debt financing modes such as loans from bank and financial institutions higher risk of insolvency is involved because of presence of higher financial leverage. However, such modes do not require the sharing of ownership to the providers of finance. In case of using the retained earnings to carry out the operations, a company may have to face the risk of shortage of funds in case of emergency as the surplus funds will be invested in the business operations (Salman, 2002).

Environmental Policy

There is a fundamental principle of financial management that the risk and return of the investment goes hand in hand. This principle suggests the direct relationship between the riskiness and return potential of the investment. An individual or firm may invest its profits in the different areas to generate further returns. The most effective way to maximise the returns from the investment is to adopt the investment diversification strategy. Through this strategy different proportions of profits can be invested in different sources that will generate different returns. This diversification will allow the investor to manage its risk effectively and efficiently in a way that when one investment face downfall in the market value, the investor will not have to suffer loss from the overall investment. Rather, only a small portion of investment will be affected because of it (Mitchell & Pulvino, 2001).

For example Mr. John has surplus funds (profits from his business) of £ 60,000. He intends to maximise its profits through the investment of such profits. He has various options available in the market such as investment in the shares of companies X Y and Z. All the three companies are offering different rate of returns and also the risk of investment in these investments is different. The following table shows the risk and return potential of investments in the said companies.

	Return	Risk
X	15%	8%
Y	20%	10%
Z	10%	6%

To maximise the return on investments, John invests its surplus funds in the equal proportion (£ 20000 each) in all the three companies. Suppose, the value of Y’s stock falls in market and due to this the return potential of the company also declines by 6%. This will cause John to incur the loss of only £ 1200 i.e. 20000*6% and the remaining investment of £ 40,000 will be safeguarded from such decline in one stock value.

Name of Ratio	Formula	Calculation	Results	Calculation	Results
Liquidity Ratio			2016		2015
Current Ratio	Current Assets/ Current Liabilities	14828/19714	0.75	11958/19810	0.60
Market Value Ratio
Book Value per share	Common Shareholder’s equity/ Number of Common Shareholders	8616/8126	1.06	7071/8107	0.87
Asset Management ratio
Fixed Asset Turnover	Net Sales/ Fixed Assets	54433/29706	1.83	56925/32256	1.76
Debt Management ratio
Debt-Equity Ratio	Total Debt/ Total Assets	(15574+19714)/8616	0.81	(19810+17333)/7071	0.84
Profitability ratio
Net Profit Margin	Net Profit / Sales	129/54433	0.24%	(5766)/56925	-10%

Evaluation:

The extracts for the ratio analysis have been taken from the financial statements of Tesco Plc. using the annual reports of the relevant years of the country. 

The current ratio of Tesco Plc. Has improved in 2016 as compared to 2015 and this shows that the liquidity position of the company has slightly improved as the company has increased its current assets (Tesco, 2016). However, the ideal current ratio is 2:1 whereas the current ratio of company in 2016 is 0.75:1 which is quite low than the ideal standards. Hence, the liquidity position of Tesco cannot be said to be satisfactory.

Fiscal policy

The book value per share of Tesco Plc. has increased in 2016 from 2015 and this shows that the company’s stock price has increased in the market because of the rise in the overall worth of company’s business in the market.

The asset management of the company has been evaluated using the ratio of fixed asset turnover. This ratio has increased in 2016 as compared to 2015 and this shows that the company has generated more returns through the effective utilization of its fixed assets of the business.

The debt management of the company has also slightly improved in year 2016 as compared to 2015 and this is depicted by the lower debt to asset ratio in 2016 as compared to that of 2015. This ratio is indicating the percentage of total assets financed by the use of external debt. Though there is a slight change in the ratios of both the reported year, but it can be said that the company has improved its financing of total assets by usage of more of internal funds (Penman & Penman, 2007).

The profitability position of Tesco Plc. is quite low at 0.24% and this is depicted by the net margin ratio of the company. However, looking at the negative net margin ratio of 2015, it can be said that the company is trying to improve its profitability position in 2016 by recovering its losses.

Year		Cash Flows	PV of Cash Flows
1	0.939	£750	£704.23
2	0.882	£750	£661.24
3	0.828	£750	£620.89
Lump sum value			£1986.36

To find how much money Alice need to deposit today so as to get £ 750 at the end of each year for first 3 years, the present value of £ 750 will be calculated using the discounting rate of 6.5 %.

	(i)	(ii)	(i) * (ii)
Years	Cash Flows ($)		PV of Cash Flows
0	-60000	1.000	-60000.00
1	35000	0.932	32634.03
2	25625	0.869	22277.64
3	6000	0.811	4863.62
4	13000	0.756	9825.49
5	35000	0.705	24665.02
NPV			34265.81
PROJECT B
0	-60000	1.000	-60000.00
1	0	0.932	0.00
2	0	0.869	0.00
3	0	0.811	0.00
4	0	0.756	0.00
5	100500	0.705	70823.85
NPV			10823.85

Since both the projects are mutually exclusive hence it is necessary to select one from the two. Therefore, NPV analysis is undertaken for the same. Project A is better than Project B as it has higher NPV. Higher NPV shows higher return potential for of the company. Therefore, Project A must be accepted.

References:

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Mitchell, M. and Pulvino, T., 2001. Characteristics of risk and return in risk arbitrage. the Journal of Finance, 56(6), pp.2135-2175.

Penman, S.H. and Penman, S.H., 2007. Financial statement analysis and security valuation. New York: McGraw-Hill.

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Salman, F., 2002. Risk-return-volume relationship in an emerging stock market. Applied Economics Letters, 9(8), pp.549-552.

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