Challenges Faced by Financial Manager in The Market Environment We Have Today

According to Arnold (2013), financial management entails the understanding, evaluation, analysis, and forecasting of economic, legal and regulatory issues. As such, financial managers have the obligation of acting in ways that improve organizations’ profitability. In their responsibilities, the financial managers experience various challenges in different market structures. As such, to have a proper understanding of the challenges that financial managers face today, it is necessary to understand the general characteristics of the different market structures and the impact of competitiveness, market liquidity, and efficiency on financial managers. A clarification of the market structures shows the basic context in which financial managers work.

The video discusses four market structures. The four market structures identify the varied types of markets in the world of business. The four market structures are; oligopoly, monopolistic competition, perfect competition, and monopoly. This paper will discuss the different types of market structures and two of the major challenges that financial managers face in these market structures. Further, this paper will analyze and review two scholarly articles that deal with financial managers’ challenges including competitiveness, market liquidity, and efficiency.

Under this market structure, the homogenous market products, and services. Under this structure, no single firm is allowed to set the prices of products solely. The structure has five main characteristics which are; buyers are aware of all the goods and prices set by each firm, all the firms have small portions of the market shares, all the organizations are price takers, the industries have the characteristics of free entry and exit, and all the organizations sell similar goods. However, according to the video, a perfect competition does not exist in the real world.

Challenges Faced by Financial Managers in Perfect Competition Market Structure

The first and major challenge that financial managers face in the perfect competition structure is price setting. Financial managers have the tasks of setting prices for their firms’ products. While undertaking this task, they need to consider various factors including the cost of production and the quality of the products (Moyer et al., 2011). However, in the perfect competition market structure, the prices that the financial managers set will need to concur with the general price in the market. Under this market structure, if a financial manager sets a price that is higher than the market price, no one will abide by the products. As such, price setting is a crucial challenge facing financial managers in the perfect competition market structure.

The second challenge that financial managers face in the perfect competition market structure is in the maximization of profitability. Financial managers have the task of ensuring higher profits for their firms. The various characteristics of the market structure limit the maximization of profits by the firm. For instance, firms cannot set prices to increase their revenues. Also, the firms can only serve a very small portion of the market share; meaning the firms cannot produce in large scales to enjoy economies of scale.

The video identifies a monopolistic competition as a market structure where there are many firms that produce slightly different products in an industry that has minimal barriers to entry. Under this market structure, the buyers place special emphasis on what they value most about the firms from which they buy products. Under this market structure, the price that one firm sets do not affect the prices of other firms in the industry. All the firms are price makers and have a relatively low degree of market power. Firms in this type of market structure tend to advertise heavily, and the demand is sensitive to changes in price.

Challenges Facing Financial Managers in the Monopolistic Competition Market Structure

One of the major challenges that face financial managers in a market having a monopolistic competition is regarding advertisement. Financial managers have the obligation of ensuring that the firm’s products are well-known by potential buyers. With the extensive emphasis of advertisement in the monopolistic market structure, financial managers may find it difficult in prioritizing the resources for advertisement and product quality improvement. In such a market structure, if a financial manager fails to pay enough emphasis on an advertisement, the firm’s revenues may drop as customers become more captivated by other firms’ products.

The second challenge faced by financial managers in this market structure is regarding the competitiveness of the industry. With the relatively minimal entry barriers, any firm can easily enter the industry and produce similar goods at lower prices. The differentiation of products also allows the production of substitutes by other firms. As such, financial managers have the responsibility of ensuring an extensive promotion of the firm’s products.

A monopolistic market structure occurs when there is only one seller of a particular product in an industry. Under this structure, one firm dominates the market and may control entry into the market, making it extremely difficult for other firms to operate in the industry. Given that the monopolistic firm is the only seller in the market, the firm’s demand curve is the market demand curve. The firm also sets the prices.

Challenges Faced by Financial Managers in the Monopolistic Market Structure

The first challenge faced by financial managers in the monopolistic market structure is regarding product development. Financial managers have the responsibility of ensuring that the products produced provide value to the buyers regarding the financial consideration. However, since, there is no completion in this type of market structure, the firms do not significantly invest in research and development. Hence, it leads to lack of innovation and poor products.

Another challenge faced by financial managers is regarding pricing. Financial managers are often tasked with setting the appropriate prices for the firms’ products. Given no competition in the industry, the prices set by the firm become the market price. With little pressure on the prices of products, financial managers often have challenges in setting prices that reflect the firm’s input in the production of the products and the utility that the buyers would derive from the products.

An oligopoly is a market structure where there is a small number of firms that have the large majority of the market share. An oligopolistic market is similar to a monopolistic market, except that, in an oligopoly, two or more firms dominate the market.

Challenges Faced by Finance Managers in an Oligopoly

The first major challenge that financial managers face in the oligopoly market structure is competition. Having very few firms in the market, there is intense competition among the firms. As such, every major decision that a financial manager makes regarding prices or other aspects affects the decisions of other firms in the industry. As such, financial managers are tasked with the responsibility of keeping an eye on the competitors. In some circumstances, getting intel from other firms on their course of action might be difficult, posing uncertainties to the financial managers.

Under this market structure, financial managers also face challenges regarding differentiation of products and prices. Having few firms in the industry, there is an immense need for differentiation. In the efforts of differentiation, financial managers have to ensures that the types of products and the prices set do not divert from the needs and expectations of the customers.

Both the articles imply that two of the biggest challenges facing financial managers today in the varied market structures are setting prices and competitiveness. The prices of products are derived from what the buyers are willing to pay for the products, considering the complete cycle of every process involved in the production of the products. The ease in which a firm can turn the assets into cash is known as market liquidity. Financial managers must consider the type of market structure that their firms are operating in to understand the possible impact of other firms involved in the same market. The impacts that other firms have in both the quality of the products and the price in the same market is known as competition (Moyer et al., 2011).

Regarding the different types of markets structures, financial managers need to understand the challenges associated with the competitiveness. For instance, in a perfect competition market structure, the level of competition is higher than in other market structures. The ease in which the market structures operate with the correct price, demand, and supply is known as the market efficiency. In this regard, financial managers need to have a comprehensive understanding of the effective elements in the market structures in which they operate to ensure the firm’s efficiency (Arnold, 2013).