Supply and Demand

Supply and demand are economic concepts that directly influence pricing and competition. The law of supply and demand states that the availability of a product (supply) and the desire for it (demand) determine its price. When demand is high and supply is low, prices rise – and vice versa. This knowledge is not only theoretically important, but also plays a crucial role in consulting projects, particularly when developing market strategies.

Let’s take a closer look at supply and demand in case interviews! ✨

Market Equilibrium and Its Significance

In an ideal market, there are many buyers and sellers, all with access to the same information. If supply exceeds demand, a surplus occurs, forcing sellers to lower their prices. This price competition may cause some companies to exit the market, restoring equilibrium. Conversely, high demand with limited supply drives prices up, attracting new competitors.

Understanding market equilibrium is critical for companies, as they often face pressure to keep their prices competitive in such scenarios. ⚖️

When you understand the dynamics of supply and demand, you can make informed decisions and offer strategic recommendations.

💡 For more insights on market strategies, check out our articles in the Case Interview Basics like market entry and market sizing!

Market Imperfections – Opportunities for Businesses

In the real world, markets are rarely perfect. Here are some imperfections that businesses can exploit:

• Product differentiation: Companies design their products to be difficult to compare. This makes it harder for customers to assess prices accurately, often leading to higher willingness to pay.
• High transaction costs: When switching providers is costly for customers (e.g., due to contracts or onboarding times), they tend to stay with their current provider, even if cheaper alternatives exist.
• Limited competition: In markets with few providers, companies have greater control over prices. This often results in higher profit margins, as the competitive situation allows sellers to dictate prices.

Porter's Five Forces can serve as a framework to assess the degree of market imperfection in an industry: the greater the imperfection, the more attractive the industry.

💡 In short: market imperfections not only allow businesses to enforce higher prices but also enable strategic decisions that strengthen their market position.

Applying the Theory of Supply and Demand in Consulting – Example: Prokura Case

🔎 Prokura Case: Packaging Paper Reduction Strategy

Imagine you’re advising a packaging company on a paper reduction strategy. Here’s how the concept of supply and demand comes into play:

1. Analyzing Supply and Demand
   Begin by examining the market:
   • Demand: Increasing numbers of customers prefer environmentally friendly packaging. Paper without foil linings is becoming more sought after.
   • Supply: Your production costs are heavily influenced by expensive materials, especially white pigments. Choosing and negotiating with suppliers is key.
2. Cost Analysis: Identifying Savings
   Your goal is to reduce costs by 33% (approx. €40/ton). Most savings would need to come from pigments:
   • White pigment:
     • Current cost: €845/ton. To meet the goal, it needs to drop to €422.50/ton – a short-term challenge.
     • Even the cheapest supplier (Supplier E) offers €550/ton.
   • Savings Potential:
     • Negotiation: Better prices by consolidating orders with one supplier.
     • Re-specification: Exploring cheaper pigments that meet your requirements.
     • Standardization: Reducing the variety of pigments used.
3. Your Strategy
   • Short-term: Negotiate bulk discounts with Supplier E. Set realistic expectations: achieving the full 33% savings may be unrealistic, but partial success is possible.
   • Long-term: Diversify suppliers to ensure independence and explore more sustainable alternatives. This could not only reduce costs but also improve market positioning.

This example illustrates the importance of leveraging supply, demand, and market imperfections in consulting. With robust market analysis and a clear strategy, you can reduce costs and simultaneously focus on sustainability – creating competitive advantages and strengthening your client’s market position.

In our Case Library, you’ll find many more examples around supply and demand. 🚀

Key Takeaways – Using Supply and Demand for Success

• Market equilibrium helps you develop pricing strategies based on supply and demand. Understand how prices fluctuate to stay competitive.
• Market imperfections offer opportunities for businesses to maximize profits. Identify these imperfections and incorporate them into your recommendations.
• Tailoring frameworks is essential. Each project has unique requirements that must be considered. Adapt your strategies to specific market conditions.

With this knowledge, you’re well-equipped to succeed in your cases! 🚀 Use these concepts to develop thoughtful and strategic solutions.

💡 Pro Tip: Check out essential calculations like ROI and ROAS, or balance sheet on PrepLounge to sharpen your case interview skills.